The alternative to raising single tax and VAT announced by president Traian Basescu envisages a drastic cut in state spending. The Government’s plan to comply with the deficit targets under the €20 bln IMF-led rescue deal involve a 25% cut in public sector wages as of June 1, 2010, and 15% cut in pensions and unemployment benefits.

Expenditures cut – drastic, unpopular, but necessary

The austerity measures announced by president Traian Basescu are as drastic and unpopular as they are compelling to support the future development of the Romanian economy, economists say, adding that these measures should have been enforced earlier.

“Any measure to cut state spending would have been cruel and unpopular. But the austerity of these measures is even greater given the Government’s failure to take a corrective approach in times of economic boom. Just waiting out the storm would have only worsened the country’s long-term situation”, said Lucian Anghel (photo), senior economist Banca Comerciala Romana.

Under IMF pressure, the government had to choose between raising income tax from 16% to 20% and the VAT from 19% to 25% and a drastic cut in state expenditures. Traian Basescu choose the latter, calling it the “reliable variant”, accepted in the end by the IMF officials.

“However, these measures may not be sufficient, but are very useful to restore the economic growth as soon as possible”, said Nicolae Chidesciuc, senior economist ING Bank Romania.

Expenditure cuts are much better than raising taxes, in terms of medium to long-term economic activity prospects.

“One of the options was the no-confidence variant which would involve an increase in VAT from 19% to 24%, of income tax from 16% to 20% and 20% cut in wages, to meet a 6-8% deficit target. But the second option was the reliable one that will allow the Government stick to the b