The government plans to increase pensions and to finance this by raising the individual revenue tax. The decision was made days after EU's statistics office, Eurostat, published a study showing Romania has the lowest revenue taxes in the EU - as well as the lowest revenues from taxes.
Employees currently pay a 9.5 percent social contribution to the pension fund from their gross salary alone. The government plans to extend this contribution to all gross revenues earned by individuals - services, liberal professions, copyrights, and so on.
According to Raiffeisen Bank's chief analyst, Ionut Dumitrescu, for Business Standard, higher revenue taxes will not cover funds needed to raise all pensions, amounting to a total of RON 7 billion (€2.34 billion), so money will be taken from the state budget, thus increasing the deficit. "We already have a budget deficit worth three percent of GDP. The revenue tax is a very low source of funds, so we could see other increases in taxation," Dumitrescu said. However, he said that a possible income tax increase would be "political suicide" for the government.
The second problem, according to Dumitrescu, is the way pensioners will spend their higher retirement benefits. Consumption is likely to rise, especially since wages also increased in recent years, possibly leading to higher inflation pressures and a widening current account deficit. "Furthermore, we can expect price rises in 2008 as well," Dumitrescu added.
