Weekly Fiscal&Political Report 4-8 September 2023

Political Updates

INTERNAL AFFAIRS

As we already know, the parliamentary vacation is over, the autumn session has started this week with debates in committees and plenary meetings, and the Government published a list of the legislative priorities for this session. As expected, President Iohannis supports a government represented by the same coalition of PSD and PNL after next year's elections, stating that he wants the current government to perform well and receive enough votes. According to a latest opinion poll regarding the 2024 parliamentary elections, the current governing coalition could remain in the same form, given that 32% of Romanians said they would vote with the PSD, 19% with the PNL, also 19 % with AUR, 12% with USR and 5% with UDMR.

Regarding the fiscal measures that have been discussed lately, President Iohannis stated that the only scenario he will not accept is that of austerity, this solution not being one that could solve the economic problems. On the other hand, the president of USR C?t?lin Drul? stated that his party will submit a vote of no confidence if the Government assumes parliamentary responsibility for the taxes increase. The USR leader also stated that Prime Minister Marcel Ciolacu has not implemented any of the reforms and restructuring he promised, and it is becoming more and more obvious that he will not cut waste from the state's money. At the same time, C?t?lin Drul? also said that he does not exclude the possibility to candidate for the next year's presidential elections and criticized the attitude of President Klaus Iohannis, emphasizing that he does not provide a feeling of security for the people.

EXTERNAL AFFAIRS

President Klaus Iohannis hosted this week the 8th edition of the Summit of the Three Seas Initiative (I3M), an event attended by 12 states from central and eastern Europe, a few special guests, as well as representatives of important international economic organizations, such as the World Bank, the International Monetary Fund or the European Bank for Reconstruction and Development. During the work of the Summit, the President of Romania highlighted the political importance and the potential of the Three Seas Initiative to contribute to reducing the development gaps between the states participating in the I3M and the rest of the EU member. At the same time, the list of strategic priority projects was also updated, the first such list being launched on the previous Summit in Bucharest in 2018.

At the end of this Summit, the leaders of the participating states issued a joint statement in which they welcomed the revised short list of I3M priority interconnection projects in the three key areas - transport, energy and digital - with the objective of increasing the effectiveness of political support for these projects and expressed their encouragement for strategic partners, interested governments, development banks, international financial institutions and private investors to share the objectives, political vision and goals of the Initiative, to support the financing of I3M's strategic projects. At the same time, in the declaration, the state leaders expressed their willingness to develop innovative projects for a resilient regional infrastructure.

The President of the Republic of Moldova, Maia Sandu, also participated in this event as a special guest, and had a series of meetings with President Klaus Iohannis, Prime Minister Marcel Ciolacu and President of the Senate Nicolae Ciuc?. The discussions referred to the progress of EU integration, with an emphasis on the opening of accession negotiations, and the strategic interconnections between Romania and the Republic of Moldova. The Prime Minister of Romania reaffirmed the political and technical support for the integration of the Republic of Moldova into the EU, showing that it is a priority at this moment to obtain the decision regarding the opening of accession negotiations. Also, Nicolae Ciuc? reiterated his support for the accession of the Republic of Moldova to the EU and mentioned that in the field of transport, new bridges will be built over the Prut, which will increase the number of border crossing points.

At the same time, in the margins of the Summit, President Klaus Iohannis had a bilateral meeting with Austrian President Alexander Van der Bellen who expressed his support for finding a solution in favour of Romania's accession to the Schengen area as soon as possible, despite the negative vote of the Austrian Government last year for our country's accession to Schengen. In favour of Romania's accession to Schengen, the MEPs from the "Renew Europe" Group also showed their support and adopted this week a declaration regarding this situation. The adopted document states that, in 2011, Bulgaria and Romania successfully completed the Schengen Evaluation Process and met all the necessary conditions for the implementation of the acquis communautaire in all areas. "Renew Europe" urges the Austrian government to cancel its veto without further delay and allow Bulgaria and Romania to join the Schengen Area.

Fiscal and Economic Updates

OVERVIEW

Once again this week has brought up the subject of tax changes prepared by the Government, this time with the appearance of other drafts of the draft Government Emergency Ordinance (one on Monday, another one on Thursday) that aims to bring a new increase in contributions to the State Budget, by increasing taxes. Thus, among the new measures we will find (1) the overtaxation of banks by 1% on turnover; (2) the introduction of a minimum tax on turnover and will apply to those companies with revenues above € 50 million (for taxpayers with a rate of return below 3%, the tax will amount to 0.5%, and for those with more than 3%, the tax will be 1% - however there is apparently no consensus between PSD and PNL here); (3) income tax rates for micro-enterprises of 1% for micro-enterprises with revenues up to and including €60,000 and 3% for micro-enterprises with revenues above €60,000; (3) the introduction of a ceiling of €60,000. 000 per year for the health contribution for self-employed activities, above which level the difference in contribution will be due; (4) a tax on interest income from government securities; (5) IT-workers to be exempt from contributing to Pillar II pensions, but with the possibility to choose to contribute; or (6) an excise tax on high sugar content drinks. As a reminder, these measures are only part of the drafts of the forthcoming draft GEO presented by the press this week, with the actual measures to be presented when the draft legislation will be published in the coming days/weeks.

Still on the subject of the future draft legislation that will bring changes to the Tax Code, we turn our attention to the statements of political leaders, in particular Nicolae Ciuc?, Marcel Ciolacu or Marcel Bolo?, who these days have discussed in the public space about the assumption of responsibility by the Government in September of the future legislative package that includes the series of tax changes discussed above. But what is the government's assumption of responsibility for a piece of legislation? Simply put, the Government drafts the legislation it wishes to assume responsibility for, followed by a Government Decision to assume responsibility. The draft legislative act is then submitted to the Joint Standing Bureaux of the Chamber of Deputies and the Senate, which set a deadline for parliamentarians to submit amendments, which may or may not be accepted by the Government. The next step is for the Prime Minister to present the draft to the joint plenary of the Senate and Chamber of Deputies, but without it being debated or voted on by the MPs. After the Prime Minister's presentation, a three-day period begins within which a motion of censure against the Government can be tabled. If no motion of censure has been tabled or rejected within this period, the draft bill or programme is considered adopted and goes to the President of Romania for promulgation.

Next, we will also turn our attention to the European Commission's position on how it sees the future fiscal measures being discussed in Romania. As we know, several political leaders in Bucharest have thrown the responsibility for the upcoming unpopular fiscal measures to Brussels, but how true is that? What we do know for sure is that the Commission has proposed that Romania pursue fiscal policies in line with the EU Council Recommendation of 18 June 2021, thus it is up to Romania to decide on the specific measures to be implemented in order to reach the deficit targets. Further, in spring 2024, the Commission is expected to assess the outcome data for 2023 and decide on possible next steps under the excessive deficit procedure.

?ON THE RECOVERY AND RESILIENCE PLAN

The Minister for European Investment and Projects, Adrian Caciu was questioned by the European Affairs Committee of the Chamber of Deputies on the state of play of the NRRP milestones, where he touched on topics such as the closure of the 2014-2020 financial year or the renegotiation of the NRRP with the European Commission. We will focus on the NRRP, about which Caciu said that there is a decrease in the grant of €2.1 billion due to Romania's economic growth above EU estimates, which will be offset by the 1.4 billion euros from the EU's REPower. Also here, the minister added that the renegotiation of the NRRP with the European Commission is in a final stage, without giving more details. Regarding payment request number 3, out of 79 milestones and targets, 64 are achieved. Thus, Caciu pointed out that one of them will be restructured and the remaining 14 milestones will be 90% met by the end of September and one or two milestones are due by October the 15th. Regarding the problems encountered with the energy and special pension milestones, the Minister said that "technical work is being done with the EC on the amendments from the Ministry of Justice and the Ministry of Labour, so that they are in line with the CCR decisions".