Ciolacu triggered a tectonic shift: Romania abandons the capital-friendly attitude that brought an economic boom and switches to leftist populism penalizing business performance
Prime Minister Marcel Ciolacu has imposed his populist will in the coalition with PNL and introduced, for the first time since 2004, a turnover tax on large companies. Add to this the capping of the trade surplus by GEO, the over-taxation of the „rich” and the targeting of austerity measures on the private sector. All point to a fundamental shift in Romania’s tax policy. The PSD is abandoning the capital-friendly attitude started in 2004 with the single tax rate and leading Romania towards the socialist populism of penalizing business performance and redistributing money by the state.
It is a road that Viktor Orban, who, incidentally, is a right-winger, has already taken. It’s what Dragnea tried, with much less success. Attacks on foreign capital, on banks, and on the rich in general, have also caught on in Hungary with the population, just as they will catch on in Romania. But Hungary’s experience serves as a warning: the economy of our neighbors is steadily collapsing, untied by the state that has saddled the market.
This is a tectonic shift, a fundamental change in the policy of the Romanian state, which will lead to major changes in economic performance. It is dangerous that the change comes not as a result of an election in which citizens voted for such a change, but as a result of a political barter between the PSD and the PNL caused by a budget crisis. This fundamental change was therefore not validated by a vote. It is imposed by the PSD-dominated government in which the PNL led by Nicolae Ciucă plays a diminishing role.
In fact, Ciolacu’s socialist advisers have seized the moment for this change: the crisis. Economic theorists have shown that extreme situations are always used by governments to reduce freedoms, and the shift to Ciolacu’s populist policies is a clear reduction of economic freedom. These have always been in the PSD’s DNA, but only now Ciolacu is managing to impose them.
Moreover, the introduction of the turnover tax – a penalty for companies – was carefully prepared by the PSD by brutally limiting the freedom of some economic agents: in June, the Ciolacu government capped the commercial surcharge on manufacturers and shops by means of an EO. I wrote at the time that this was a fundamentally flawed political decision with long-term effects, a purely communist measure that ignores a sacred principle: prices are set by the market, not by politicians.
Now the effects of that cap have appeared: society seems to have accepted the second step towards reducing economic freedom extremely easily. Once again: the turnover tax is an absurd measure that does not take account of economic performance, it is a penalty for capital. And the reason why it was taken is also absurd. The PSD has invoked the alleged ripping off of corporation tax by large companies, making them guilty as charged and turning them into real enemies of the people.
The correct solution to such a problem, if it really exists, is to strengthen the institutions of verification and control and penalize those companies that are wrong. Instead of this logical reaction, the solution has been violent and populist: to penalize all the big companies.
The irony is that the greatest impact will be felt by Romanian capital, which is still fragile and in the process of consolidation. Foreign capital has the resources to get over this hurdle more easily, but it too will suffer in intra-group competition (the Romanian subsidiary of multinational X will lose the battle for investment to the Polish subsidiary, as a hypothetical example).
Back to the fundamental change initiated by Ciolacu.
Since 2004, when the DA Alliance government and President Traian Băsescu introduced the single tax rate, Romania has gradually become a destination for foreign investment and domestic capital. No government has attacked the capital-friendly policy as harshly as the Ciolacu government is doing now. Right-wing governments have maintained the policy, and even the Ponta government (ex-PSD) has moved in the same direction, under the influence of Tony Blair’s ideologue, who also favored capital. The PSD led by Liviu Dragnea has also tried to change direction, but the premiers he appointed never went that far.
Now, however, the populist movement of Marcel Ciolacu and the PSD comes against an external background favorable to socialism. Ciolacu’s armoury is a World Bank report, produced with PNRR funding for the Ministry of Finance. It recommends to the government a complete reform of tax policy: tax on dividends, increased taxation of micro-enterprises, and shift to progressive taxation of employees.
The „redistributive” movement, whereby the state takes from high-performing companies and employees and gives to welfare, is in vogue in the EU. This socialist approach, in which governments arrogate increasing powers to themselves at the expense of the market, has also led to a net decline in the EU’s competitiveness compared with the US, according to a Wall Street Journal analysis.
There is also ongoing discussion in the EU about unifying member states’ tax policies, with German Chancellor Olaf Scholz himself proposing in 2022 that the EU should be able to make foreign policy and tax/tax decisions by a majority vote of member states, rather than unanimously as at present. Romania has consistently opposed this, precisely to preserve its ability to use fiscal policy as a lever to attract investment, as compensation for its many shortcomings (lack of critical infrastructure, unskilled labor, lack of political stability, etc.).
Against this external background favorable to socialist measures, Marcel Ciolacu came up with the change. And with the „justice” message that we take from the rich (higher taxes on expensive cars and houses) to give to the poor. That is, to those dependent on the party. A new Robin Hood, otherwise head of a party of millionaires.
And the Ciolacu government has found a solution to the problem of the „horror asylums”: the companies are all social enterprises, which are obliged to reinvest 90% of their profits. Basically, this will make this business disappear, because no entrepreneur will want to invest in order to benefit from only 10% of the profit he manages to make.
Lucian Croitoru correctly explained the political strategy: „What the ruling elite is doing with the kind of measures described above with reference to the two messages is to maintain, consciously or not, the socialist dream. This dream is that everyone is equal. Initially, the ideologues of socialism believed that this could happen by confiscating the means of production. After the former socialist countries screwed up confiscating the means of production, bringing everyone to equality in poverty, the promoters of the socialist dream moved on to a more advanced and subtle strategy: Let the honest capitalists produce, for this is where these people excel, then come in and take as much as they can in taxes to redistribute at will, after hiding the discretionary nature of the redistribution behind some snarky ideas and „principles” about the role of the state in achieving greater economic equality, always on the horizon but never achievable.”
We have reached this point also thanks to the complicity of the PNL and President Iohannis, who think almost the same as the PSD, but are more clumsy when it comes to making decisions. Some of the liberal leaders did, however, manage to stop, in extremis, another socialist horror – the over-taxation of highly profitable micro-enterprises. That is, over-taxing real economic performance. But that is too little.
This is a turning point for Romania. If Prime Minister Ciolacu and the PSD have weak opposition to the decision to return the country to socialist populism, they will continue even more strongly in the super-election year 2024.
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