By Luiza Ilie and Radu-Sorin Marinas
BUCHAREST (Reuters) – Romania’s ruling Social Democrats announced a tax overhaul for 2018 on Thursday, ditching a flat 16 percent tax on income and profit that has attracted investment into the European Union’s fastest-growing but least-developed economy.
Markets reacted badly, with stocks and the leu currency falling, and centrist President Klaus Iohannis strongly criticized the measures.
Parliament gave the cabinet of Prime Minister Mihai Tudose a vote of confidence on Thursday. Tudose replaces Sorin Grindeanu, who was ousted by the ruling Social Democrats (PSD) and junior coalition partner ALDE for failing to implement the governing program that helped win them a December election.
Critics said that with some leading political figures facing allegations of graft, Grindeanu was more likely fired for not doing enough to water down anti-corruption legislation. The Romania is plagued by bureaucracy and corruption.
The tax changes – included in a revised governing program – and a plan to scrap a mandatory private pension pillar, which was later retracted, drove the Bucharest stock market almost 3.6 percent lower, and the leu currency down half a percent.
“We find the coalition with a new government, and surprisingly, a new governing program,” Iohannis told the cabinet at its swearing-in ceremony.
“Such behavior certainly does not fall within what is fiscal-budgetary predictability and … certainly induces doubts within the business environment. In the name of Romanians, I ask you to stop this fiscal-budgetary hopping.”
The president, a centrist, can obstruct the changes to a limited extent. He has become a counterweight to the coalition’s attempts earlier this year to weaken anti-corruption legislation and his criticism will sting.
PSD leader Liviu Dragnea said the tax program had been re-worked to make up for delays. Former Finance Minister Darius Valcov, currently on trial for taking bribes, is one of its authors.
“I have no other objective than enforcing the governing program and recovering the delays,” Tudose told lawmakers. “If we want campaign promises to become reality, we must forget the state of normality.”
Loose fiscal plans have worried the European Commission and the International Monetary Fund over missing budget targets. The Commission expects Romania to run the EU’s largest deficits this year and next.
Romanian and foreign investors have repeatedly urged the PSD to ensure predictable fiscal policies.
“The proposed measures have a major impact on the Romanian economy and cannot be made without public consultations and an impact assessment,” said the Coalition for Romania’s Development, which groups investors’ associations.
“The nature of the proposed tax changes can affect large-scale investment and compromise the positive economic growth cycle of the Romanian economy.”
PRIVATE PENSIONS IN FOCUS
The program plans replace the 16 percent corporate tax on profit with a progressive tax of 1-3 percent on turnover. Income tax will fall to 10 percent.
Social security contributions will fall by 4.25 percentage points to 35 percent and will be paid solely by workers, not their employers.
A dividend tax will be scrapped, but a one percentage point cut to value added tax will be postponed by a year to 2019. A new solidarity tax could be enforced on people who earn more than 14,500 lei ($3,617) per month, Finance Minister Ionut Misa said, adding all data was preliminary.
In a new twist, Misa said the cabinet planned to scrap a mandatory private pension pillar that was introduced in 2008 to supplement a communist-era system. Up to 7 million Romanians contribute to mandatory private pension funds, whose assets stand at 35.1 billion lei ($8.78 billion).
Hungary and Poland have taken similar steps that had upset investors and weighed on local markets for years.
PSD had vehemently denied it was planning to scrap the pension system and later on Thursday, both PSD leader Dragnea and Tudose contradicted Misa and denied the plans existed.
The Romanian Private Pension Association welcomed the denial.
“(The association) would like to remind that the second pillar has been one of the most successful structural reforms in Romania, which … does not justify in any way a measure to affect its architecture,” it said in a statement.
(Writing by Luiza Ilie; Editing by Angus MacSwan)