Weekly Fiscal and Political Report, July 28 - August 4, 2023

Political Updates

INTERNAL AFFAIRS

Although the business environment has already been waiting for several weeks for the fiscal package announced by the government to reduce the budget deficit, the political figures are stagnant and instead choose to blame each other for this precarious economic situation. For example, Robert Sighiart?u, vice-president of PNL, recently declared that PM Marcel Ciolacu should resign from his position, stressing that the partnership with PSD is not auspicious - this after 2 years in which the two parties brought each other praise. His counterpart, the PSD vice-president, Ionu? Pucheanu, wanted to specify that the social democrats are "a lifeline" for this government, given the failure of the former PNL-USR-UDMR coalition. Both liberals and social democrats forget, however, that although the previous cabinet was led by Nicolae Ciuc? (PNL), the Ministry of Finance was, however, led by PSD, through Adrian Caciu - so the current situation is given by the entire governing coalition. And the former prime minister Nicolae Ciuc? seems to realize this, declaring that "looking for culprits for the state of the budget today and the related legislation does not take us forward".

Until another, in addition to the well-founded dissatisfaction of the business environment, there were also criticisms from hundreds of NGOs, whose entire activity is threatened by the supposed ordinance to reduce budget expenditures. The reason would be that this normative act would cancel the current corporate sponsorship mechanisms, leaving the sector of non-governmental organizations without extremely important funding - we are talking about a sector that brings immense benefits to the entire society, through actions aimed at improving the way of life in Romania. Thus, the representatives of the organizations ask the Government, through an open letter, to remove from the text of the Ordinance any provision intended to change the current fiscal facilities that the NGO sector benefits from. For example, Agent Green claims that these yet-to-be-published provisions “eliminate the possibility for private sector partners to support the communities in which they operate.” Instead, the Association “D?ruie?te Via??”, which built a hospital from sponsorships, thus doing the work of the state, urge Prime Minister Marcel Ciolacu and the other ministers “not to undermine the activity of NGOs”. Now, it remains to be seen whether the governors will remain impassive in the face of the NGO sector's request, until one more time we can only wait for the respective ordinance to be published in decisional transparency.

Finally, in addition to the previously mentioned problems, the PSD-PNL Government faces another obstacle to obtaining European funds – the Constitutional Court (CCR) decided that the draft bill on special pensions is unconstitutional and requested its re-examination. The normative act was assumed by the National Recovery and Resilience Plan (PNRR), and large sums of European money depend on its implementation, which Romania could use in this uncertain economic period. And so, PM Marcel Ciolacu finds himself forced to request an extraordinary session of the Parliament, next week, in order to reconcile the Special Pensions Law with the CCR's objections and adopt it once again.

EXTERNAL AFFAIRS

This week, PM Marcel Ciolacu had a meeting with the ambassador of Japan in Romania, Hiroshi Ueda, during which the promotion of the bilateral economic objectives of the Strategic Partnership between the two states was discussed, in areas such as technology, research, infrastructure and innovation. On the same day, the Prime Minister also discussed with the ambassador of the Hashemite Kingdom of Jordan in Romania, Sufyan Qudah, about the development of bilateral projects. The Head of the Executive specified that Jordan is among Romania's main partners in the Middle East and South Africa.

Finally, during an official visit to the USA, Romanian MEP Victor Negrescu had several high-level meetings to promote cooperation between the United States and the European Union, in general, and Romania, in particular. On this occasion, Victor Negrescu met with the representative of the State Department responsible for Romania, Jessica Warder, with whom he discussed the tense situation on the Black Sea. "Romania can rely on the direct support of the United States to become a regional hub capable of ensuring the development and stability of NATO's eastern flank", declared the Romanian MEP, in this context.

Fiscal and Economic Updates

OVERVIEW

Although almost every week this July we have been hearing that the Government is working on a new Ordinance that will make a series of tax changes as well as lots of press rumours about the way it will actually look like, including at one point an unofficial draft version of the draft Ordinance. From, abolishing the 5% VAT rate, employees in construction and agriculture to pay social health insurance contribution (CASS exception is eliminated), IT-employees limited income tax exemption facility to RON 10,000, new tax on real estate owned, CASS applied to meal vouchers, different taxation on SMEs or yet another increase in the dividend tax were among some of the rumours we have heard in recent days, without having a clear, transparent position from the government on the changes they are currently preparing.?

We also recall that the current governing coalition has been in power for almost two years, ever since the PNL representative Nicoale Ciuc? took office as Prime Minister, which means that the culprit for the hole in the state budget that the governors have found for several months are the same people who now declare that "the waste must end", that is, namely the PNL and PSD. Is there any assumption on the part of the former/current Prime Minister, or former/current ministers? Of course not, and probably the strategy chosen by the current government will be to further burden the already poor population and businesses that cannot compete, both financially and in terms of lobbying, with the large corporations present in the Romanian economy. But that remains to be seen.

And to further support the statements outlined above, we will make a brief incursion into the speeches of the main political actors, starting with Prime Minister Marcel Ciolacu. At a press conference held at the end of a working meeting with the Minister of Finance, Marcel Bolo?, Ciolacu stressed that "there are more than 50 measures", but without giving details on the fiscal measures, the ones everyone is waiting for, preferring to shift the focus to personnel spending in the budgetary system. On the other hand, Minister Bolo? said that there are "no final simulations or final decisions agreed in the governing coalition" on the fiscal measures envisaged, and he continued to point the finger at the employees in the budgetary sector, who are considered somewhat guilty for the current hole in the state budget. And finally we left the final icing on the cake, namely the statement of the interim president of the Chamber of Deputies, Alfred Simonis, who added that "it would not be a tragedy if micro-enterprises paid higher taxes".

Lastly, the Memorandum approving the Government's Public Debt Management Strategy 2023-2025 was adopted at yesterday's Cabinet meeting. According to the description of the normative act, it provides the direction and guidelines in which the Ministry of Finance will act to improve the structure of the public debt portfolio, the principles that will underpin financing decisions. At the same time, it sets out the objectives of the Ministry of Finance in the management of government public debt for the period 2023-2025, including (1) ensuring the financing needs of the central government against the background of minimizing medium and long-term costs, (2) limiting the risks associated with the government public debt portfolio, and (3) developing the domestic government securities market.

ON THE RECOVERY AND RESILIENCE PLAN

Yesterday's Government meeting approved the draft bill approving the €600 million financing contract for the A7 Motorway (Ploiesti - Pascani, 319 km), signed between Romania and the European Investment Bank, financed under the NRRP - Component C4, Investment I3 - Development of sustainable road infrastructure on the TEN-T network, road charging, traffic management and road safety. The draft bill will be sent to Parliament, where the Senate will be the first decision-making chamber.