Special pensions, tax exemptions plague Romania’s budget as EU scrutiny continues

Romania’s ballooning public deficit has warranted European scrutiny as spending has increased thanks to an overly generous special pensions system for a select number of public officials while revenues have been hurt by a number of tax exemptions.

Romania has been under an excessive deficit procedure since early 2020, but the suspension of the EU’s fiscal rules during the COVID pandemic and its aftermath eased the pressure on the government in Bucharest.

With EU fiscal rules coming back in force in 2024 and Romania’s budget deficit increasing more strongly than predicted, the government is forced to look at ways to improve its budgetary situation, which means looking at its special pensions system as well as its tax loopholes.

A weakened reform

Since the end of the 1990s, Romania has had a special pension system that initially targeted judges. The system was later extended to military personnel, diplomats, and parliamentarians.

According to Free Europe, the average pension of a special pensioner is almost €3,000, while the highest pension is over €10,000. In comparison, the average ordinary pension is 1,960 lei, the equivalent of €385, according to data centralised by the National House of Public Pensions.

The result: Around ten thousand special pensioners still earn pensions several times higher than the president or prime minister. Judges are the richest pensioners in the Romanian public pension system.

Many special pensioners even return to the state system, some to positions of public office, and end up combining their salaries with their pensions. At the end of last month, and under pressure from EU scrutiny, Romania’s Parliament adopted a bill to abolish special pensions.

However, the draft law has undergone important changes compared to the version first proposed by the government and agreed with European officials.

Specifically, lawmakers of the governing PSD (socialists) and PNL (liberals) introduced derogations and exceptions that postpone the implementation of the reform for the next five years and extend the elimination of special pensions for 20 years.

Moreover, among the exempted categories that will still be able to combine salary and pension are parliamentarians, high-ranking employees in public administration, and employees in the health and education sectors.

“It seems that the authorities’ main objective is to guard special pensions,” a source from the National Bank of Romania (NBR) told EURACTIV.

“Special pensions are a serious issue from a budgetary point of view, but also a serious issue from a social cohesion point of view,” the NBR source said.

“These pensions represent 1% of GDP, and the percentage increases every month. You can’t have super-people retiring at 40 with pensions higher than their salary or people retiring with 10,000 euros.”

Meanwhile, government sources told EURACTIV that there had been “a permanent exchange of views with the European Commission experts on the amendments,” and that “the form voted in Parliament complies with the requirements of the Commission.”

The same source added that the law had been challenged by the Romanian High Court of Cassation and the Constitutional Court (CCR) with a deadline set for 27 July.

“If the CCR says that there are elements of unconstitutionality in this law, then we will quickly organise an extraordinary parliament session to make the necessary changes,” the government source said.

Tax exemptions

The Romanian budget also suffers on the revenue side as there are hundreds of thousands of Romanians who currently benefit from tax benefits, including workers in agriculture, the IT industry, and construction.

For Valentin Lazea, the chief economist at the NBR, the solution would be to abolish all tax exemptions. However, he said, the solution is simple and known to everyone but it is not put into practice.

“The answer lies in three words: greed, ideology, fear. The greed of the business environment that benefits from exemptions; the ideology of a large part of analysts and economists; the fear of the consequences of the reform on the part of the political class”, he said.

Meanwhile, the government is looking into other options.

According to a government source, the Commission would like the Romanian state to choose from the fiscal measures proposed in the World Bank study carried out for Romania as part of the National Recovery and Resilience Plan

It is not clear, however, what the governments will decide in the political negotiations, given that the list of the measures being discussed includes, in addition to those proposed by the World Bank, tax hikes, such as the increase in excise duties on tobacco and alcohol, disregarding the schedule of increases agreed with the industry last year.

According to Profit.ro, firms in the industries concerned have criticised the idea, arguing that a large number of successive excise tax increases only encourage evasion to the detriment of legal businesses.

The government is also considering the introduction of a 1% tax on houses worth more than €500.000.

However, the leaders of the governing coalition have repeatedly promised that there would be no new tax increases in 2023.

At the end of last week, the American Chamber of Commerce in Romania called on policymakers for transparency and long-term vision in defining the package of measures to reduce the budget deficit, worrying that short-term solutions might do more harm than good.

Elections and an Excessive Deficit Procedure

As elections are looming in Romania next year, the budget situation is unlikely to ameliorate soon, according to former prime minister Florin Cîțu.

“Given that next year is an election year and the budget is in their hands, [the socialists] will only increase spending,” he told EURACTIV.

The former liberal prime minister also said that the government led by Marcel Ciolacu would continue to adopt populist measures and would only reduce the deficit by taxing the private sector.

“And they will blame the Commission,” Cîțu added, arguing for pension reform instead of tax hikes.

While the prime minister’s office did not react to EURACTIV’s inquiry, a source close to the government dismissed the former prime minister’s criticism, saying that “Cîțu comes and gives us lessons and tells us to make reforms that he himself did not make”.

According to sources within the NBR, the coming elections mean that there will be very little courage to cut spending or cut handouts and that this might increase inflation.

“The budget deficit means additional aggregate demand. And when you have additional aggregate demand that you cannot cover with your own production, you cover it with inflation or with imports,” the NBR source said.

Contacted by EURACTIV, Finance Minister Marcel Boloș (PNL) reacted with a statement saying that the finance ministry was planning a “thorough assessment” of the budget.

“We recognize the need to optimizs spending without compromising essential services,” he said.

Meanwhile, the Commission might start insisting more emphatically on the need for budget reform.

„Budget execution for the early part of 2023 has been challenging, suggesting some consolidation measures will be needed to reach the 2023 headline deficit target,” a Commission spokesperson told EURACTIV.

“In April 2024, the Commission will assess the outturn data for 2023 and decide accordingly regarding possible next steps under the excessive deficit procedure.”

[Edited by János Allenbach-Ammann/Zoran Radosavljevic]

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