The salary increases recently adopted by the Parliament will cause the increase of Romania’s budget deficit to about 3.5% of GDP in 2017, well above the International Monetary Fund’s (IMF) recommendation of 2% of GDP, which could result either in lower investment expenditures or additional tax applied, considers the IMF Resident Representative for Bulgaria and Romania, Alejandro Hajdenberg, quoted by Agerpres.
„During the mission in March, but also on the subsequent updates, we concluded that in current circumstances Romania’s budget deficit will exceed 3% of GDP in 2017 (about 3.2% of GDP). Following these salary increases, it will become harder to maintain the deficit at 3% of GDP. We estimate a net impact of salary increases of 0.3 to 0.4 percentage points of GDP. As effect of this law, the deficit will be around 3.5% of GDP next year, „said Alejandro Hajdenberg, on Wednesday, for Agerpres.
He mentioned that the institution he represents has recommended Romania a budget deficit ‘not of 3%, but of 2% of GDP’ for 2017, to create tax buffers (reserves) and keep public debt under control.
The IMF official also explained why a budget deficit above 3% of GDP is not desirable for Romania.
„First, Romania must fall within the limits imposed by the European Union, of 3% of GDP. If this level exceeded, the excessive deficit procedure would start and Romania’s reputation would be affected, „said Hajdenberg.
Moreover, a deficit exceeding 3% indicates, in his opinion, that Romania has a pro-cyclical fiscal policy. ‘The economy is already growing fast and this relaxation created by the salary growth will provide additional stimulus to the economy, which is not recommended at this point. In addition, the VAT reduction will also come into force next year (from 20% to 19% – editor’s note), as well as the repealing of the extra excise and the tax on special constructions (editor’s note: included in the Tax Code), which will stimulate even more the private consumption,” said the IMF representative.
He considers that the salary increases add to the fiscal loosening, which could cause the return to some developments observed in Romania before the crisis and that situation should be avoided.
The official IMF also believes that salary increases do not solve the distortions from the system of public sector pay and will affect the competitiveness of the Romanian companies on the foreign markets.
„There are many distortions in the system of public sector pay. There are people who do the same work within different government institutions, but they are paid differently. This is a problem that must be addressed, „said Hajdenberg, quoted by Agerpres.
Competitiveness could be affected by the fact that private firms will be under pressure to increase salaries, at their turn, to attract or retain employees who would be tempted by the increased salaries from public sector.
„This situation will put pressure on prices, corporate profits and ultimately the external competitiveness of the country,” said the IMF’s official.
In case that the salary increases are implemented, and the Tax Code measures applied, although the IMF has recommended to postpone them until the economic conditions allow that, Romania will have two choices: either to raise the budget revenues (which could mean new or higher taxes – editor’s note) or cut spending or both, to keep the deficit target of 3% of GDP. A part of the salary increases might turn this way on citizens in the form of additional taxes or spending cuts for investment.
„These are difficult choices to make because Romania needs public investment in infrastructure to achieve growth on mid-term. Romania now grows by 5%, but to keep growing at the same pace, structural reforms and public investments are needed. Unfortunately, when there were problems in the past, first to cut was the public investment spending,” said the IMF official.
He drew attention to the fact that salary increases have a permanent effect, so that they must be paid regardless of whether the economy goes well or slows. “You should think that the economy will not grow at the same fast rate for a long time, so you must be careful to have the fiscal space for the necessary measures if something bad happens,” added Hajdenberg.
According to him, the IMF acknowledges the need of salary increases in the public sector, but that step must be made in a sustainable manner, based on a thorough analysis that simultaneously takes into account the distortions from the system and the fiscal space available.
„We are ready to work with the current government and the one to be formed after the elections, to help authorities prepare this plan and find a good solution to this problem”, said the IMF representative, quoted by Agerpres.
The Chamber of Deputies passed Monday the Ordinance 20/2016 with the amendments made in the specialized commissions that provide for salary increases in education and healthcare on average by 15%.
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