Social partners criticise 2004 state budget

Romania's state budget for 2004 was adopted in late November 2003. Despite the fact that social assistance expenditure will rise to 10.8% of GDP, the budget came under criticism from the social partners. Their criticisms focused on the unchanged tax burden, a perceived lack of incentives for economic development and the persistent low wages.

The 2004 state budget was adopted at the end of November 2003 by means of Law no. 504, printed in the Official Monitor on 2 December. This law also governs the health insurance budget, while the 2004 social insurance budget was set by a different law.

The basic premises for the drafting of the 2004 budget were:

• an increase in gross domestic product (GDP) of 5.5% (compared with 4.9% in 2003);

• an annual average inflation rate of 9% (14.1% in 2003); and

• a budgetary deficit of up to 3% of GDP (2.4% in 2003).

GDP in 2004 is forecast to stand at approximately EUR 50 billion, with state budget receipts rising to EUR 8.6 billion and the budget deficit to EUR 1.5 billion. In 2000, when the current government was elected, GDP stood at only EUR 40.3 billion, state budget receipts at EUR 6.03 billion and state budget expenditures at EUR 7.5 billion, with the budget deficit standing at 3.6% of GDP. The government highlights the stability achieved in public finances.

Budgetary policy

According to its economic restructuring and reform plan, the present Social Democratic Party (Partidul Social Democrat, PSD) government foresees the prolongation of the current austere budgetary policy until 2006. The main arguments invoked for this approach are the need to: fight inflation, including by reducing the budget deficit; conform to EU convergence criteria; and harmonise Romanian fiscal regulations with those in current EU Member States, which will allow for both a reduction in tax burden and a general increase in the tax base.

In recent years, the government has had to face multiple challenges. These have come from both: within the country, notably economic restructuring, accompanied by collective redundancies (RO0307102N) and the attendant compensation, the persistence of high inflation and the need for macroeconomic stabilisation; and from the outside, resulting from Romania’s coming accession to the EU and from a new agreement signed with the International Monetary Fund (IMF). The main short- and medium-term priority for budgetary and fiscal policy has been the consolidation of public finances, especially by ensuring their stability and a steady increase in budgetary receipts.

This situation has frequently led to tension in the social dialogue and trade unions in particular have expressed their discontent vigorously over many unpopular measures, such as:

• periodic price increases (almost every quarter) for electricity and other public utilities (such as natural gas, water and sewage) in order to adjust them to European or international prices;

• cuts in public subsidies;

• adjustments to the excise tax regime in line with that in force in the EU, which has resulted in higher prices for both imported and domestic goods;

• other measures adopted in order to bring customs duties and VAT into line with EU fiscal regulations; and

• keeping the budget deficit under control (lower than 2.5%-3% of GDP), at the expense of lowering social assistance standards.

Social partners' views

Both trade unions’ confederations and employers’ organisations criticise the current wage taxation regime, which remains unchanged under the 2004 state budget law. Out of the total wage cost, over recent years 32% has been made up of social security contributions/taxes paid by the employer, whereas of the remaining 68% (ie the gross wage) only 46-48 percentage points represents the net pay actually received by the employee.

Employers’ organisations claim they can not afford further pay increases as long as their social security contributions remain at high levels, and the outcome is a rising share of employees paid only the minimum wage as well as the spread of illegal work. Also with regard to state budget policy, some employers’ associations are demanding more domestic subsidies and higher custom duties on imports in order to protect domestic goods against competition from other countries in the Central European Free Trade Agreement (CEFTA) area and the EU, especially for products such as meat and milk. Quite opposed are the demands of companies active in the foreign trade sector or industries that use or assemble imported products. Their argument is that subsidies and custom duties are forcing Romanian consumers to pay higher prices or to buy lower-quality domestic merchandise.

When the draft 2004 budget was analysed by the tripartite Economic and Social Council (Consiliul Economic si Social, CES), employers’ organisations also expressed their discontent with the small sums provided as incentives for export companies and with the limited financial resources allotted for subsidised credits for the development of small and medium-sized enterprises. Employers are also seeking tax deductions for reinvested profits.

Both employers and trade unions have expressed considerable concern about the way current problems with the health insurance system are being tackled, and have demanded a more transparent use of funds.

Trade unions have called for a reduced tax burden, a demand which is strongly related to their main objective of increasing the national minimum wage (RO0401104F). Recognising that employers will not meet union demands under the current taxation regime, unions have been calling for a sharp cut in income tax rates on wages, from a range of 18%-40% at present to 14%-25% (RO0310102F), but the government has has made clear that it will not allow unions and employers to reach an agreement on the minimum wage at the government’s expense (RO0312101N). Furthermore, in an assessment of its record, released on 19 December 2003, the government states that payroll taxation has followed a downward trend: 'as a proportion of wages, contributions were cut from 60% in 2000 to 52.5% in 2003; in 2004 a new reduction will follow, to 49.5%.'

When, through the adoption of the state budget law, it became clear that the government will increase wages in the public sector by 6% from January 2004 and by another 6% from October 2004, the leaders of the Public Servants Trade Union (Uniunea Sindicatelor Functionarilor Publici, USFP), affiliated to the National Trade Union Bloc (Blocul National Sindical, BNS), announced their intention to bring to a halt all official reporting activities if their members' wages are not increased by at least 50%. They demanded an average monthly wage of EUR 105 (compared with only EUR 70 in the present) and wage indexation in line with variations in the official ROL/EUR exchange rate. BNS accused members of parliament 'of approving at high speed the state budget and the Fiscal Code while being insensible to the disgraceful regulations on the minimum wage'. Furthermore, BNS claimed that the Minister of Public Finances, Mihai Tanasescu, should be discharged for his failure to cooperate with the social partners on this matter.

For its part , the government was content that the 2004 state budget was completed before the beginning of the year in question, and not a few months later, as used to happen until 2000. One of its main points of satisfaction is that in 2004 budgetary expenditure on social assistance will reach 10.8% of predicted GDP. This will enable a 100% increase in pensions for workers in agriculture, the conclusion by the end of 2004 of a long process of recalculating all pensions, and also improved standards for the whole welfare system.

Commentary

Regardless of all controversies, the 2004 state budget is now in force and is able to guarantee a minimum level of macroeconomic stability and the functioning of the social assistance regime, as well as the fulfilment of all obligations that Romania has previously assumed in respect of accession to the EU. Taking into account that the budget covers an electoral year, the government showed political courage in promoting such a project.

Despite domestic quarrels about budgetary and fiscal provisions, outside the country Romania's financial and fiscal policies have been positively assessed not only by the IMF but also by other international financial institutions, which have progressively improved the country’s rating. (Constantin Ciutacu, Institute of National Economy)