Romania raises VAT after court ruling

29/06/2010

The Constitutional Court's rejection of half of the government's austerity package sparked a decision to raise the VAT.

By Paul Ciocoiu for Southeast European Times in Bucharest – 29/06/10

"I am disappointed. This is not a good measure for Romania," Finance Minister Sebastian Vladescu said of the increase. [Gabriel Petrescu/SETimes]

More than 1.3 million state employees will see their salaries drop by 25% on Thursday (July 1st) as part of the government's austerity measures. In hopes of swelling the country's ailing state budget by 2 billion euros per year, the government also decided on Saturday to raise the VAT from 19% to 24%.

Romania's Constitutional Court rejected a plan Friday to reduce pensions by 15%, which sent the ministers into an emergency meeting to come up with alternative measures. The VAT hike was the result.

The court declared the laws referring to the overall pension reduction and the special pension cuts as unconstitutional and sent them back to parliament for revision.

About 180,000 Romanians -- former military personnel, magistrates, pilots, diplomats, MPs and parliamentary clerks -- receive the so-called special pensions. More than 8,000 of them get high-quota pensions, an average 1,400 euros a month, as opposed to the 150 euros an average pensioner gets.

But the nine magistrates upheld the law on cutting state employees' salaries by a quarter and the recalculation of the other special pensions.

"Salaries and other indemnities concern the future; pensions are a past phenomenon, one cannot change them, they are predefined," one of the judges explained.

But the VAT increase will lower purchasing power, traders warned, with prices expected to rise by an average 8%, which may lead to the demise of many small firms.

"I am disappointed. This is not a good measure for Romania," Finance Minister Sebastian Vladescu said. Amid a general climate of distrust following the court's verdict, the national currency hit a historic low against the euro Monday.

"Lower salaries, higher prices, it couldn't get any better! We are double-hit!" state employee Alex Predescu, 30, told SETimes. "One of the consequences of this dire situation: I am seriously considering leaving the field and turning to the private sector because it is slowly becoming a survival issue."

"Our solidarity in these times should be accompanied by the government's common sense as concerns the volume of salary cuts -- 25% is way beyond that," said 32-year-old French teacher Florenta Vatamanu. "And what scares us the most is that we are convinced these measures won't be temporary, as they are now claiming."

The opposition slammed the VAT increase, which they labelled as "insufficient, inefficient and burdening".

"This was the last nudge that sent the country into the precipice. Increasing the VAT will bury the private sector altogether," main opposition Social Democrats leader Victor Ponta said.