VZCZCXRO6043
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBM #1016/01 3641423
ZNR UUUUU ZZH
P 291423Z DEC 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9073
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 BUCHAREST 001016 
 
STATE FOR EUR/CE ASCHIEBE AND EEB/IFD/OMA 
TREASURY FOR LKOHLER 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV RO
SUBJECT:  ROMANIA: NEW COALITION'S ECONOMIC PLAN A MOVING TARGET 
 
REF: BUCHAREST 961 AND PREVIOUS 
 
Sensitive but Unclassified; not for Internet distribution. 
 
SUMMARY 
 
¶1.  (SBU) The new PDL-PSD coalition government announced a ruling 
program full of campaign promises and political sweeteners prior to 
officially taking power on December 22, but has just as quickly 
begun to back away from many of those positions in its first two 
weeks in office.  New Prime Minister Emil Boc's first official 
statements have emphasized fiscal policy "prudence" and "coherence" 
in the face of the economic downturn, and his government has taken 
some early steps to cut expenditures.  Still, the coalition's 
revenue and spending plans don't add up, and uncertainty as to how 
the Government of Romania (GOR) will actually manage the 
deteriorating economic situation will likely keep financial markets 
depressed into the New Year.  The overall program maintains rather 
rosy assumptions about future growth and new spending but makes no 
mention of the 50 percent hike in teacher's wages, anticipation of 
which helped precipitate a breakdown in Romania's sovereign debt 
rating and fiscal outlook in the fall.  Ultimately, the ruling 
program should be seen as more of a political statement rather than 
a concrete governing plan, and will be subject to extensive revision 
by the Parliament as it drafts the 2009 budget in early January. 
End summary. 
 
AN AMBITIOUS, COSTLY, AND OPTIMISTIC GOVERNING PROGRAM... 
 
¶2.  (SBU) If fully implemented, the PDL-PSD ruling program as 
announced the week of December 15 would worsen Romania's 
progressively bleak fiscal situation.  Apparently eager to 
demonstrate responsiveness to voters who supported them on November 
30, the PSD and PDL cherry picked the most popular parts of their 
respective economic platforms and linked them together into one 
shared statement.  For its part, the PSD compromised on income 
taxes, agreeing to the preservation of the 16 percent flat tax on 
income and capital gains provided that the value added tax (VAT) on 
basic foodstuffs (a major source of GOR revenue) would be cut from 
19 to 5 percent.  As a further sop to PSD voters, the coalition 
document proposed additional, as yet unspecified, individual tax 
exemptions for low income individuals.  In order to preserve a 
semblance of fiscal discipline, the parties proposed to partially 
offset the VAT cut on food by raising the VAT on luxury goods to 25 
percent and slapping a new 19 percent tariff on real estate 
transactions for commercial purposes. 
 
¶3.  (SBU) No sooner had the government taken office, however, than 
it signaled it was likely to keep current VAT levels unchanged, 
creating widespread confusion over which position will actually 
prevail when Parliament writes the budget.  Other targets for 
additional revenue in the program are a new corporate windfall 
profits tax (which would affect energy producers like OMV-owned 
Petrom), and better revenue collection through improved enforcement, 
something every new government has promised and which fiscal 
analysts say is very much needed, but which the GOR's track record 
to date suggests is unlikely to produce dramatic results.  Finally, 
local taxes on buildings, cars, and motorboats will all increase, 
with an eye toward reducing the amount of money the central 
government transfers annually to local municipalities. 
 
¶4.  (SBU) On the spending side, the GOR program makes the obligatory 
nod toward increasing retirement pensions as a long-term goal and 
proposes a vigorous highway construction program.  The new 
government promises more social programs targeting youth and young 
adults, including more state assistance for young, first-time home 
buyers.  Firms will be eligible for incentives if they hire young 
people.  Reflecting the priority on young and future voters, the 
National Agency for Youth has been upgraded to a full Ministry with 
a larger budget, charged with implementing a vague program of 
"active social security systems for the youth."  Farmers receive 
something as well, with the promise of government funds to assist in 
the marketing of agricultural products and a cut in the diesel fuel 
excise tax for farmers (subject to EU commission approval) from 
80.90 euros to 21 euros per metric ton.  For workers, the ruling 
program presages a steady increase in the monthly minimum wage, with 
the goal of pushing it to 500 euros (or at least 50 percent of the 
gross average wage) over the next five years. 
 
¶5.  (SBU) The governing plan assumes a best-case macroeconomic 
scenario in 2009, projecting GDP growth of 3.5 percent, inflation 
decreasing to 5 percent, and a cut in the current account deficit to 
11.1 percent of GDP.  Less likely to be achieved, given the hefty 
spending already promised by the outgoing Parliament, is a 
programmed budget deficit of only 2.5 percent of GDP.  (This is in 
contrast to the new forecast by international ratings agency Fitch, 
 
BUCHAREST 00001016  002 OF 002 
 
 
more representative of private sector views, predicting just 1 
percent GDP growth and the budget deficit reaching 5 percent of GDP 
in 2009.)  Much will hinge on any actual modifications to the tax 
code.  To revive the broader economy, the new government promises to 
increase credit availability to small and medium enterprises and to 
cut capital market trading costs in an effort to stem the outflow of 
foreign portfolio investment on the Bucharest Stock Exchange. 
 
...TOSSED OVERBOARD IN THE FIRST TWO WEEKS 
 
¶6.  (SBU) In light of the rapidly deteriorating economic situation, 
however, the campaign platforms touted in advance of November's 
parliamentary elections are ancient history.  Since taking office 
December 22, PM Boc and some Cabinet members, with support from 
President Traian Basescu, have indicated they are already 
jettisoning some of the campaign's most notable promises.  Despite 
agreement among the parties to allocate six percent of GDP to 
education, the PDL-PSD program conspicuously makes no mention of the 
50 percent increase in teacher salaries which became law in 
November; former PM Tariceanu had been strongly criticized by Boc, 
Basescu, and PSD leaders when he refused to implement it.  Teachers' 
unions are already threatening new strikes after the New Year if the 
raise is denied.  Also gone by the wayside is a promised January 1 
hike in pensions for certain categories of retirees.  New Minister 
of Labor Marian Sarbu has announced he wants major changes to a 
generous maternity leave and benefits law, passed in November, under 
which the state would pay an income supplement for up to two years 
for women who leave their jobs to give birth.  Sarbu, who has 
characterized the law as "poorly conceived," is now under fire from 
PNL opponents who note he was vice-president of the parliamentary 
committee which first approved the legislation without opposition 
two months ago. 
 
¶7.  (SBU) The Boc Government is also targeting public sector 
salaries.  Through the end of 2009, directors of state-owned 
enterprises will see their monthly salaries cut to the level of 
state secretaries, or 4,100 lei (around USD $1450), a huge reduction 
considering that current directors of Romgaz and Hidroelectrica, for 
instance, make around 27,000 lei (USD $9,600) per month.  The GOR 
will freeze hiring for the approximately 140,000 positions 
government-wide which are currently vacant, with the exception of 
law enforcement/judicial jobs or (tellingly) positions responsible 
for accessing and processing EU funds for various programs.  For his 
part, new (and former) Transport Minister Radu Berceanu called a 
press conference to announce he is immediately dismissing all 24 of 
the agency directors under him (including leaders of the National 
Highway Authority, air traffic control agency Romatsa, Bucharest's 
two airports, and national airline Tarom).  Berceanu justified the 
move on the basis of the "excessive" salaries of these officials, 
but outgoing minister Ludovic Orban claimed this was merely a 
pretext for politicization of the ministry with new appointments, 
noting that the officials' salaries had not changed significantly 
since Berceanu was minister the last time. 
 
COMMENT 
 
¶8.  (SBU) The accelerating economic downturn -- GOR tax revenues are 
off more than 30 percent in the last quarter of 2008 -- is forcing 
major adjustments in the new Government's plans.  While some 
analysts applaud the new atmosphere of austerity as just what the 
doctor ordered, others believe that major spending cuts due to 
Romania's deficit financing troubles will push the economy even 
faster towards a recession, since government spending now represents 
more than 35 percent of GDP.  The Boc Government's willingness so 
quickly to abandon campaign commitments is also a two-edged 
political sword:  foreign investors, financiers, and ratings 
agencies may look favorably on this new dose of fiscal reality, but 
large numbers of voters certainly will not.  Most likely to be 
disappointed are PSD supporters; their party now controls major 
social ministries like labor, education, and health, but with the 
PD-L holding the purse strings at the ministries of economy and 
finance, the PSD will be hard pressed to secure funding for its 
priorities.  The stage is already set for a tug of war within the 
coalition when the new Parliament begins crafting the 2009 budget in 
early January.  End Comment. 
 
GUTHRIE-CORN