Why is the state afraid of layoffs?

• Experts warn that drastic layoffs could create major budget imbalances

• The payment of the compensations could lead to an unsustainable increase of budget expenses, far exceeding the levels of the previous years

• Mihai Tănăsescu, Romanian official with the IMF: "We hope we won"t be forced to take on a new loan or get to the point where we default on the payments for the loans we"ve taken so far"

• The EBRD: the stimuli for the economic recovery "have been more fantasy than reality until now"

The government seems to hesitate to begin massive layoffs in the public sector, for fear of the grave consequences that this measure could have on the global budget expenses.

A massive layoff policy, which according to some is needed in order to cut wage expenditures, could cause greater expenses with severance packages, which could in turn generate new budget imbalances due to insufficient funds, experts say.

Even though wage expenses dropped 3.2% on average in the first two months of the year, over the similar period of 2009, paradoxically enough, Government officials expect budget spending to increase in the first quarter compared to the previous years.

• Gherghina: Budget expenses will increase in the first quarter

Gheorghe Gherghina, secretary of state in the Ministry of Finance, stressed that in the first quarter of the current year, budget expenses will increase compared to other years.

Experts consider that this is because layoffs will generate a series of additional costs - the payment of unemployment aids and compensation packages - and at the same time will lead to a drop in budget revenues and social security contributions - which will generate chain deficits of the social security budget that will need to be covered by other funds from the budget.

"As long as all the ministries stay within their allocated budgets which were agreed upon with the international financial bodies, I don"t see why we should resort to layoffs", Gherghina said however, thus hinting that the state is treading carefully on the matter of layoffs.

The state secretary said that the ridiculous bonuses that public sector workers received in 2009 would be cut this year, but experts warn that this measure could create budget imbalances as well because the recipients of these bonuses usually win them back in court.

• Tănăsescu: Let"s hope that we can pay back the installments we have received so far

Mihai Tănăsescu, Romania"s official with the IMF, considers that the layoff policy poses a real risk on the global spending.

"It could happen, but we hope that the economy will recover eventually", Tănăsescu said. When asked if these issues could require a new loan from the IMF, the official mentioned that it is a possibility that should not be ruled out.

"We hope that we don"t get to the point where we need to take out a new loan or default on the payments of the tranches we have already received", Romania"s official with the IMF said.

• Meeting the required target for wage expenditures will be hard to do at the current pace

As part of its agreement with the IMF, the government has made the commitment to cut public sector wage expenses to 8.7% of the GDP, from 9.3%, in 2009.

In order to meet this objective, the current pace of cutting wage expenses which stands at 3.2%, needs to be kept steady, if not sped up.

Experts consider that the government will fail to lower salary expenditures without cutting global expenses, and say that the only solution for offsetting this would be for the GDP to increase and economic growth to resume.

But according to a report by the EBRD, the stimuli for economic recovery "have been more imaginary than real so far". "Few new projects were initiated, and their effect on economic growth was negligible", the EBRD.

Romanian experts agree with that prognosis, saying that Romania most likely won"t have any economic growth, and the pessimistic scenario of the government which expects an unemployment rate of 9% and an economic growth of just 0.2% in 2010 seems more than plausible. This means that the next mission of the IMF, scheduled for early summer, will catch the Romanian government off its guard when it comes to the commitments it has made to the IMF.

• The Romanian railways example: Hundreds of thousands of Euros in severance packages

The flurry of layoffs has begun with railway workers, with over 4,500 employees of the Romanian Railway Company (CFR) officially joining the ranks of the unemployed yesterday. They will most likely be joined by another 6,000 railway workers in the coming months, as the sector is undergoing restructuring based on the commitments Romania made to the international financial institutions.

The terms under which the former employees of the Romanian railway company are going home will be hard on the state"s budget: the people that have been laid off will receive their unemployment compensation plus additional payments, for a period of 12 to 15 months, which will amount to a maximum of 1350 lei/month.

The situation of the railway sector will most likely happen in other sectors of the economy, in case the Government goes through with the layoffs which have already been announced.