Weekly Fiscal & Political Report (25-29 September 2023)

Political Updates

INTERNAL AFFAIRS

The Parliament adopted the draft bill with the fiscal measures aimed to reduce the budget deficit, after the Government assumed its responsibility before the Parliament on Tuesday, September 26. In the absence of a vote of no confidence submitted by the MPs, as the Constitution stipulates, the Government’s project is considered adopted. But it was not an easy journey, as the Government made several changes to this draft bill, both before adopting it and after, consistent with the amendments tabled. Indeed, we did not expect the Executive to approve the amendments submitted by the MPs, but they were signed by the deputies and senators from PSD and PNL, therefore, everything remains in the political family of the governing alliance. There was also an embarrassing situation to say the least, if we consider that one of the amendments provided for the nationalization of Pillar II of pensions, but the rapid reaction of the national mass media determined the withdrawal of this amendment. We remember that the social democrats' idea of nationalizing this pillar is not new, but dates back to the time when Liviu Dragnea was leading the party. Finally, after finding a scapegoat for this amendment (a state secretary from the Ministry of Finance), the Government adopted the final version of the draft bill, on which it assumed its responsibility in Parliament. Of course, we will talk about the actual measures provided by this project in the 'Fiscal and Economic updates - Overview' section of this report.

Returning to our political matters, what is rather interesting is that the opposition did not bother to even exercise a democratic right – to submit a vote of no confidence, even if would not pass the vote of the two chambers. We remember from the previous report, that the opposition parties verbalized their desire to submit such a political action, both those from USR and REPER conditioning this vote of no confidence on the exclusion of those from AUR from signing it. There are therefore two reasons that could be behind the fact that no such vote has been submitted: (1) the parties have not agreed on signing a single vote of no confidence (coming from either USR or REPER) or (2) they realized there is no point in doing so, as the move is a superfluous one, because the opposition does not have the necessary MPs (175) for a vote of no confidence to pass the Parliament and, therefore, to dismiss the Government.

However, the Government seems not to have considered the right of MPs to notify the Constitutional Court (CCR) regarding this project. Something that is already happening, with the MPs from USR and Force of the Right Party submitting a notification of unconstitutionality on this draft bill. The only way in which these provisions can enter into force from October 1 is for CCR and President Klaus Iohannis to hurry and work during weekend days and, thus, the law to be published in the Official Gazette on Sunday morning, October 1, the latest. If this won’t be the case, those provisions which were planned to apply from October 1, would most probably apply from the day the law is published in the Official Gazette.?

EXTERNAL AFFAIRS

Another attempt to put pressure on Austria to accept Romania's accession to the Schengen area came this time from the president of the European Parliament (EP), Roberta Metsola. The high European official declared that Romania expects and deserves, "since 2011", a positive decision regarding its accession to Schengen, during the Spanish presidency of the EU Council. Roberta Metsola claims that the Spanish presidency will certainly try to work with Austrian officials on this file, hoping for a positive conclusion regarding Romania. Let's not forget, however, that Romania shares this file with Bulgaria, and things get complicated because although it is not against Romania, the Netherlands opposes Bulgaria's accession to Schengen - therefore, there would be two negative votes for this file.

Changing the register, at the end of last week, the European Council adopted the long-awaited decision on the composition of the European Parliament for the 2024-2029 legislature. In one of the previous reports, we specified that Romania will not receive, this time, additional mandates in the European elections. And thus, by Council decision, additional places were allocated as follows: Belgium (+1), Denmark (+1), Ireland (+1), Spain (+2), France (+2), Latvia (+ 1), Netherlands (+2), Austria (+1), Poland (+1), Slovenia (+1), Slovakia (+1), Finland (+1). Thus, in the next legislature, we will have 720 MEPs, of which 33 will belong to Romania.?

Fiscal and Economic Updates

OVERVIEW

As promised in the previous chapter of this report, we shall now focus our attention on the main provisions of the draft bill on fiscal measures aimed at reducing the budget deficit. In a short brief summary we recall the introduction of turnover taxes for companies, an additional tax for banks (2% of turnover, according to the final version after amendments), new tax rates for micro-enterprise income, changes in the payment of social security contributions, increases in VAT or excise duties, and a specific 0.5% turnover tax was added for companies operating in the oil and gas sectors (according to the final version after amendments, except for those operating exclusively in the distribution/supply/transport of electricity and natural gas & regulated/licensed by the National Energy Regulatory Authority), here being presented some of the two main changes present in the draft bill.

In this regard, PM Marcel Ciolacu expressed his belief that Romania will have a budget deficit of no more than 5.5% at the end of this year, which according to him will be achieved through fiscal-budgetary measures. At the same time, Ciolacu said that it would "affect the whole business environment and Romania as a whole if Marcel Ciolacu, the Romanian government, and this coalition had not come up with this package", adding that Romania "has no chance of joining the OECD in the next 3-4 years" if the reforms contained in the NRRP are not completed. Still about Ciolacu, we recall that yesterday's Government meeting adopted Decision no. 900/2023 according to which, from October 1, 2023, the minimum gross basic salary per country guaranteed in payment is increased to RON 3,300 per month, while another draft ordinance published this week repeals the tax exemption for RON 200 of the minimum wage.

Finally, several PNL MPs have registered a draft bill in the Senate which provides that, as of January 1, 2024, all taxpayers who are good payers, payers of corporate income tax or income tax on microenterprises, who in the last year have paid the tax due quarterly or in advance by the due dates and who on January the 1st 2024 do not have any outstanding tax obligations to the general consolidated budget, will benefit from a 3% bonus exclusively for investments. However, here there are some requirements that must be met, namely that the benefit is to be used exclusively for making investments such as constructions, technical installations, means of transport, livestock, and plantations or to support vocational-dual education and is to be used no later than December 31 of the year in which it is granted. At the same time, it is also specified that the unused 3% subsidy shall be returned to the state budget, with the corresponding interest and penalties, and the provisions on the granting mechanism will be established by the Government Decision within 30 days of publication in the Official Gazette.

ON THE RECOVERY AND RESILIENCE PLAN

Promises about the adoption of a new pension law continue to come from political leaders in Bucharest who, this time through the increasingly vocal voice of PM Marcel Ciolacu, promise that from January 1, 2024, there will be a new pension law, as he announced that the authorities in Bucharest and those in Brussels have agreed on pensions based on contributory contributions, without specifying the position on special pensions, the main "glitch" in the Romanian pension system. In addition, PM Marcel Ciolacu said that the way in which pensions will be increased will be closely linked to the percentage of inflation, with small pensions enjoying higher percentages and larger pensions lower percentages, which we know may not necessarily be a fair approach. Finally, on the state budget law for 2024, he said that it is possible that the draft bill will probably be ready in November. We remind you that pensions are part of the NRRP - Component 8 - Tax reform and pension reform.