Playing with the economy: How did the ruling coalition in Romania alter the business environment with inadequate decisions and with totally or partially withdrawn initiatives

„Stop this fiscal and budgetary hopping,” President Klaus Iohannis told the governing Social Democratic Party (PSD), Alliance of Liberals and Democrats (ALDE) and Democratic Alliance of Hungarians in Romania (UDMR) on June 29, at the Tudose Government swear in ceremony. The president’s request was totally ignored in the three-month governance of the Tudose cabinet.

It all started with a new governance program, in which the coalition promised measures to which the Government placed itself in different ways: some were rejected after public scandals, others were postponed, others were adopted indifferently to negative reactions. The business environment was, however, seriously disrupted by controversial measures such as VAT split, Social Security switching from the employer’s obligation to the employee’s part, over-excise on fuel, or forcing state companies to pay extra dividends. All these were accompanied by repeated attacks on banks or on mandatory private pension funds, which makes their fate unclear. There were also ideas of the „discussed and forgotten” category such as solidarity tax or turnover tax.

The Tudose Cabinet began its mandate by taking over from the PSD-ALDE coalition a completely different governing program than the one which they won the election with, the VAT drop from 19% to 18% being postponed by one year, by 2019, and being added new taxes such as the solidarity tax or turnover tax with 2-3 tax stages. Following the negative reactions on the market, the Government abandoned the idea of introducing these two forms of taxation. But it also gave up a beneficial measure for the business environment, even if it was included in the governance program: the discharge of dividend tax. Instead, he did not give up the introduction of VAT split, a measure not well received by the just firms.

Surprisingly, the VAT split has undergone changes in the Senate budget committee. The committee has decided, following amendments submitted by the PSD senators, that the disbursed VAT payment will be mandatory starting next year, only for state-owned companies and firms in contractual relations with the state. It remains to be seen what will be the final form approved in Parliament.

In addition to the Social Democratic Party (PSD)and Alliance of Liberals and Democrats (ALDE) Coalition program, the Government came up with a completely unexpected measure: applying an over-excise to fuel. Even state-owned companies will not escape government interventions, being forced to pay additional amounts in the form of dividends other than those already distributed out of 2016 profit. This decision puts state companies in a position to borrow money next year for big investments. In fact, in the three months since the investment, the Government has not proved too friendly with the investments. In the budget rectification, the Ministry of Development lost almost 2 billion RON and the Ministry of Transport – 6.2 billion RON. Most of the money has been redistributed to pay salaries in the budget sector

Another controversial measure by the Government is for employers of private companies to maintain a certain level of gross salary after the Social Security contributions will be exclusively in the duty of the employees. It was announced by the Finance Minister, but it is unclear even now what form will this law have

The business environment has been hard pressed after the Finance Minister’s statement that Pillar II pensions will be disbanded. Immediately the stock market reacted negatively, the most affected being the listed energy companies. Subsequently, the information was denied by the Prime Minister Mihai Tudose and leader of Social Democratic Party (PSD) Liviu Dragnea, but shortly after, various attacks on the private pension funds were launched. Banks did not escape from repeated criticism and attacks from the government, being accused of failing to declare their profits. Finally, the Ministry of Finance came up with a controversial list that for the most part included bankrupt banks from long time ago.

Private or state-owned companies endure ,in fact, the government’s inability to provide the necessary budgetary revenues to cover the rise in pensions and salaries in state institutions.