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High impact tax measures taken by Grindeanu government. Trap of repealing maximum threshold for CAS and CASS
de Razvan Diaconu 8.1.2017
The emergency ordinance by which Grindeanu government will increase some wages of the employees from the public service (salaries in administration, culture) will have a budget impact of – 5.13 billion lei in 2017, according to the draft emergency ordinance published by the Ministry of Finance.
On the other hand, according to some other changes of the Tax Code expected for Friday, the employees will owe contributions to the pension and healthcare system for the entire income, as the current threshold equivalent to 5 gross national average salaries has been repealed. According to the Government’s calculations, the measure will ensure additional budget revenues of 1.9 billion lei.
The entire additional revenue will be spent after 1 July, on the increase of the pension point.
To note: the draft budget prepared by Ciolos government is based on a budget deficit of 2.99% of GDP, without integrating the impact of the social measures promised by PSD during the election campaign, which started to materialize on Friday.
List of measures decided by the Government on 6 January
The Government meeting agenda from Friday included an emergency ordinance for increasing several types of incomes.
The measures planned by the Government include:
- introducing free railway transportation for students
- increasing the pension point to 1,000 lei
- increasing student scholarships by rising the allocation per student from 83 lei to 201 lei
- increasing the minimum pension from 400 lei to 520 lei
- 20% wage increase for the local administration
- 50% wage increase for actors and other artist categories
According to the document, the budget impact of all the measures from the ordinance is of 5,13 billion lei for 2017. The document does not include the budget impact calculated for the next years.
Minimum wage increases to 1,450 lei, threshold for microenterprises increases to 500,000 euros
The increase in the minimum wage to 1,450 lei, the increase of 20% of the wages from the local administration and the 50% wage increase for actors and other groups of artists have been announced the day before the Government meeting by the Chairman of PSD, Liviu Dragnea.
Grindeanu’s cabinet also adopts the tax cut to 1% of the turnover for the enterprises below the threshold of 500,000 euros.
“I hope for both the President and the opposition to understand the signal given by the Romanians’ vote. Romanians voted to have a better life,” justifies Liviu Dragnea the social measures from the debut of Grindeanu government.
On the other hand, the employees, PFAs, and pensioners who also obtain dividend, interest, royalty, and rental income will be exempted from CASS for these incomes.
Eliminating maximum threshold for CASS and CAS – long-term effects
The issue of eliminating the maximum threshold of five national average gross salaries for pension and healthcare contributions is likely to cause very big problems for the public pension system in time.
For now, authorities estimate that will collect an additional revenue of 2 billion lei by repealing this threshold – a wrong calculation from several points of view:
- first, in an extraordinary session, lawmakers voted on Thursday the CASS exemption for pensions – annual budget impact: – 745 million lei
- secondly, the Government also exempted on Friday the employees and PFAs from CASS for the income from dividends, interest, royalties, rentals (unspecified impact of this decision)
It means, without any doubt, that the 2 billion that Sorin Grindeanu counted in the opening of the government meeting on Friday are at the best one billion.
In the long term, the issue is much more complicated: The pension budget has a deficit of EUR3.2 billion. Since the “liberalized” CAS contributions, those who pay now higher contributions should receive in the future pensions commensurate with their contributions.
By complementing the picture with the statistics from INS on the birth rate, analysing the clear trend of demographic aging, the long-term unsustainability of the measures summarized above becomes obvious.
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