Romanian FinMin prepares measures to increase efficiency of public spending

The finance ministry is working on a set of measures for improving public spending efficiency, said Finance Minister Eugen Teodorovici in a TV show. He wants to correlate the new measures with a budget revision scheduled for end-July, so an agreement inside the ruling coalition should be reached soon.

Teodorovici is looking to reduce pension expenditure, a reasonable intention considering the fact that the recently approved pension law would have a significant fiscal impact, especially as of next year. Hence, he wants to eliminate the possibility for public servants who retired early to continue working for the state. There are numerous public-sector employees that benefit from early retirement and simultaneously work at another position in the public sector, accumulating public pension with salary. Teodorovici wants to ban such situations, sending those persons to work in the private sector. We should note that a previous government tried to ban accumulating public pension with wage about 10 years ago, but the Constitutional Court ruled it as illegal.

Teodorovici also eyes special pensions, even though the PSD-led government reintroduced them in 2015 and even extended them to more categories of staff. As a result, state spending on public pensions has increased significantly in the past years. Some 150,000 benefit from special pensions which will cost the state about RON9.15bn this year, according to media calculations. To compare, there are about 4.7 million pensioners which receive public pensions amounting to RON71.6bn. The finance minister’s idea for making public pensions more efficient for the state is to introduce a progressive income tax on them.

Some staff cuts in the public sector are also envisaged, according to Teodorovici. Although not such a popular move in election year, governmental sources recently revealed that PM Viorica Dancila is trying to clean up the administration from all traces remaining of former PSD leader Liviu Dragnea. Increasing personnel spending efficiency in the public sector could be an official reason for getting rid of remaining loyalists of Dragnea. We remind that the government already decided to freeze hiring in the public sector as of the beginning of 2019.

A flat tax to be paid annually by all domestic companies is Teodorovici’s idea for reviving budget revenue. Such a tax was applied in 2009-2010, leading to about 150,000 bankruptcies among local firms.

Generally, Teodorovici’s thoughts about improving efficiency of public spending resemble some measures included in the austerity package agreed with the IMF for receiving the financial support in 2009. Implementing such measures in election year reflects that the government has really reached the point of living from hand to mouth, we think. Deficit figures released so far show that the gap is widening worryingly, whereas the government still hopes to keep it below 3% of GDP by end-2019, even narrower than in 2018.

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