Major investors in Romania say Govt. should hike income tax, fire 30% of public servants

Romania's Government will have to take unpopular decisions to keep the budget deficit under control, according to a report compiled by the Coalition for Romania's Development (CDR) consulted by Ziarul Financiar daily.

The potential measures include hiking the income tax from 10% to 16%, levying health insurance contributions on pensions above the average wage, or fire 30% of the employees in the budgetary sector (within five years).

CDR recommends a series of other unusual steps, such as swapping into equity the rescue loans extended to companies (and not paid back) or empowering by default the creditors with claims due more than five days with writs of execution. The central bank should step in as well, CDR says, by purchasing up to RON 12.9 billion (1.3% of GDP, or EUR 2.65 billion) state debt from banks.

The report assumes a GDP decline of 8-9% this year, more than four times the 1.9% decline expected by the Government under the latest budget planning. By comparison, the International Monetary Fund (IMF) expects Romania's economy to contract by 5% this year.

According to CDR, the public deficit will rise to between 7% of GDP, under the best-case scenario, assuming that the hikes in pensions and children allowances are canceled. If the Government sticks with the promises and hikes the pensions by 40% in September, the deficit will reach 11% of GDP, according to CDR estimates. The financing of the deficit is going to be "nearly impossible" under such a worst-case scenario.

In any case, the Government must try to draw a minimum of EUR 10 billion through Eurobonds or loans from the European Union and international lenders.

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