Romania cuts public sector wages and pensions to comply with IMF deal, does not touch tax rates

Newsroom 10/05/2010 | 12:13

Public sector wages are cut 25 percent, while pensions and unemployment benefits are slashed by 15 percent. The Romanian government is taking drastic measures to reduce the budget deficit.


President Traian Basescu announced last week that all public sector wages will be cut by 25 percent, while pensions and unemployment benefits will go down 15 percent in a move to comply with an IMF deal and reduce the budget deficit. According to an IMF forecast, Romania’s economic growth will be 0.8 percent this year, after contracting by 7.1 percent last year.

These options were chosen over a much-speculated increase in VAT to 25 percent and of the flat tax to 20 percent.

Under the terms of the loan, Romania must narrow its budget deficit to 5.9 percent of the GDP this year from 7.2 percent last year.

“It is not an easy path but it is a necessary one because at present maximum 3 million people are working in the real economy. The real economy is the one that restructured heavily in 2009. It reacted correctly to the crisis. It is the state that did not react correctly to the crisis!” Basescu said, adding that the state “looks like a very fat man that has climbed on the back of someone very thin, and this is the economy.”

The president said that the measures need to be implemented from June 1, and heads of institutions are required to prune their staff, keeping only the best workers. All salaries are expected to be affected, the president said, including the minimum wage, but the government will compensate for the difference to prevent the minimum wage from falling below RON 600.

Along with 15 percent cuts in unemployment benefits and pensions, subsidies will also be cut.

“I want you to keep in mind the following thing: public sector salaries represent 28 percent of the budget. Social expenses represent 12 percent of the GDP, which is over 35 percent of the state budget. (…) We wonder how we can allocate enough money to schools and hospitals, and for the army and the police to function,” Basescu said.

The president added that revenues to the state budget are 31 percent, while budget expenses are 41 percent, and the difference needs to be covered by restructuring the budget and social sectors. Other measures are expected like changes to the labor code to make the work force more flexible, and analyses of various taxes.

According to local newswire Mediafax, the wage cut will bring savings of RON 7 billion (around EUR 1.7 billion). According to the same newswire, over 140,000 public sector employees will be sacked by the beginning of next year in order to keep staff wage bills within the limits agreed upon by the IMF. This is the equivalent of 10 percent of employees in the public

sector being given their marching orders.

Central Bank governor Mugur Isarescu said that so far the public sector has only managed to increase its deficit, while the external imbalance was adjusted only at the expense of the private sector. He added that going back to economic growth where adjustments have not been finished is not desirable, and that it was essential for these corrections to be made as soon as possible.

Trade unions have threatened to protest against the measures. “Basescu and his people have ruined the country’s economy and we are in collapse because of their policies,” said Vasile Marica, the leader of Sed Lex trade union.

Similarly, pensioners’ organizations have criticized the announced measures.

“The likelihood that we will strike is high if these draconian measures are not abandoned,” said Marius Petcu, head of the CNSLR Fratia union, which represents about 800,000 people, quoted by

Reuters. “I think in two weeks we will know whether we will strike. We are talking about hundreds of thousands of people that need to be consulted.”


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