ING: Court Ruling To Plunge Romania Into Political Turmoil

The Court’s decision will also delay a EUR850 million loan tranche from the International Monetary Fund, ING chief economist Nicolae Chidesciuc told MEDIAFAX.

He said a possible decision to raise taxes will not solve the country’s budget deficit problem.

„Higher taxes cannot boost the revenues above 34% of the gross domestic product, whereas the expenditure exceeds 40% of GDP,” Chidesciuc said. „Romania must lower the deficit to below 3% of GDP and this is not possible by raising taxes alone; costs must be reduced.”

Chidesciuc echoed earlier remarks made by central bank governor’s adviser Lucian Croitoru, who said that the bigger taxes would be insufficient to reduce the budget deficit to 6.8% of the gross domestic product by year-end.

Romania’s Constitutional Court Friday said a planned 15% cut in pensions was unconstitutional, delaying the enforcement of a set of austerity measures and endangering key loan disbursements under a EUR20 billion package from the International Monetary Fund and the EU.

According to people close to government talks, the authorities are considering tax hikes to lower the budget gap.

Prime Minister Emil Boc said after the court’s ruling that the government has already prepared alternative measures that should slash expenditure by over 1.3% of GDP by year-end, but wouldn’t comment on whether the new steps include tax increases.

According to Chidesciuc, fiscal adjustment will be sluggish over the next period, regardless of the government’s alternative plan, which in turn will dampen economic recovery.