Public sector wages were cut by 25% in July 2010 as part of austerity measures and then raised by 15% in 2011, and in order for them to be restored to the original level, another increase of around 16% would be set to follow.
While the Democrat Liberal camp, which is leaving office, say there is money in the budget for wage increases, the former opposition currently in power says there isn’t.
All talks converge towards dropping the budget deficit target, set in the agreement with the International Monetary Fund and the European Commission at 1.9% of the gross domestic product, as the political battle heats up in the run-up to elections.
After representatives of the former government repeatedly said that there was fiscal room for wage increases, prime minister designate Victor Ponta said on Thursday that he had now reached the conclusion, as finance minister designate Florin Georgescu, was “looking over the papers,” that neither the Boc Government or the Ungureanu Government had allocated money for the restoring of wages, with the situation being “much worse” than it had been presented to be.
Under the circumstances, raising the budget deficit target is required. Were it to be exceeded, this could be penalized by the markets and by rating agencies, and Romania would run the risk of borrowing at higher costs.
According to the calculations of the Finance Ministry, raising public sector wages by 16% as of June would cost 2 billion lei (EUR450 million), while the reduction of social security contributions (CAS) by 5 percentage points, another measure contemplated by the former government, would require additional RON2.3 billion.
As far as social security contributions on pensions are concerned, data shows that RON650 million would be necessary to pay back unlawfully retained contributions for this year alone.
Some political uncertainty over this autumn’s parliamentary elections has already been factored into Romania’s rating, but Fitch ratings agency warns that “a material increase in populist policies resulting in a significant divergence from the current fiscal consolidation program could put downward pressure on the rating.”
Moody’s in turn believes that going back on any of the measures of fiscal consolidation would delay the reduction of the budget deficit. The two agencies currently have Romania in the investment grade category.
Most Romanian analysts are skeptical that a potential increase in the deficit would consolidate the trust of foreign investors. Lucian Anghel, chief economist of the BCR, believes ratings agencies will not penalize Romania for increasing public sector workers’ wages.
“I think it is essential for Romania to stay within the target of 3% of GDP according to the European methodology in order to consolidate foreign investors’ trust. I am convinced the new Finance Minister, First Deputy Governor [of Romania’s central bank], is the perfect choice at this time. We are talking about restoring wages. It will be a very difficult task for him to find long-term financing resources and to negotiate an increase in the deficit with the IMF,” Anghel said.
Ionut Dumitru, president of the Fiscal Council, says if one wants to boost wages, the only possibility is to reduce personnel numbers. He cites the Law of fiscal-budgetary responsibility, according to which overall personnel spending of the general consolidated budget cannot be increased during the budget year through budget revisions.
Spending on public sector personnel has been set at RON39.8 billion this year. If this provision were to be ignored, which would not be the first time it happened – a waiver to this law has been granted in the past in 2011, when overall budget spending included in the budget was boosted in order for arrears to be paid.
The head of the Fiscal Council says one should try to prevent raising the budget deficit during the year because this could be perceived as a fiscal policy slippage. The latest letter of intent negotiated by the Boc government with international financers provides for a deficit target of 1.9% of GDP for this year (around RON12 billion according to the cash methodology used by the IMF and by the Romanian authorities) and under 3% of GDP using the European methodology (ESA 95).
Whereas in the past the difference between the European reporting methodology and the Romania one was of around half a percentage point, in 2011 the difference increased to over one percentage point, most likely because of arrears, mainly from state-held companies. After the first quarter of 2012, the deficit reached 0.6% of GDP.
The head of the Fiscal Council estimates that this year the difference between the reporting of the budget deficit according to the two methodologies (cash and ESA) could be of 0.5% at the most. So, in theory, the cash methodology deficit could be boosted from 1.9% of GDP to 2.5% of GDP at the most.
(English version by Daniela Stoican)