BNR official: The deficit will jump by 6%, tax exemptions must be eliminated

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The budget deficit at the end of the year risks exceeding 6% of GDP, warned the chief economist of the National Bank of Romania (BNR), Valentin Lazea. He draws attention to the fact that, if a series of measures are not taken urgently, Romania may lose European funds. The short-term solution is to return to the true flat tax, says Valentin Lazea, meaning the elimination of tax exemptions for certain categories such as IT, agriculture and construction.

The chief economist of the BNR told Digi24 that the finances must come with a package on September 1, in order to produce effects of 2% of GDP reducing the deficit. “It is unacceptable to exceed 5.7% by even one leu. Fiscal consolidation means not exceeding. Point. If we do not fit in, one of the risks is that the money from the European Commission will stop coming. A risk for the private financial markets is to no longer finance Romania except at interest, very high costs,” Lazea argued.

“After the first five months of 2023, the budget deficit (by cash definition) was 2.32 percent of GDP, i.e. about 0.8 percent of GDP higher than in the first five months of 2022. Under these conditions, if if a number of measures are not taken urgently, the budget deficit at the end of 2023 risks exceeding 6 percent of GDP, i.e. it would constitute a regression compared to the deficit level of 5.7 percent of GDP recorded in 2022. It is easy to imagine the consternation that such a counter-performance would cause in Brussels and on the financial markets: a country that has pledged to reduce its budget deficit to 4.4 percent of GDP this year and which is unable to reduce, even marginally, the deficit compared to the previous year would – probably – be a first at the EU level,” Lazea wrote in an article on opiniibnr.ro.

He opined that, in order to avoid the shame of having no fiscal consolidation at all this year, Romania should implement from September 1 a fiscal package equivalent to at least 2 percent of GDP. “Why 2 percent of GDP? Because, applying only in the last 4 months (ie a third of this year) this package would generate a reduction in the budget deficit of around 0.67% of GDP, probably enough to come – marginally – below the deficit level of 5 .7 percent of last year’s GDP. It is also important to mention that this package of 2 percent of GDP, if extended throughout 2024 (and not affected by other electoral “gifts”) would allow the budget deficit to be reduced to 4 percent of GDP next year, without other additional measures, difficult to take in an election year.”

In his view, the solution is, in the short term, the return to the true flat tax/single quota, claimed by all but respected by too few; due to numerous exemptions and exemptions from paying taxes and fees, Romania today has a regressive fiscal system, in which those who earn more pay less to the budget.

Eliminating these exemptions and exemptions could bring in more than 2 percent of GDP, that is, what is needed to solve the fiscal problem presented in the statement. If things are so simple – and known to everyone – why don’t we see them put into practice (at least as of this writing)? The answer lies in three words: greed, ideology, fear. The greed of the business environment that benefits from exemptions and exemptions; the ideology of a large part of analysts and economists; fear of the consequences of reform on the part of the political class. Let’s analyze them one by one”, wrote Lazea.

 

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