Isarescu: Pension Cuts Preferable To VAT Rate Increase

05.25.2011 By Florentina Dragu

Lowering the pensions would have been a better fiscal measure than increasing the value added tax rate and Romania would have emerged from recession sooner, central bank governor Mugur Isarescu said Wednesday.

"The economy has tried to exit recession twice before, but there have been all those blunders with the value added tax… I think that the government's initial solution to correct the larger deficits at the social security budgets would have been financially better, but it wasn't politically sustainable," Isarescu told an economic seminar.

Last year, the government tried to reduce pensions by 15%, as part of an austerity package meant to jumpstart the economy, which included a 25% cut in public salaries and lower unemployment benefits.

However, the Constitutional Court declared the pension cuts unconstitutional and the government had to increase the sales tax instead, which negatively affected the annual inflation.

President Traian Basescu said last week that hiking the VAT rate to 24% from 19% was a "political error" which delayed the country's exit from recession by at least six months.

Basescu said the government should have decided to tax pensions temporarily instead of increasing the VAT rate.