September 7 (SeeNews) - Romania's government must let economic logic and common sense prevail in economic policy to avoid repeating the mistakes made in 2008, which also was an election year, analysts said on Wednesday.
"We recall that next year’s budget is already stretched, with our call for a -3.6% of GDP (cash based) fiscal gap based on current laws on a 10% wage bill increase assumption," ING analysts said in a daily comment.
Romania will hold parliamentary elections in December 2016.
On Tuesday, Romania's Senate voted in favour of a bill exempting all pensions from revenue tax and covering retirees' health contributions from the state budget as of January 1.
The bill is now awaiting a final vote in the chamber of deputies. If the new legislation passes, it will need the signature of president Klaus Iohannis to become law.
The vote came only three days after Romanian finance minister Anca Dragu sent a letter to Parliament recommending the adoption of budgetary measures that allow Romania to reinstall structural deficit of at most 1% of GDP in the shortest time possible.
In the letter, Dragu added that the European Commission could refer Romania to the Court of Justice over failure to commit to the economic governance treaty on limiting structural budget deficit to 1% of GDP.
Romania charges a 16% tax on pensions higher than 1,050 lei ($263/245 euro) and a health tax of 5.5%.
The Romanian government has said that it does not support the bill as its impact on the consolidated budget revenue for 2017 is estimated at 2.2 billion lei.
While ING analysts say that scrapping the revenue tax on all pensions is not a game-changer in terms of its impact, they remind that MPs are also discussing a law hiking all pensions which could be worth 3% of GDP per year if enacted, highlighting the inherent dangers related to election years.
"We would still expect economic logic and common sense to prevail after December’s general elections and the new government to take the necessary steps to take the fiscal gap below the -3%/GDP threshold; however, the 2008 populist measures (also an election year) and the well wider fiscal gap that followed are stark reminders that caution is required," ING analysts added.
In May, the International Monetary Fund (IMF) warned Romania of electoral, external risks to the economy and advised monetary tightening.
"On the domestic side, populist measures in an election year could negatively affect market confidence and undermine investment. On the external side, a deterioration in emerging market risk perception could trigger capital outflows, a depreciation of the currency, and a substantial increase in the external debt-to-GDP ratio," the IMF said in a statement at the time.
Romania's consolidated budget showed a deficit of 0.2% of GDP, or 1.74 billion lei ($440 million/390 million euro), for the first seven months of the year, according to the latest data available from the finance ministry. Revenues fell 2.4% on the year to 129.6 billion lei, while spending rose 4.7% to 131.4 billion lei.
According to previous data released by the finance ministry, Romania posted a surplus of 7.4 billion lei, or 1.06% of GDP, for the first seven months of 2015.
Romania targets a consolidated budget gap of 2.95% of GDP on a cash basis in 2016, below the 3% EU ceiling. The country's consolidated budget for 2015 showed a deficit of 1.47% of GDP, below the 1.85% limit set in the fiscal strategy for that year.
Romania's annual economic growth quickened to 6.0% in the second quarter of 2016 from 4.3% the quarter before, reaching its highest level since the third quarter of 2008 and exceeding significantly market expectations, latest statistics office data showed.
In the first half of the year, the country's GDP rose by an annual 5.2%.
Romania's economic growth accelerated to 3.8% last year from 3.0% in 2014.
(1 euro= 4.4514 lei)