Weekly Fiscal&Political Report, June 23-30 June, 2023
Political Updates
INTERNAL AFFAIRS
The government led by Marcel Ciolacu seems to have outlined its agenda for the next period, with a first important measure already announced by the Executive: an emergency ordinance meant to reduce the prices of 14 basic foods, for a period of 3 months. According to the normative act, a reduction of commercial surcharges by up to 20% is foreseen for processors and retailers, as this surcharge reaches up to 45% currently. However, in order not to affect the distribution activity, the commercial surcharge applied cumulatively on the entire distribution chain, regardless of the number of distributors in the chain, can be a maximum of 5%, compared to the purchase price to which expenses are added operational. Among the products that were to have lower prices on the shelf are: white bread, cow milk of 1.5% fat, cow cheese, plain yogurt with 3.5% fat, white wheat flour, white sugar, eggs, sunflower oil, pork and chicken meat, but also fresh vegetables and fruit. Therefore, in the Government meeting held today, June 30, in which this ordinance is adopted, PM Marcel Ciolacu declared that, through this normative act, the governors begin to deliver "from the major objectives of this government". But, according to the prime minister, the change does not come through a temporary measure, but when the increase in production and processing is supported - in this case, through a support scheme worth 600 million euros for Romanian food producing companies that make investments in the processing units, also adopted by the Government.
Moving from the Government to the Parliament, just a few days before the end of this ordinary session and the start of the parliamentary vacation (July 3 – August 31), senators and deputies were busy debating and adopting projects that could not be postponed for the autumn ordinary session . Thus, the MPs quickly adopted 3 very important projects long awaited by civil society: (1) the elimination of special pensions ; (2) the elimination of the special pensions of MPs ; (3) the elimination of the pension-salary cumulation for civil servants .
Thus, the law on special pensions provides for the calculation of service pensions based on contributions, seniority in the specialty, but also the reduction of the calculation percentage related to the earned income. The minimum contribution period will be similar to that applied in the public pension system. However, the calculation percentage is reduced for all service pensions established based on normative acts, other than magistrates. In this case, the opposition harshly criticized the maintenance of magistrates in the special pension system, arguing that this way there is no social justice, given that the average pension in the contributory system is up to RON 2,000, ten times smaller than the pension received by a magistrate (RON 21,000). The High Court of Cassation and Justice (HCCJ) also has objections regarding this law, as it notified Constitutional Court (RCC) on this matter, citing, among other things, the defense of fundamentals human rights and freedoms. Of course, as we are used to, we expect RCC to admit the HCCJ referral and declare the special pensions law unconstitutional.
The law eliminating the pension-salary cumulation for civil servants also reached the RCC, following the objections of the HCCJ. Of course, in this case too, the legislators formulated exceptions to the law, among those who will be able to combine the two sources of income being teachers, caregivers, doctors, assistants, priests, artists, members of the Romanian Academy, dignitaries, but also the employees from the National Bank (BNR),?Financial Supervision Authority (ASF), National Authority for Communications Administration and Regulation (ANCOM), and National Energy Regulatory Authority (ANRE). Motivating these exceptions, PM Marcel Ciolacu declared that "if we want to decapitate the BNR today and all the institutions that are subordinated to the Parliament because we feel like it, we are making a fundamental mistake". In this case, as in the previous one, we can only wait for the decisions of RCC, to see where this important subject for Romania and its European funds progresses.
EXTERNAL AFFAIRS
This week, a small format meeting in preparation for the NATO Summit in Vilnius, organized by the Prime Minister of the Kingdom of the Netherlands, Mark Rutte, took place in The Hague. While also attending this meeting of the heads of state, President Klaus Iohannis provided a series of details regarding the discussions discussed during the meeting. Thus, the President of Romania claims that the Summit in Vilnius, from July 11-12, 2023, will mean strengthening the capabilities and the defence posture of the allies, but also the continuation of the support offered to Ukraine and, more recently, to the Republic of Moldova. Given the current geopolitical context on our borders, President Iohannis claims that Romania is "particularly" interested in further strengthening the Eastern Flank, by ensuring the necessary forces, structures, capabilities, and equipment, as well as the appropriate command and control arrangements. In this context, the head of state called for a meeting of the Supreme Council of Defense of the Country (CSAT), on Thursday, July 6, to discuss Romania's objectives for the NATO Summit in Vilnius, but also about the Romanian armed forces that can be deployed in missions and operations outside the territory of the Romanian state in 2024.?
Finally, on the occasion of this week's reception organized by the United States Embassy in Bucharest for the celebration of the Independence Day anniversary, the Romanian officials present at the event reiterated the importance of the Strategic Partnership between Romania and the United States (US). Thus, President Iohannis declared that Romania's foreign and security policy is based on this Strategic Partnership, recalling, at the same time, the firm commitment of the US President, Joe Biden, to defend "every centimetre of allied territory". At the same time, the head of state also mentioned the continuous effort of the Romanian authorities to actively collaborate with American partners to achieve the common goal of including Romania in the Visa Waiver Program. Instead, PM Marcel Ciolacu affirmed Romania's intention to deepen the Strategic Partnership with the US, by intensifying cooperation on all levels, "from the area of defence and security to the economic or cultural component". The example given by the prime minister is the "extensive program of reforms", which would ensure the development of an attractive business environment and increase the degree of legislative predictability.
Fiscal and Economic Updates
OVERVIEW
The new Minister of Finance, Marcel Bolo?, announced his main future priorities and plans. Thus, among the immediate priorities of his mandate are (1) reducing the budget deficit and ensuring fiscal discipline, and (2) reforming the tax system, which the minister says would consist in reducing the tax burden on individuals and businesses, while ensuring a fair tax environment, to which is added the accelerated digitization of National Agency for Fiscal Administration (ANAF) through the implementation of digitization projects such as the modernization of the electronic archiving solution and the implementation of the electronic invoicing system that allows the real-time transmission of invoices issued to ANAF. In addition, Marcel Bolos announced that it is very likely that a new set of measures to enter into force on September the 1st will be presented to the coalition, which means that most likely this summer we will have new changes to the Tax Code, in the same way we had last summer.?
As we have become accustomed to, every government that has come to power in recent years has come up with its own changes to the legislation, even though it will soon be barely a year since GO 16/2022, the last act that brought important changes to the tax system. Without bringing up the subject of the implementation of a progressive tax regime, as we were used to before taking office as Prime Minister, Marcel Ciolacu said that an analysis is being made of the restructuring of tax facilities announced by the Minister of Finance, concerning the construction and IT sectors. At the same time, he said that "We are the only European country which has a tax system where there is no single rate. We have 16, 5, 3, 8, 9. Nobody knows anymore. The single rate is the single rate. That's why it's called single rate, otherwise we would call it differentiated rate, not single rate", reinforcing the idea that restructuring tax facilities is mandatory. However, Ciolacu stressed that there will be discussions with representatives of the construction sector, IT-workers and all those who benefit from tax exemptions and said he was convinced that the best solution will be found.
The European Commission published a week ago the Proposal for a Council Decision authorising Romania to introduce a special measure derogating from Articles 218 and 232 of Directive 2006/112/EC on the common system of value added tax, granting Romania a derogation for the application of electronic invoicing for all types of transactions between businesses in Romania, with the provision that the use of the RO e-Invoice system will be optional for unsettled traders. It is recalled that the introduction of mandatory e-invoicing is one of the measures included in the NRRP, the derogation measure being applicable from 1 January 2024 until 31 December 2026, with the possibility of extension based on a new substantiated request from Romania.
ON THE RECOVERY AND RESILIENCE PLAN
This week, the Ministry of Investments and European Projects announced that the European Commission has positively assessed Romania's second payment request under the NRRP, worth €3.22 billion. Of this total, €2.14 billion is non-reimbursable financial support and €1.08 billion is support in the form of a loan, including 13% pre-financing. We note that Romania will receive €53.36 million less for the loan support component of the NRRP, related to payment request 2, but has 6 months to prove that the milestones have been satisfactorily met for this amount as well. However, the new Energy Minister moved quickly and of the two problematic milestones (milestones 129 and 133), milestone 133 has been met with the signing of the financing contract for a new 295 MW power plant in Craiova. Next, the European Commission will submit the assessment of Romania's payment application No 2 to the Economic and Financial Committee (EFC) for approval.
Finally, following completion of the public consultation in late March 2023, the Ministry of Investment and European Projects published this week an updated version of the proposals for Component 16 - REPowerEU. In addition to the recommended changes to the reforms and investments originally included, several new proposals have been made, such as the establishment of energy communities, the installation of photovoltaic panels in rural areas, the construction of natural gas and green energy transmission infrastructure in disadvantaged areas, the reduction of fossil fuel dependency by implementing programmes to transition individual heating systems from fossil fuels or wood to renewable sources. It is recalled that the REPowerEU programme is a special pillar dedicated to investments in energy infrastructure, with the aim of reducing energy dependence on Russia and better connecting Member States.
Lastly, after a several months break, this week saw the meeting of the Interministerial Coordination Committee of the National Recovery and Resilience Plan, an event coordinated for the first time by the new Prime Minister, Marcel Ciolacu. The meeting discussed the targets and milestones to be met for the submission of payment claims 3 and 4, as well as the progress made in updating the NRRP by including the RePowerEU chapter. Last but not least, the Prime Minister called for the deadlines set by the ministries and the Government to be respected for the implementation of reforms and investments.