The Romanian Senate recently approved cutting the social security tax (CAS) paid by Romanian companies on behalf of their employees by 5 percentage points.

This measure, which was intensely promoted by the Government led by Victor Ponta, will be effective starting October 1, 2014. It steel needs to pass the vote in the Chamber of Deputies.

The social security tax cut, which the Government wanted to implement starting July 1 this year, was the main disagreement topic between Romanian authorities and the International Monetary Fund (IMF) delegation to Bucharest, at the beginning of June. The IMF representatives asked the Government to come up with compensatory measures, as the CAS decrease will result in lower revenues for the state budget.

The negotiations ended abruptly, as the IMF delegation left with no letter of intent from the Romanian authorities and postponed the evaluation of the stand-by agreement to fall.

However, the tax cut was welcomed by the local business community. The Coalition for Romania’s Development (CDR), which is a representation structure for local and foreign companies and banks active in Romania, believes that this measure could generate positive effects for the local economy. It should offer companies more resources for investment and should contribute to raising the employment level, thus generating more revenues for the state budget.

However, on the short term, this would generate a deficit for the consolidated state budget resulting in some EUR 5 billion revenue decrease for the next four and a quarter years, according to official estimates.

The social security tax paid by employers for employees who work under normal conditions should decrease from 20.8 percent of the gross salary to 15.8 percent. The social security tax paid by employees will remain flat at 10.5 percent, out of which 4.5 percent goes to the privately managed mandatory pension funds.

Andrei Chirileasa, andrei@romania-insider.com