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DE RUEHBM #0915/01 3291529
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P 241529Z NOV 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 8940
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 000915 
 
STATE FOR EUR/CE ASCHIEBE 
TREASURY FOR LKOHLER 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PREL RO
SUBJECT:  ROMANIA: PARTIES' POCKETBOOK PROMISES 
 
REF: A) Bucharest 838 
 
Sensitive but Unclassified; not for Internet distribution. 
 
SUMMARY 
 
¶1. (SBU) Fiscal profligacy has been the leitmotif of the current 
parliamentary campaign.  While the governing National Liberal Party 
(PNL) has hardly been a paragon of fiscal prudence -- ramping up 
social spending and allowing the expected budget deficit to rapidly 
increase in the third quarter -- the Liberal Democratic (PD-L) and 
Social Democratic (PSD) parties have more than kept pace with their 
campaign promises, proposing a raft of new tax cuts and spending 
initiatives in an effort to woo the Romanian voter.  Implementing 
the full range of initiatives proposed by any of the parties would 
likely push Romania's fiscal deficit well above three percent of 
GDP, negatively affecting both the domestic economy and Romania's 
midterm euro zone aspirations.  However, this being politics, no one 
expects all these proposals to be enacted, and the coming economic 
crunch will likely force a quick reality check on the government 
which emerges from the November 30 elections.  End Summary. 
 
NATIONAL LIBERAL PARTY (PNL) 
 
¶2. (SBU) Perhaps the most hotly contested issue of the election 
campaign has been the new law granting teachers a 50 percent wage 
increase, and the refusal of Prime Minister Tariceanu's government 
to implement it (reftel A). Even as the PNL reached an agreement 
with the teachers to postpone a general strike until after the 
election, the party agreed to a demand from health sector workers to 
raise wages an average 10 percent in 2009.  While claiming that a 
tight budget makes wage hikes too expensive, in truth the PNL-led 
government has not been idle in announcing other popular tax breaks 
and spending initiatives.  These include a gradual cut in payroll 
taxes by 10 percent over the next four years, the elimination of 
taxes on reinvested dividends, and a temporary suspension of the new 
car tax for domestically produced and small imported vehicles. 
(Comment:  The main beneficiary of the latter would likely be 
Renault, which produces the popular Dacia Logan model domestically 
at a plant in Pitesti.  End Comment.)  Shortly after being elected 
in 2004, this government implemented a 16 percent flat tax on income 
which has proven politically popular and which the PNL promises to 
keep in place if returned to office. 
 
¶3.  (SBU) Staying true to the party's interest in investment, the 
PNL is promising to expand state aid schemes to lure investors and 
to increase the capitalization of the state-owned savings bank (CEC) 
in order to boost lending to small and medium enterprises, measures 
which would require substantial spending outlays.  The PNL also 
plans to leave in place the law requiring that six percent of GDP be 
spent on education.  On highways, the PNL plan is ambitious, 
promising an additional six percent of GDP annually will be spent 
constructing 2,100 kilometers of new roadway by 2012.  Voters, 
however, may be skeptical on this count given the current 
government's dismal road-building record over the last four years. 
 
SOCIAL DEMOCRATIC PARTY (PSD) 
 
¶4.  (SBU) Not surprisingly, the left-of-center PSD is focused more 
on promising new spending than on tax breaks.  The party has said it 
will increase the minimum wage, allocate five percent of GDP to 
health care, six percent of GDP to education, and subsidize 
residential natural gas prices.  The PSD proposes to pay for all 
this by scrapping the current flat tax regime and replacing it with 
a progressive income tax.  Keeping the focus on workers (and 
potential voters), the PSD has proposed a 25,000 euro grant to any 
Romanian expatriate who returns and takes a job locally.  Hoping 
that holding the election on the Sunday of a three-day holiday 
weekend will lure large numbers of pensioners to the polls, the PSD 
has promised them major increases in pensions and a guaranteed 
minimum income in retirement.  While pronouncements of other parties 
focus more on the urgent need for new road construction, the PSD has 
promised major investments in railways and airport infrastructure, 
in addition to a road building plan. 
 
LIBERAL DEMOCRATIC PARTY (PD-L) 
 
¶5. (SBU) President Traian Basescu's PD-L has promised the voters 
both continued economic growth and a rapid convergence in wages and 
quality of life with the rest of the EU.  The focus is on shrinking 
and reinventing government, with a planned elimination of more than 
100 taxes and duties.  To make up for the revenue shortfall, the 
PD-L proposes to partner with the Romanian Orthodox Church to assist 
with the delivery of social services.  A related goal is a major 
overhaul of the education and health systems through the devolution 
of power to public-private partnerships set up through local 
communities.  The PD-L shares the consensus view that six percent of 
GDP should be allocated to education, and has also proposed 
 
BUCHAREST 00000915  002 OF 002 
 
 
allocating one percent of GDP to basic research.  They plan to 
undertake significant government reforms to increase the capacity to 
absorb EU structural funds, using these funds to replace some of the 
revenue the government loses in tax-cutting.  Accessing EU funds 
will be critical if the PD-L hopes to match PNL promises to build 
2,100 kilometers of new roads, albeit over a longer time horizon 
than their electoral rivals. 
 
MACROECONOMIC OUTLOOK 
 
¶6. (SBU) Economic analysts broadly agree that the populist promises 
of the campaign trail will run smack into hard realities once the 
votes are counted.  The working assumptions about future growth on 
which the parties have based their platforms are looking very 
optimistic in light of the world financial crisis.  In the last 
three months growth projections for Romania in 2009 have fallen from 
six percent or higher, down to three or four percent, a figure that 
could go lower still as the recession deepens in developed markets. 
This represents a significant slowdown for an economy which is 
projected to grow above eight percent in 2008, and will hinder any 
government trying to implement substantial new spending plans. 
 
¶7.  (SBU) It is worth noting that Romania is already obligated to 
send one percent of GDP to the EU and spend nearly two percent of 
GDP on national defense under NATO commitments.  Adding in six 
percent for education means that 9 percent of GDP, or almost a 
quarter of the budget, is already committed before the budget season 
even starts.  Furthermore, the financial crisis has already taken a 
toll on the GOR's credit rating, with two international rating 
agencies having downgraded the country's sovereign debt to junk 
status.  With credit extremely tight in global markets, this all but 
forecloses the GOR's ability to finance the deficit through external 
borrowing in the near term.  If the GOR is forced to borrow more to 
pay for new spending initiatives, it will be largely limited to 
raising funds domestically.  Doing so will suck up scarce liquidity 
and force interest rates higher, potentially crowding out commercial 
borrowers and adding another major drag on growth.  These harsh 
realities throw into question the ability of any future government 
to implement big new spending plans. 
 
COMMENT 
 
¶8.  (SBU) The parties' spending proposals do reveal some elements of 
common consensus on Romania's most urgent needs.  Critical 
improvements must be made in education and infrastructure if Romania 
is going to continue to attract foreign investors.  Party leaders 
across the spectrum appear to recognize this, though they differ 
somewhat in how to tackle the issues.  For a government whose 
growth-fueled spending already represents 38.8 percent of annual 
GDP, the problem is less one of resources than of ability to use 
existing monies effectively.  Romanian state institutions broadly 
lack the administrative capacity to plan and implement major 
projects in a timely and efficient manner.  As a result, at year's 
end the GOR traditionally scrambles to spend unused funds on 
wasteful consumption measures, primarily because the sclerotic 
bureaucracy has failed to use its allotted resources.  The current 
government's lack of a parliamentary majority over the last year has 
exacerbated this problem, as it has limited the GOR's ability to 
push through difficult legislative initiatives.  If the next 
government genuinely hopes to strengthen the foundation for future 
growth, especially in these tough economic times, it will need to 
focus on building up the GOR's institutional capacity to implement 
long-term investment plans.  Otherwise, all the campaign spending 
rhetoric truly will be just a set of empty promises.  End Comment.