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Cablegate: Romania: New Coalition's Economic Plan a Moving Target

VZCZCXRO6043
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBM #1016/01 3641423
ZNR UUUUU ZZH
P 291423Z DEC 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9073
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 001016

STATE FOR EUR/CE ASCHIEBE AND EEB/IFD/OMA
TREASURY FOR LKOHLER

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN PGOV RO
SUBJECT: ROMANIA: NEW COALITION'S ECONOMIC PLAN A MOVING TARGET

REF: BUCHAREST 961 AND PREVIOUS

Sensitive but Unclassified; not for Internet distribution.

SUMMARY

1. (SBU) The new PDL-PSD coalition government announced a ruling
program full of campaign promises and political sweeteners prior to
officially taking power on December 22, but has just as quickly
begun to back away from many of those positions in its first two
weeks in office. New Prime Minister Emil Boc's first official
statements have emphasized fiscal policy "prudence" and "coherence"
in the face of the economic downturn, and his government has taken
some early steps to cut expenditures. Still, the coalition's
revenue and spending plans don't add up, and uncertainty as to how
the Government of Romania (GOR) will actually manage the
deteriorating economic situation will likely keep financial markets
depressed into the New Year. The overall program maintains rather
rosy assumptions about future growth and new spending but makes no
mention of the 50 percent hike in teacher's wages, anticipation of
which helped precipitate a breakdown in Romania's sovereign debt
rating and fiscal outlook in the fall. Ultimately, the ruling
program should be seen as more of a political statement rather than
a concrete governing plan, and will be subject to extensive revision
by the Parliament as it drafts the 2009 budget in early January.
End summary.

AN AMBITIOUS, COSTLY, AND OPTIMISTIC GOVERNING PROGRAM...

2. (SBU) If fully implemented, the PDL-PSD ruling program as
announced the week of December 15 would worsen Romania's
progressively bleak fiscal situation. Apparently eager to
demonstrate responsiveness to voters who supported them on November
30, the PSD and PDL cherry picked the most popular parts of their
respective economic platforms and linked them together into one
shared statement. For its part, the PSD compromised on income
taxes, agreeing to the preservation of the 16 percent flat tax on
income and capital gains provided that the value added tax (VAT) on
basic foodstuffs (a major source of GOR revenue) would be cut from
19 to 5 percent. As a further sop to PSD voters, the coalition
document proposed additional, as yet unspecified, individual tax
exemptions for low income individuals. In order to preserve a
semblance of fiscal discipline, the parties proposed to partially
offset the VAT cut on food by raising the VAT on luxury goods to 25
percent and slapping a new 19 percent tariff on real estate
transactions for commercial purposes.

3. (SBU) No sooner had the government taken office, however, than
it signaled it was likely to keep current VAT levels unchanged,
creating widespread confusion over which position will actually
prevail when Parliament writes the budget. Other targets for
additional revenue in the program are a new corporate windfall
profits tax (which would affect energy producers like OMV-owned
Petrom), and better revenue collection through improved enforcement,
something every new government has promised and which fiscal
analysts say is very much needed, but which the GOR's track record
to date suggests is unlikely to produce dramatic results. Finally,
local taxes on buildings, cars, and motorboats will all increase,
with an eye toward reducing the amount of money the central
government transfers annually to local municipalities.

4. (SBU) On the spending side, the GOR program makes the obligatory
nod toward increasing retirement pensions as a long-term goal and
proposes a vigorous highway construction program. The new
government promises more social programs targeting youth and young
adults, including more state assistance for young, first-time home
buyers. Firms will be eligible for incentives if they hire young
people. Reflecting the priority on young and future voters, the
National Agency for Youth has been upgraded to a full Ministry with
a larger budget, charged with implementing a vague program of
"active social security systems for the youth." Farmers receive
something as well, with the promise of government funds to assist in
the marketing of agricultural products and a cut in the diesel fuel
excise tax for farmers (subject to EU commission approval) from
80.90 euros to 21 euros per metric ton. For workers, the ruling
program presages a steady increase in the monthly minimum wage, with
the goal of pushing it to 500 euros (or at least 50 percent of the
gross average wage) over the next five years.

5. (SBU) The governing plan assumes a best-case macroeconomic
scenario in 2009, projecting GDP growth of 3.5 percent, inflation
decreasing to 5 percent, and a cut in the current account deficit to
11.1 percent of GDP. Less likely to be achieved, given the hefty
spending already promised by the outgoing Parliament, is a
programmed budget deficit of only 2.5 percent of GDP. (This is in
contrast to the new forecast by international ratings agency Fitch,

BUCHAREST 00001016 002 OF 002


more representative of private sector views, predicting just 1
percent GDP growth and the budget deficit reaching 5 percent of GDP
in 2009.) Much will hinge on any actual modifications to the tax
code. To revive the broader economy, the new government promises to
increase credit availability to small and medium enterprises and to
cut capital market trading costs in an effort to stem the outflow of
foreign portfolio investment on the Bucharest Stock Exchange.

...TOSSED OVERBOARD IN THE FIRST TWO WEEKS

6. (SBU) In light of the rapidly deteriorating economic situation,
however, the campaign platforms touted in advance of November's
parliamentary elections are ancient history. Since taking office
December 22, PM Boc and some Cabinet members, with support from
President Traian Basescu, have indicated they are already
jettisoning some of the campaign's most notable promises. Despite
agreement among the parties to allocate six percent of GDP to
education, the PDL-PSD program conspicuously makes no mention of the
50 percent increase in teacher salaries which became law in
November; former PM Tariceanu had been strongly criticized by Boc,
Basescu, and PSD leaders when he refused to implement it. Teachers'
unions are already threatening new strikes after the New Year if the
raise is denied. Also gone by the wayside is a promised January 1
hike in pensions for certain categories of retirees. New Minister
of Labor Marian Sarbu has announced he wants major changes to a
generous maternity leave and benefits law, passed in November, under
which the state would pay an income supplement for up to two years
for women who leave their jobs to give birth. Sarbu, who has
characterized the law as "poorly conceived," is now under fire from
PNL opponents who note he was vice-president of the parliamentary
committee which first approved the legislation without opposition
two months ago.

7. (SBU) The Boc Government is also targeting public sector
salaries. Through the end of 2009, directors of state-owned
enterprises will see their monthly salaries cut to the level of
state secretaries, or 4,100 lei (around USD $1450), a huge reduction
considering that current directors of Romgaz and Hidroelectrica, for
instance, make around 27,000 lei (USD $9,600) per month. The GOR
will freeze hiring for the approximately 140,000 positions
government-wide which are currently vacant, with the exception of
law enforcement/judicial jobs or (tellingly) positions responsible
for accessing and processing EU funds for various programs. For his
part, new (and former) Transport Minister Radu Berceanu called a
press conference to announce he is immediately dismissing all 24 of
the agency directors under him (including leaders of the National
Highway Authority, air traffic control agency Romatsa, Bucharest's
two airports, and national airline Tarom). Berceanu justified the
move on the basis of the "excessive" salaries of these officials,
but outgoing minister Ludovic Orban claimed this was merely a
pretext for politicization of the ministry with new appointments,
noting that the officials' salaries had not changed significantly
since Berceanu was minister the last time.

COMMENT

8. (SBU) The accelerating economic downturn -- GOR tax revenues are
off more than 30 percent in the last quarter of 2008 -- is forcing
major adjustments in the new Government's plans. While some
analysts applaud the new atmosphere of austerity as just what the
doctor ordered, others believe that major spending cuts due to
Romania's deficit financing troubles will push the economy even
faster towards a recession, since government spending now represents
more than 35 percent of GDP. The Boc Government's willingness so
quickly to abandon campaign commitments is also a two-edged
political sword: foreign investors, financiers, and ratings
agencies may look favorably on this new dose of fiscal reality, but
large numbers of voters certainly will not. Most likely to be
disappointed are PSD supporters; their party now controls major
social ministries like labor, education, and health, but with the
PD-L holding the purse strings at the ministries of economy and
finance, the PSD will be hard pressed to secure funding for its
priorities. The stage is already set for a tug of war within the
coalition when the new Parliament begins crafting the 2009 budget in
early January. End Comment.

GUTHRIE-CORN

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