Cablegate: Romania: Parties' Pocketbook Promises

DE RUEHBM #0915/01 3291529
P 241529Z NOV 08




E.O. 12958: N/A

REF: A) Bucharest 838

Sensitive but Unclassified; not for Internet distribution.


1. (SBU) Fiscal profligacy has been the leitmotif of the current
parliamentary campaign. While the governing National Liberal Party
(PNL) has hardly been a paragon of fiscal prudence -- ramping up
social spending and allowing the expected budget deficit to rapidly
increase in the third quarter -- the Liberal Democratic (PD-L) and
Social Democratic (PSD) parties have more than kept pace with their
campaign promises, proposing a raft of new tax cuts and spending
initiatives in an effort to woo the Romanian voter. Implementing
the full range of initiatives proposed by any of the parties would
likely push Romania's fiscal deficit well above three percent of
GDP, negatively affecting both the domestic economy and Romania's
midterm euro zone aspirations. However, this being politics, no one
expects all these proposals to be enacted, and the coming economic
crunch will likely force a quick reality check on the government
which emerges from the November 30 elections. End Summary.


2. (SBU) Perhaps the most hotly contested issue of the election
campaign has been the new law granting teachers a 50 percent wage
increase, and the refusal of Prime Minister Tariceanu's government
to implement it (reftel A). Even as the PNL reached an agreement
with the teachers to postpone a general strike until after the
election, the party agreed to a demand from health sector workers to
raise wages an average 10 percent in 2009. While claiming that a
tight budget makes wage hikes too expensive, in truth the PNL-led
government has not been idle in announcing other popular tax breaks
and spending initiatives. These include a gradual cut in payroll
taxes by 10 percent over the next four years, the elimination of
taxes on reinvested dividends, and a temporary suspension of the new
car tax for domestically produced and small imported vehicles.
(Comment: The main beneficiary of the latter would likely be
Renault, which produces the popular Dacia Logan model domestically
at a plant in Pitesti. End Comment.) Shortly after being elected
in 2004, this government implemented a 16 percent flat tax on income
which has proven politically popular and which the PNL promises to
keep in place if returned to office.

3. (SBU) Staying true to the party's interest in investment, the
PNL is promising to expand state aid schemes to lure investors and
to increase the capitalization of the state-owned savings bank (CEC)
in order to boost lending to small and medium enterprises, measures
which would require substantial spending outlays. The PNL also
plans to leave in place the law requiring that six percent of GDP be
spent on education. On highways, the PNL plan is ambitious,
promising an additional six percent of GDP annually will be spent
constructing 2,100 kilometers of new roadway by 2012. Voters,
however, may be skeptical on this count given the current
government's dismal road-building record over the last four years.


4. (SBU) Not surprisingly, the left-of-center PSD is focused more
on promising new spending than on tax breaks. The party has said it
will increase the minimum wage, allocate five percent of GDP to
health care, six percent of GDP to education, and subsidize
residential natural gas prices. The PSD proposes to pay for all
this by scrapping the current flat tax regime and replacing it with
a progressive income tax. Keeping the focus on workers (and
potential voters), the PSD has proposed a 25,000 euro grant to any
Romanian expatriate who returns and takes a job locally. Hoping
that holding the election on the Sunday of a three-day holiday
weekend will lure large numbers of pensioners to the polls, the PSD
has promised them major increases in pensions and a guaranteed
minimum income in retirement. While pronouncements of other parties
focus more on the urgent need for new road construction, the PSD has
promised major investments in railways and airport infrastructure,
in addition to a road building plan.


5. (SBU) President Traian Basescu's PD-L has promised the voters
both continued economic growth and a rapid convergence in wages and
quality of life with the rest of the EU. The focus is on shrinking
and reinventing government, with a planned elimination of more than
100 taxes and duties. To make up for the revenue shortfall, the
PD-L proposes to partner with the Romanian Orthodox Church to assist
with the delivery of social services. A related goal is a major
overhaul of the education and health systems through the devolution
of power to public-private partnerships set up through local
communities. The PD-L shares the consensus view that six percent of
GDP should be allocated to education, and has also proposed

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allocating one percent of GDP to basic research. They plan to
undertake significant government reforms to increase the capacity to
absorb EU structural funds, using these funds to replace some of the
revenue the government loses in tax-cutting. Accessing EU funds
will be critical if the PD-L hopes to match PNL promises to build
2,100 kilometers of new roads, albeit over a longer time horizon
than their electoral rivals.


6. (SBU) Economic analysts broadly agree that the populist promises
of the campaign trail will run smack into hard realities once the
votes are counted. The working assumptions about future growth on
which the parties have based their platforms are looking very
optimistic in light of the world financial crisis. In the last
three months growth projections for Romania in 2009 have fallen from
six percent or higher, down to three or four percent, a figure that
could go lower still as the recession deepens in developed markets.
This represents a significant slowdown for an economy which is
projected to grow above eight percent in 2008, and will hinder any
government trying to implement substantial new spending plans.

7. (SBU) It is worth noting that Romania is already obligated to
send one percent of GDP to the EU and spend nearly two percent of
GDP on national defense under NATO commitments. Adding in six
percent for education means that 9 percent of GDP, or almost a
quarter of the budget, is already committed before the budget season
even starts. Furthermore, the financial crisis has already taken a
toll on the GOR's credit rating, with two international rating
agencies having downgraded the country's sovereign debt to junk
status. With credit extremely tight in global markets, this all but
forecloses the GOR's ability to finance the deficit through external
borrowing in the near term. If the GOR is forced to borrow more to
pay for new spending initiatives, it will be largely limited to
raising funds domestically. Doing so will suck up scarce liquidity
and force interest rates higher, potentially crowding out commercial
borrowers and adding another major drag on growth. These harsh
realities throw into question the ability of any future government
to implement big new spending plans.


8. (SBU) The parties' spending proposals do reveal some elements of
common consensus on Romania's most urgent needs. Critical
improvements must be made in education and infrastructure if Romania
is going to continue to attract foreign investors. Party leaders
across the spectrum appear to recognize this, though they differ
somewhat in how to tackle the issues. For a government whose
growth-fueled spending already represents 38.8 percent of annual
GDP, the problem is less one of resources than of ability to use
existing monies effectively. Romanian state institutions broadly
lack the administrative capacity to plan and implement major
projects in a timely and efficient manner. As a result, at year's
end the GOR traditionally scrambles to spend unused funds on
wasteful consumption measures, primarily because the sclerotic
bureaucracy has failed to use its allotted resources. The current
government's lack of a parliamentary majority over the last year has
exacerbated this problem, as it has limited the GOR's ability to
push through difficult legislative initiatives. If the next
government genuinely hopes to strengthen the foundation for future
growth, especially in these tough economic times, it will need to
focus on building up the GOR's institutional capacity to implement
long-term investment plans. Otherwise, all the campaign spending
rhetoric truly will be just a set of empty promises. End Comment.

© Scoop Media

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