Taxes, constitutionally validated; War in Israel

The terrorist attacks that took place on October 7 in Israel, followed by the bombing of Gaza by the armed forces led from Tel Aviv, the attack in Brussels and the return of terrorist threats in the states of Western Europe made October the hottest month of autumn of the last years.

External events also had an effect on the internal level, the Government and the Parliament acting for the repatriation of Romanians on pilgrimage to Israel or settled in the Gaza Strip.

In this context, the first visit to our country by Ukrainian President Volodymyr Zelensky, who signed a joint statement with President Iohannis and who did not want to make a speech in the plenary session of the Parliament, and the joint meeting of the governments of Romania and Ukraine, went almost unnoticed. which took place in Kiev and which ended with several promises from officials there regarding the regime applied to national minorities.

The conflict in Israel did not appear to be a priority for members of the country's Supreme Defense Council, who met on September 12, determined that drug trafficking and consumption are a threat to national security and approved the plan to endowment of the armed forces for the next period.

At the macroeconomic level, at the beginning of last month, we recorded the decision of the Board of Directors of the National Bank of Romania to maintain the reference interest rate at 7% per year, given that at the end of September the Ciolacu government assumed its legislative package in Parliament regarding the new fiscal measures, the law passing the Constitutional Court filter on October 18, a fact that immediately attracted its promulgation by President Iohannis on October 26, so that on October 27 the normative act was published in the Official Gazette under the name of Leagea 296/ 2023.

In October, the Ministry of Finance published the budget execution for the first three quarters of 2023, a document that shows an increase in the deficit by almost 0.6% compared to last year. According to the data of the Ministry of Finance, the budget deficit for the first nine months of 2023 was 56.46 billion lei, respectively 3.55% of the Gross Domestic Product compared to the deficit of 41.70 billion lei, respectively 2.96% of the related GDP the first nine months of 2022.

However, the Government decided in the meeting on October 27 to set up the Interministerial Coordination Committee to support Romania's candidacy, the preparation and holding in Bucharest of the UEFA Europa League Final in 2026 or 2027, and on October 31 the increase of the gross minimum basic salary per country guaranteed payment for the fields of construction, agriculture and the food industry.

• Zelensky's visit, overshadowed by the conflict in Israel

The first visit of Ukrainian President Volodymyr Zelensky to our country, almost a year and six months after the start of aggression by the Russian Federation, took a back seat at the international and national level after the tragic events of October 7, 2023 that took place in Israel .

Members of the Palestinian terrorist group Hamas launched, on the morning of October 7, from the Gaza Strip more than 5,000 rockets against several towns in Israel, while approximately 3,000 Palestinian militants broke through the barrier between Gaza and Israel, killing civilians, setting fire to their homes and attacking Israeli Defense Forces (IDF) military bases. According to the government in Tel Aviv, more than 1,400 Israelis and foreigners, mostly civilians, were killed on October 7, including 260 people at a music festival in Re'im, and more than 200 captured Israeli civilians and soldiers were taken as hostages in the Gaza Strip.

After evicting Hamas forces from southern Israel, the IDF carried out airstrikes in the Gaza Strip. According to the Gaza Ministry of Health, on October 31, more than 9,000 Palestinians, most of them civilians, were killed in shelling by the Israeli army.

In this international context, on October 10, Ukrainian President Volodymyr Zelenskiy made his first official visit to our country, which ended with the signing of a joint statement with President Klaus Iohannis. In that document it is stated that relations between Ukraine and Romania will develop on the basis of a Strategic Partnership between the two states, that the amount of Ukrainian grain transited through Romania will be increased from 2 million tons to 4 million tons per month, that Ukrainian pilots will be trained in the training center in our country to operate F-16 fighter jets, that it is necessary for Romanians in Ukraine to enjoy the same treatment from the authorities in Kiev as Ukrainians and from our country regarding the respect of rights and that the government in Kiev and that in Bucharest will solve the problem of the artificial distinction between the Romanian language and the so-called "Moldovan" language.

According to the program initially announced by the Chamber of Deputies, Volodymyr Zelenskiy would also have delivered a speech in the plenary session of the Parliament, but the Ukrainian president would have changed his mind following the information received about a possible disruption of that moment by the unaffiliated senator Diana Sosoacă and by AUR parliamentarians. That is why the leader from Kiev preferred that, in addition to the meeting with President Klaus Iohannis, he also met with Prime Minister Marcel Ciolacu at the Victoria Palace and at the Parliament Palace with Nicolae Ciucă - the president of the Senate and Alfred Simonis - the interim president of the Chamber of Deputies, at the meeting with the two officials passing by Senator Diana Şoşoacă, who was displaying the map of Greater Romania.

Following the visit of President Zelensky, on October 18, a joint meeting of the governments of Ukraine and Romania took place in Kyiv, after which it was decided that our country will continue investments from European funds for the development of the infrastructure necessary for the transit of 4 million tons of Ukrainian grain on month through the Romanian ports on the Danube and through the port of Constanţa, that the companies with state capital in the Romanian defense industry will cooperate with the Ministry of Strategic Industries in Kiev, that new border points will be opened between the two states and that the government led by Dennys Shmyhal will initiate steps so that the language spoken by our compatriots in the neighboring country is no longer called the Moldovan language by the authorities, but the Romanian language.

• Consistency in BNR decisions

Regarding the internal situation, we point out that on October 5, 2023, the Board of Directors of the National Bank of Romania unanimously decided to maintain the monetary policy interest rate at the level of 7% per year (in line with other similar decisions during the current year) and maintaining the interest rate on the lending facility (Lombard) at 8% and the interest rate on the deposit facility at 6%.

During the meeting, the Board of Directors discussed and adopted the monetary policy decision, based on the data and analyzes regarding the current and prospective macroeconomic, financial and monetary developments presented by the specialist departments and other available internal and external information.

In justifying the decisions taken, the members of the BNR's Board of Directors showed that the annual inflation rate continued to decrease over the first two months of the third quarter in line with forecasts, dropping to a single digit level in July and reaching 9.43% in August, from 10.25% in June. It was observed that the evolution of the exogenous components of the CPI became marginally inflationary again in this interval, as the more than expected reduction in LFO prices and the new dynamic decreases recorded in energy prices were overtaken as an impact by the increase in fuel prices and the increase in medicine prices.

In contrast, the annual adjusted CORE2 inflation rate accelerated its decline, falling slightly below the forecast level to 12% in August from 13.5% in June, mainly as a result of the continued sharp deceleration in the growth of processed food prices, but also against the background of the tempering of dynamic growth in the segment of non-food goods and services, noted the members of the Council.

Following the analysis, it was agreed that the decrease in the annual rate of basic inflation had as major determinants disinflationary basic effects, downward corrections of commodity quotations, primarily agro-food, and the measure of temporary capping of the commercial addition to basic food products implemented in August.

Turning to future developments, Council members indicated that, according to new assessments, the annual rate of inflation will continue to decline until the end of the current year in line with the latest medium-term forecast, published in the August Inflation Report, which it anticipates it falling to 7.5% in December 2023, to 4.4% in December 2024 and to 3.8% at the end of the projection horizon. The members of the CA of the BNR also showed that the fiscal adjustment program assumed by the Government in the Parliament will emphasize the correction of the current account deficit, together with the reduction of the budgetary one, with favorable implications including on the costs of financing the economy and the behavior of the exchange rate of the leu.

Council members once again emphasized the importance of attracting and using European funds, especially those related to the Next Generation EU program, which are essential for achieving the necessary structural reforms and the energy transition, as well as for increasing the growth potential and strengthening the resilience of the Romanian economy.

As for the foreign currency reserves of the state, at October's end the BNR recorded that they consisted of 58.18 billion euros, 1.15 billion euros less compared to September 30, 2023.

The gold reserve level remained at 103.6 tons. In terms of international price developments, its value was 6,246 million euros.

The BNR also showed that the payments due in November 2023 in the account of the public debt denominated in foreign currency, direct or guaranteed by the Ministry of Finance, amount to around 1.75 billion euros.

• Budget deficit of 56.46 billion lei

Also in the macroeconomic field, from the data published in October by the Ministry of Finance regarding the execution of the consolidated general budget in the first nine months of 2023, we note that it ended with a deficit of 56.46 billion lei, respectively 3.55% of GDP compared to the deficit of 41.70 billion lei, respectively 2.96% of GDP for the first nine months of 2022.

The document drawn up by the Ministry of Finance states: "Total revenues amounted to 368.03 billion lei in the first nine months of the current year, increasing by 11% (year/year). Their dynamics were mainly supported by the evolution of income tax and income tax, insurance contributions, European funds and profit tax. VAT receipts recorded a more moderate positive dynamic, explained both by the deceleration of the macroeconomic base and by a higher level of VAT refunds".

Salary and income tax receipts totaled 29.92 billion lei, recording an increase of 21.4% (y/y), determined by the increase in dividend tax receipts (56.4%) and pension income tax ( 42.4%), the receipts related to the single statement also recording a positive dynamic of 11.2%.

Insurance contributions recorded 116.73 billion lei, increasing by 12.8% (year/year), while income tax receipts totaled 20.40 billion lei, recording an increase of 11.4% (year /year), supported mainly by the advance of income tax from economic agents.

Compared to the revenues, the expenses of the general consolidated budget in the amount of 424.49 billion lei increased in nominal terms by 13.7% compared to the same period of the previous year. Expressed as a percentage of the Gross Domestic Product, spending in the first nine months of 2023 increased by 0.2 percentage points compared to the same period in 2022, from 26.5% of GDP to 26.7% of GDP.

Personnel expenses totaled 96.69 billion lei, up 10.8% compared to the same period of the previous year. Expenditure on goods and services was 53.99 billion lei, up 9.4% compared to the same period of the previous year. An increase is reflected in local budgets, respectively 11.4% compared to the same period of the previous year, as well as in the budget of the Single National Health Social Insurance Fund of 11.9% for the settlement of medicines with and without personal contribution and medicines used in national health programs.

Interest expenses were 23.56 billion lei, 2.61 billion lei more compared to the same period of the previous year, respectively 12.5% compared to the same period of the previous year.

Social assistance expenses were 145.11 billion lei, an increase of 9.9% compared to the same period of the previous year.

Investment expenditures, which include capital expenditures as well as those related to development programs financed from internal and external sources, amounted to 54.33 billion lei, an increase of 40.2% compared to the same period of the previous year when were worth 38.76 billion lei. There is also an increase in the share of investments financed by external non-reimbursable funds after accession, representing 58.53% of the total expenditure on investments.

• The fiscal changes, promulgated by President Klaus Iohannis

In all this macroeconomic and financial context, in order to control the increase in the budget deficit, President Klaus Iohannis promulgated Law 296/2023 on September 26, which was published the next day in the Official Gazette. The fiscal measures and the reform of budget expenditures provided for in that normative act previously received, on October 18, the Constitutional Court of Romania, which rejected the objections of unconstitutionality raised by some members of the parliamentary opposition.

With the exception of the limitation of cash payments between legal entities that will enter into force from November 11 and the reduction of tax benefits granted to employees in the IT, construction, agriculture and food industry sectors, most of the provisions will come into force from January 1, 2024. The most important among them are the 2% taxation of banks' turnover for the years 2024 and 2025, the minimum tax of 1% on the turnover of companies registering turnovers exceed 50 million euros, the change in the taxation of micro-enterprises depending on the level of income achieved and the CAEN code, the taxation with 10% - CASS contribution - of meal vouchers and holiday vouchers, the VAT increase for some goods and services, which will have a VAT between 9% and 19%, special tax of 0.3% for people who own buildings with the taxable value of the building over 2.5 million lei and for individuals and legal entities who own cars registered/registered in Romania a whose individual purchase value exceeds 375,000 lei.

We remind you that the Government decided to adopt this law in order to reduce the budget deficit of our country, which this year is estimated to be 1.1% higher than the target set in the spring of 2020 with the European Commission for the end of 2023, namely 4, 4%.

• Drugs - the main topic of the CSAT meeting

The consumption of drugs and other psychoactive substances by young people and students, as a major risk to individual and national security, was the main theme of the October 12 meeting of the Supreme National Defense Council. The CSAT members came to the conclusion that, due to the severity, ways of manifestation, the repeatability of the actions and the cumulative damage caused both in terms of health, by endangering life or its quality, and in terms of public safety, against the background of connecting our country to international routes and routes for the transfer/transport of narcotics, the consumption of drugs and other narcotic substances harms the national security values provided for by the Constitution and legislation in the field of national security. Thus, the legal order and the climate of unrestricted exercise of the rights, freedoms and fundamental duties of citizens are affected.

Following the discussions during the meeting, CSAT decided to set up an inter-institutional working group that will develop a joint action plan, which will include the objectives, general and particular measures, specific tasks and responsibilities in order to effectively prevent and combat risks generated by drug trafficking and consumption to individual and collective safety, according to the competences of each participating institution. Also, at the county level, operational working groups will be established, made up of specialists and experts appointed by the responsible institutions.

The CSAT members also approved at the same meeting the Endowment Plan of the Romanian Army for the period 2024-2033. According to this document, the armed forces will be equipped with high-performance military technique and equipment, compatible and interoperable with those existing in the armies of other NATO and EU member states, which will ensure both the fulfillment of deterrence and defense missions, as well as their long-term viability through the level of efficiency and technological development. At the same time, in order to protect the essential security interests and ensure security of supply, CSAT wants industrial capacities to exist on the national territory that can ensure both the production of modern military equipment for equipping the peacetime force structure and maintaining the purchased equipment in operational condition , as well as the manufacture/development of new equipment to contribute to the multiplication of military capabilities in crisis or war situations.