BR Opinion! Alexandra Smedoiu, fiscal services Partner, Deloitte: 2019 – going up or going down?

The first months of the year have been full of news for the Romanian public: new legislative provisions came into effect from a Government Ordinance published just before New Year, macroeconomic data released in early February shows a decreasing pace of growth for 2018 and potentially 2019 going forward. What should we, as citizens, read of this news? First, we did not understand the urgency of Government measures passed in just under two weeks, whereas new tax measures, as a rule, have to be announced 6 months in advance.

Is it because Romania runs the risk of a large budget deficit, higher than 3% of the gross domestic product, as agreed with the European Union? Is it because there is an implicit economic slowdown and we want to protect budget revenues? Secondly, we note that certain sectors are favored by the new measures, like construction, kindergartens, while others are affected, like banks, pensions, energy and telecommunications. This might be an indication of a larger country strategy to focus on certain sectors rather than other; or it could be a way to collect more revenues from sectors, which generally can afford this. The bigger question here is what would be the level of adjustment in these markets and what would be the impact on the larger public? The answer depends on the way companies in affected sectors can swallow the effect or transmit it to their customers via increases in prices.

Major concerns

One good example here is the bank asset tax. The bank asset tax is not a Romanian invention. It is a tax which applies in other European jurisdictions as well, quite successfully, and which functions as a deterrent to banks for engaging in risky, toxic business. What is
unusual here is the level of the tax, 1.2% per year (as per current rules), and the pegging factor, which is the interbank offered rate, the very famous ROBOR. For debtors, this new tax may mean an increased borrowing cost, up to a certain extent, whereby we expect
banks will cover internally some of the cost and will pass on only a part of this cost to the customers. In addition, by pegging the tax to ROBOR, the law reduces the effectiveness of the monetary policy, which should limit inflation. Without this mechanism, the inflation may
go up even further, which translates into increased prices for goods and services throughout the entire spectrum. Like in a circle, while the inflation is relatively high, the ROBOR cannot go down, so the cost of credits is not likely to reduce in the near future, quite the opposite.

The fix here is to find the optimal level of the tax, which can be supported by the system, and to remove the pegging from the interest rates.
Another example is the measure concerning the private pension system, where the future contributions can be transferred to the state system. At the same time, pension administrators are required to contribute additional capital. The private pension system was
created to support in the future the public pension system in paying the pensions of retirees, whereby around year 2030 there will be a boom of retirees. The private pension system (pillar 2) can be assimilated to a mandatory savings scheme. Since Romanians do not generally save, this pillar is a mechanism, which provides a savings instrument to millions of people which otherwise, could not have afforded it. So at the cost of foregone current social contribution income, the state created an alternative to fund future pension payments. The impact of changes proposed by the Government can be devastating to Romania’s pension system and have not been discussed publicly before. A real dialogue is
mandatory to further identify constructive measures to support Romania’s retired population in living a good life while being old. It is obvious that simply ignoring the future needs of citizens puts our children and us all at risk of being required to pay an even larger share of
our incomes to support the state’s social income security scheme.

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The income security scheme should be part of a larger national strategy to tackle Romania’s important problems in the area of demography and emigration. Solutions result from social dialogue. Another example comes from real estate. Construction companies benefit of a reduced salary cost, which however comes at the expense of removing private pension contributions for employees in those companies. Potential benefits to these new rules may come from reduced emigration and even return of those workers that sought higher salaries abroad. Even so, the reverse of the coin is an increased construction cost of real estate, and thus lower accessibility for people to buy homes.

Moreover, similar examples can be given from sectors such as energy and telecommunications, where new rules may lead to increased prices of those services, at the risk of generalized inflation. The central idea is that there are sectors, which benefit at the expense of others, while at the same time we lack an overall country strategy and a social dialogue that would allow us to find solutions for the benefit of the greater society. Definitely the market will self-adjust, but as citizens, 2019 is a time to be prudent, excel at
what we do and find the optimism to see long term.