Romania’s Prime Minister Victor Ponta presented on Tuesday, in a press conference, a document by which he tried to demonstrate the positive effect of the social security tax (CAS) cut and the sources to cover the revenues that the state budget will lose by implementing this measure.

According to Ponta’s document, the CAS cut by 5 percent will leave some EUR 1.08 billion, annually, at the disposal of local companies, which will pay lower taxes for their employees.

The Government was asked both by the International Monetary Fund (IMF), in June, and then by president Traian Basescu to show how it will cover the resulting deficit. The meeting between Prime Minister Ponta, finance minister Ioana Petrescu and president Basescu last week showed that the Government was unprepared or unwilling to answer this questions.

In his conference on July 22, Ponta tried to convince journalists and those who watched it on TV that the Government does have a clear idea about covering the deficit. His presentation contains several graphs that show how Romania’s economy improved in the two years he has been prime minister compared to the previous years, when president Basescu’s allies had governed Romania.

However, Romanian journalists did not seem convinced by Ponta’s presentation and wrote that the sources presented by him to cover the deficit from the CAS cut are hypothetical. The Prime Minister said that EUR 294 million will come from the creation of new jobs and another EUR 283 million will come from VAT as an effect of new investments, also stimulated by the tax cut.

Ponta also hopes to get EUR 905 million from the recovery of 10 percent of the debt of insolvent companies to the state and EUR 430 million from reducing social security related tax evasion by 10 percent. This adds to a total of more than EUR 1.91 billion, which in theory would be enough to compensate the EUR 1.08 billion that the budget loses.

The Government’s estimates seem overly optimistic, as the local Fiscal Council and the IMF and European Commission specialists as well showed that next year it will be difficult for the Government to lower the budget deficit, even without the CAS cut. The Government has a budget deficit target of 2.2 percent of GDP for this year and 1.4 percent of GDP for 2015.

The Prime Minister said that fiscal revenues in the first half of this year were some EUR 21.8 billion, EUR 675 million higher than in the same period of last year. However, he did not answer questions from journalists who wanted to know how the fiscal revenues were compared to budget projections for this year.

The Government might have to make a budget adjustment in the following month and cut expenses for education and transports, but also for other sectors, as the revenues are under the projected levels.

However, Prime Minister Ponta cannot afford to back down on the social security tax cut that he promised, as he’s preparing to run for President in November and this is part of his campaign.

Theoretically, the CAS cut would be good news for the local business environment, as labor taxation in Romania is among the highest in Europe. However, the representatives of the business community asked Prime Minister Ponta to make this decision only if it is sustainable on the long term and will not require other taxes to be increased.

The full document presented by Prime Minister Victor Ponta (in Romanian), can be found here.

editor@romania-insider.com