Romania – President-PM clash over fiscal reform during cohabitation

A previous post on Romania’s current period of cohabitation focused on the first serious clash between President Iohannis of the National Liberal Party (PNL) and PM Ponta of the Social Democratic Party (PSD) caused by the former’s veto on the Forestry Code. The relations between the head of state and the prime minister are now heading towards a full-blown crisis after President Iohannis rejected a tax-cutting plan that had been almost unanimously backed by the parliament, including the opposition led by the Liberal party.

The president’s justification for vetoing the forestry legislation in March 2015 was its breach of European Union competition law, as the new bill aimed to limit the economic activities of some companies. On July 17, President Iohannis rejected the government’s tax-cutting plan on the grounds that it had failed to obtain the approval of the European Commission and IMF officials and ran counter to the fiscal and budgetary strategy and the convergence programme.

The head of state deemed the new fiscal plan unsustainable in the long run. He argued against both excessive taxation and strong fiscal relaxation and criticised the government for failing to present a budget spending plan for 2016 including concrete measures aimed at reducing public expenditure to compensate for the extensive tax cuts. The prime minister denounced the president’s veto as a purely political act, aimed at blocking government actions at any cost and/or enforcing decisions made abroad against Romania’s interests.

The president’s decision to veto the Fiscal Code came as a surprise for several reasons. To start with, President Iohannis’ National Liberals not only gave their full support to the tax cuts in parliament, but also insisted on lowering the VAT rate from 24 percent to 19 percent (instead of 20 percent as the government had initially proposed). The reduction of the VAT rate to 19 percent had also been one of Klaus Iohannis’ core electoral pledges in the 2014 presidential campaign. The president’s opposition to the new fiscal legislation was therefore difficult to foresee, all the more so as he refrained from commenting on the new fiscal legislation while it was under public debate or when the Chamber of Deputies passed the bill with strong cross-party support on June 24. As a matter of fact, the president voiced his opposition to the tax cuts only a few days before the end of the 20-day period during which he is required to sign bills into law upon receiving them from the parliament or to request their re-examination.

Nevertheless, the president’s veto needs to be seen in a larger context. Economically, Romania’s Central Bank as well as the IMF and the EU have drawn attention to the unsustainable increase in fiscal deficit that the government’s fiscal easing plan might trigger in 2016. Additionally, prior to having its latest tax package passed by parliament, the government also lowered the VAT rate for food items from 24 percent to 9 percent with effect from 1 June 2015.

Politically, the relations between the Klaus Iohannis and Victor Ponta have worsened significantly after a criminal investigation was opened against the prime minister on June 5 on grounds of forgery, tax evasion, money-laundering, and conflict of interest. Since then he survived a parliamentary vote to have his immunity lifted, a no-confidence motion, and the president’s repeated calls for resignation. Eventually, PM Ponta did withdraw temporarily as a leader of Social Democrats, a move that opened up a fight for power inside the party.

Given the prime minister’s vulnerability on the party line, President Iohannis seized the opportunity to undermine his authority over the cabinet as well. Just days before he vetoed the fiscal code, the head of state rejected the prime minister’s first nomination for the Transport Ministry in a move that was reminiscent of his predecessor’s cohabitation wars. Undoubtedly, their relationship stands to deteriorate even further as the 2016 electoral contests are drawing closer. Under these circumstances, the head of state may be understandably unwilling to allow an embattled prime minister to use fiscal relaxation to his advantage in the 2016 local and general elections.

What next? Unless parliament calls an extraordinary session, a new vote on the Fiscal Code will take place in September. If legislators vote to preserve the initial form of the bill, the president has to promulgate it within ten days after receiving it unless he decides to challenge its validity at the Constitutional Court. Despite the bill’s initial passage in the Chamber of Deputies with just two votes against and one abstention, its fate the second time around depends on whether the National Liberals stick to their programmatic position or decide to rally around the president’s call. The prime minister has also announced the government’s readiness to speed up the enforcement of the VAT rate cut either by emergency ordinance or by assuming responsibility for the Fiscal Code in parliament.

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