Budget Chaos Hits Romanian Leu

Different Romanian Lei Banknotes on the table

Business and opposition leaders, trade unionists, small firms and even local councils across Romania have condemned an emergency ordinance (OUG) passed by the country’s government on November 8 which transfers the responsibility for paying social contributions from employers to employees. It is claimed that the changes, which take effect from January 1, 2018, will lead to additional costs for business and may mean that workers take home less money each month. Some companies may even be forced to lay workers off. The Romanian currency, the leu, moved past the psychologically crucial 4.6 lei to the euro barrier even before the OUG had been formally approved, hitting its lowest level for over five years.

“It’s a calamity,” said Ludovic Orban, leader of the largest opposition party, the Liberals. “The PSD-ALDE coalition is putting the health of the entire Romanian economy in danger, as well as the standard of living of every Romanian.” Romanian President Klaus Iohannis has also made public his opposition to the changes, saying that they will bring “fiscal chaos.” Mr Orban later said his party plans to put forward a no-confidence motion as soon as possible, and claimed he had the support of a “growing number” of PSD lawmakers.

Radu Derscariu, head of Deloitte Romania, issued a statement claiming that somebody earning an average gross salary of 3131 lei (676 euros) would need to see their pay rise 16.6 per cent in order to ensure they continue to take home the same net amount each month. Mr Derscariu also said that those who currently benefit from tax breaks (workers in the IT sector and the handicapped) would lose out even more.

Besides the changes to the way social contributions are paid, the OUG also slashes income tax from 16 per cent to just 10 per cent, and imposes a new form of taxation on SMEs: these will now all be taxed on turnover, at a rate of 1 per cent, and not on profit. Companies which lose money will be forced to pay tax regardless.

Florin Jianu, president of the National Council of SMEs, said that the change would “blow apart” the business environment. “More than six million contracts will need changing,” he said, before condemning the haste with which the government plans to implement the changes: “We can’t keep up anymore,” Mr Jianu claimed, “nobody knows where they stand.”

Local government budgets will be hit particularly hard. Until now social contributions were paid by firms into the accounts of local councils. Under the new rules the money will be paid direct to the state budget. Although Prime Minister Mihai Tudose reassured local council leaders and mayors that they would not lose out, many – including some belonging to the ruling PSD – are sceptical that the money will find its way from the central budget back to them.

Calin Popescu-Tariceanu, speaker of the Romanian Senate and leader of ALDE, part of the ruling coalition, brushed aside the criticism. “These measures will bring a whole raft of benefits,” he said. “They will in no way lead to an increase in the cost of employing somebody, nor will they lead to a fall in net salaries. These measures are part of the government’s programme to increase the spending power of ordinary Romanians.”

Even before the OUG was passed, official statistics suggested that uncertainty surrounding the budget were already having an effect on Romanian consumer confidence. On November 6, the country’s National Institute of Statistics (INS) published its latest set of numbers which showed that retail spending in September had slowed 2.2 per cent since August.