IMF: The new fiscal measures will lead to a deficit of 5% of GDP in 2024 but it should fall below 3%

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The Government’s package of fiscal measures is intended to reduce the budget deficit, however, many other programs are needed to increase efficiency and revenues, in general, the head of the International Monetary Fund (IMF) mission for Romania, Jan Kees Martijn, said on Wednesday.

An IMF team, led by Jan Kees Martijn, the head of the mission for Romania, is in Bucharest starting from September 25 for the annual analysis of the Romanian economy, and on Wednesday the head of the mission presents the conclusions.

IMF considers that that the package of fiscal-budgetary measures already adopted, but blocked at the CCR, is a step forward towards consolidating the fiscal regime, but that other measures are still needed to collect 2% of GDP in addition to revenues in the next two years.

The IMF’s forecast for the budget deficit at the end of the year is 6% and if the recently adopted measures are implemented, it could decrease to 5% in 2024. IMF experts point out that fiscal deficits will have to fall below 3% of GDP, as agreed with European Commission, to stabilize public debt in the medium term.

The Fund believes that government price controls for food products are not an appropriate tool for reducing inflation because they can compress supply and increase the prices of other goods.

Also, the turnover threshold for SMEs should be 60,000. Members of the IMF mission also criticized the way the measures were implemented, saying that fiscal policy needs to be more predictable.

“The fiscal package is an important step to reduce the deficit, but more reforms are needed to increase revenues. Fiscal policy must be more predictable. Economic growth will remain robust and higher than in surrounding countries. In 2023, economic growth is forecast at 2.3% of GDP, supported by a large increase in investment. The economy will recover modestly and reach 3 percent growth as fiscal consolidation also occurs. In the medium term we expect the economy to reach its potential growth of 3 – 3.25% as consumption and investment supported by PNRR funds remain strong. A decline in economic growth, inflation will fall from 7% to 4.5% at the end of 2024, but above the inflation target set by the NBR,” said Jan Kees Martijn.

In his view, the risks surrounding this forecast are substantial, the war in Ukraine, a possible decline in economic activity in Europe or a global economic downturn could affect the funds needed by emerging countries.

“It could also be a challenge to implement the fiscal consolidation and the next steps in the PNRR, because there are countless elections next year. In terms of political priorities, I would like to start with fiscal policy. The recently adopted tax package is a step in the right direction but further reforms are needed. The initial fiscal deficit for 2023, of 4.4%, will be exceeded and we forecast a deficit of 6% of GDP. The new fiscal package will improve public finances in 2024 and beyond by around 1% of GDP, leading to a deficit of just over 5% of GDP in 2024. However, fiscal deficits will need to fall below 3% of GDP, as agreed with the European Commission, to stabilize public debt in the medium term, to help secure the necessary financing in the market at lower interest rates and to support the continued payment of EU funds. Achieving this target will require an additional adjustment of at least 2% of GDP in the coming year,” he pointed out.

The IMF Head for Romania also said that the threshold for micro-enterprises needs to be lowered and the 1% turnover tax is an additional burden.

“Increasing the tax on micro-enterprises will increase tax revenues; however, to truly close this gap, the threshold for registration as a micro-enterprise should be further lowered. In addition, turnover taxes on banks and large businesses place an unfair burden on low-margin businesses and can reduce financial intermediation.”

According to Jan Kees Martijn, the National Bank of Romania’s commitment to maintain the interest rate is appropriate. “Looking ahead, the NBR’s public commitment to keep rates low until 2023 is appropriate given the still high core inflation and wage growth risks. An easing of monetary policy should wait until core inflation is on a firm downward path so that the target range is clearly within reach. Furthermore, there are good reasons to implement any reduction in interest rates gradually, given the high uncertainty about the process of inflation, monetary transmission and fiscal policies. In the event of a significant upward revision of expected core inflation, the NBR should be prepared to tighten monetary policy, including liquidity management, as appropriate.”

On the other hand, the IMF chief for Romanian considers that the government price control of food products is not an adequate tool for reducing inflation because it can compress the supply and increase the prices of other goods.

“It is important for Romania to reduce the deficit. The tax package is a step in this direction. We do not see the need for Romania to have a financial assistance package from the IMF. For long-term deficit reduction, revenue growth is an important objective. Exceptions should be removed. The possibility of progressive taxation was discussed a year ago, but we came to the conclusion that the system of taxes and exceptions must first be put in order. There is no single charge now. Everyone should pay their fair share of taxes. To reduce the deficit, the authorities must first look at the tax system.”

The IMF calls for additional measures to increase revenues, such as the elimination of remaining exemptions, privileges and loopholes, the continuation of VAT leveling, the implementation of property tax reform.

“Tax revenues in Romania are very low compared to other European states and that is why we believe there is room for improving collection. We have not explored various options regarding the privatization of some state-owned companies. The property tax system is outdated and we support its modernization. We believe that through micro-enterprises there are loopholes through which the payment of some taxes is avoided. That is why the threshold must be lowered, but even 250,000 is high. 60,000 euros would be more appropriate,” said Jan Kees Martijn.

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2 Comments
  1. Panagiotis Spyridis says

    Let me translate it for you all. It is really simple… if you do not raise taxation to close to the EU mean, then we will force you to self of Romanian State property (privatisation) to us. You can not have both low competitive to us taxation and private property. CHOOSE.

  2. Panagiotis Spyridis says

    #sell off Romanian State property

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