European Commission warns: New pension law increases public debt, inflation rate on the increase, deviating deficit rate

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European Commission representative Isabel Grilo said on Friday that pension increases “have generated deviations and have increased public debt.”

To counterbalance this situation that could lead Romania to collapse, the European Commission recommends the development of Pension Pillar II, b1.ro reports.

The emergency ordinances in 2018 and 2019 have changed the way banks will be taxed. This kind of <to and fro> in the legislative and administrative environment is not appealing. It’s not a positive element. On pensions, we see GEO from 2018 with a number of provisions that have negatively affected the sector. They could cause some deviations. We see changes in the situation regarding the capital requirements for these pension funds. The European Commission has always encouraged the development of the Pension Pillar II because it helps diversify pension benefits. These changes have led to an increase in public debt,” Isabel Grilo said.

The European official added that the new pension law “has introduced a number of changes in the system and we believe that they create a threat to the sustainability of the public pension system, the first pillar, due to an uncontrolled increase in expenditures, in the pension system.”

Isabel Grilo also argued that Romania’s legislative developments in the banking sector “have increased uncertainty in the functioning of this sector and other sectors, such as pension funds, energy or telecommunications.

Risk that inflation exceeds BNR’s target

The EC representative stressed that Romania has failed to observe the provisions of the law on fiscal responsibility since 2016 and the inflation rate continues to increase.

The Head of Unit with the Directorate General for Economic and Financial Affairs of the European Commission expressed concern on the failure to collect taxes.

A reason for concern is that the inflationist pressure is building up. The inflation is going up, probably will exceed the upper limit set by the National Bank as target. In Romania, there is a set of fiscal rules that have been ignored or avoided,” Isabel Grilo said.

She also expressed concern regarding the growing current account deficit.

“The core inflation is up, which means there is reason for concern, measures are needed to limit this development. These are the reasons for which we are concerned about Romania’s fiscal options, we notice increases of the fiscal deficit, of the current account deficit,” the EC representative said.

Referring to tax collection, she said that there is a need to improve it and the tax compliance. “An obvious issue is the VAT collection. An important part is not collected. We notice a huge difference between the situation in Romania and the EU average: 36% in Romania and the EU average is 12%. This situation leads to higher deficit,” Isabel Grilo said.

Deviating deficit target

The EC has also warned Romania, that, due to the amendments operated on the Budget law, the wages evolution is much too higher compared to the country’s productivity. Isabel Grilo argued that Romania risks deviating from the budgetary deficit rate of 3 per cent.

The long and medium term goal should be what Romania has decided, a value that has been reached in 2014-2015, but it has diverted from this target since then, going down below this target, a 1 pc deficit. According to the Commission forecast, without certain political actions enshrined in the Budget Law, the target will come even lower, so the deficit would increase. What the EC would ask on the structural deficit is an adjustment for 2019 and 2020, and then Romania would get back to a 3 pc deficit,” Grilo pointed out.

The European top official has also voiced concern on the growing current account deficit and on the increasing salaries in the public sector compared to the country’s productivity. At the same time, Grilo argued that the amendments brought to the Romanian Tax Code are affecting the business environment negatively and investors would not want to come in Romania anymore.

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