Romania to cut labour tax despite IMF reluctance

(BUCHAREST) - Romania will reduce labour taxes despite the reservations of International Monetary Fund auditors who fear the step will increase the public deficit, Prime Minister Victor Ponta said Thursday.

"Next week, the government will submit to parliament a draft law cutting the labour tax by five percentage points" from the current 45 percent, Ponta told a press conference.

The cut will be effective starting October 1.

"We have the means to set off the negative impact on public revenues... without raising other taxes," he added.

The Social-Democrat Prime Minister said the step would deprive the public budget of 850 million lei ($261 million, 193 million euros) in revenue in the fourth quarter.

As journalists asked if the IMF had okayed the cut, Ponta said: "No."

A joint IMF-EU mission, in Bucharest for talks with Romanian officials since June 2, has not yet reacted to the announcement.

Ponta stressed the deal with the IMF was "on track", adding that auditors would be back in Romania in November to talk about the 2015 draft budget.

Romania has long planned to reduce social security contributions from 45 percent, which is one of the highest rates in the European Union, hoping this will spur job creation.

But the IMF insists that any such cut would have to be offset by either trimming public expenses or finding additional revenues.

Romania has pledged to bring the public deficit down to 2.2 percent in 2014, from 2.5 percent last year.

The government has ruled out any pension or wage cut, saying that a newly-introduced tax on "special constructions" such as oil wells, hydroelectric plants and electricity poles will make up for the loss in revenues.

In 2010 the wages of public workers were slashed by 25 percent and the value-added sales tax was raised by five percentage points to curb an exploding public deficit.

Last year, Romania concluded a deal with the IMF and the EU on a 4.0-billion-euro ($5.5 billion) precautionary credit line, which the government intends to tap only in the case of a crisis.

It was the third accord signed with international lenders since 2009, when Romania obtained a 20-billion-euro bailout package in exchange for austerity measures.

The IMF expects Romania's economy to grow by 2.2 percent in 2014, one of the highest rates in eastern Europe.

In 2013, the Balkan country's economy expanded by 3.5 percent.