BUCHAREST (Reuters) - Romania may beat its official growth forecast of 5.2 percent this year and will press ahead with tax cuts in 2018, Finance Minister Viorel Stefan said on Friday.
The planned cuts have raised concerns with the European Commission and the International Monetary Fund, but Stefan said that budget costs would be mitigated by a higher tax pool.
He said Romania would also meet its budget deficit target of 3.0 percent of gross domestic product this year.
“We will certainly introduce from January 2018 the fiscal relaxation measures mentioned in the governing programme,” Stefan said in an interview for the Reuters Central & Eastern Europe Investment Summit. “Taxation levels will fall.”
At the moment, workers and employers jointly pay nine types of social security contributions totalling 39.25 percent of wages. From next year, there will be just two levies, for pensions and healthcare, totalling 35 percent of wages and payable only by workers, not their companies.
Parliament is also on the brink of approving a multi-year public sector wage bill, which would more than double healthcare workers’ gross wages, boost teachers’ pay by 50 percent and other public salaries by lower double digits.
But Stefan said most of the wage hikes would return to the budget in the form of taxes.
“What has not yet been understood is that the public sector wage hikes introduced by ... the bill include the social security contributions,” Stefan said.
“To not affect (state) employees’ net wages, we must cut social security contributions, and we said down to 35 percent would be reasonable, and ... cut the income tax,” he said.
“We want employees to have slightly more in net wages. (All these moves) make the impact on net salaries almost neutral.”
The minister aims to cut income tax from the current 16 percent in 2018, and the governing Social Democrats have said it will fall to 10 percent. Stefan said his ministry was still assessing the impact of the cut and that it was unclear whether it would be enforced in stages.
Taxation changes could be debated in parliament in September.
EU‘S LARGEST DEFICIT
The European Commission estimates Romania will run the EU’s largest deficit ratios this year and next, at 3.5 percent and 3.7 percent of GDP respectively.
But Stefan said the EU and IMF did not take into account the impact of fiscal stimulus, which will boost the taxation pool and generate higher revenue, including from about 100,000 new jobs created since the start of the year.
He also said Bucharest plans to run large structural deficits until 2019 to help the EU’s second-poorest state catch up to Western peers.
“We are talking about convergence and joining the euro, but we forget that these don’t mean just meeting nominal criteria, but also mean investment, raising household income, infrastructure that is compatible with the European one and regions in the country that are equal in development.”
Romania’s gross monthly average wage is a little over 700 euros ($786), compared with the EU average of 2,370 euros.
The country spends just under 20 percent of GDP on state wages, pensions and social assistance. Public investment is persistently low, with 40 percent of roads made of gravel and decades-old hospitals.
Romania was the bloc’s fastest-growing economy in January-March, expanding by 5.7 percent thanks to a consumption boom, and its budget ran a small surplus at the end of April.
Stefan said the budget could run a surplus at the end of the first half, which would mean its 3 percent deficit target for the full year would certainly be met.
“The pace of growth in the first quarter is generally slower than the other quarters. So the figure ... makes us optimistic that economic growth for the full year will be higher than 5.2 percent.”
“Our governing programme includes structural reforms, measures to stimulate production in several sectors, which will slowly make economic growth engines switch from consumption to production.”
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Editing by Mark Trevelyan