VAT cut in 2016, unstudied decision that was turned against the original purpose – BNR official says

The VAT cut in 2016 has not been adequately studied, it was adopted late and did not have the desired effect, i.e. to lead to sustainable economic growth, but generated an accelerated increase in consumption reflected especially in imports, the advisor to the National Bank Governor, Lucian Croitoru, said.

“In 2016 there was an abrupt change in fiscal policy. We have switched from a practice after the ‘90s that, whenever we had a problem, we raised taxes and tried to reduce expenses, to the reversal of this trend in 2016 and to VAT cuts concomitantly with increases in expenses, leading to a deficit, a shock to the society. Those who supported this reform said we will have accelerated economic growth, and many said that these measures are not sustainable,” Lucian Croitoru said on Thursday during a debate on entrepreneurship, capital.ro reports.

“In my opinion it is very difficult to reach the conclusion that a shock such as the one in 2016 (budget deficit shifted from 0.8% of GDP in 2015 to 2.8% in 2016, i.e. a fiscal boost of over 2 percentage points ), a very large shock that came at the right moment. No! Such a shock to the economy is done when it is operating below potential, nevertheless everybody knows that Romania already had reached the potential in 2016. So, it didn’t come in time, it came too late, when it was not needed,” Croitoru said.

Moreover, the nominal wage growth has produced a great disadvantage to producers, he added

“Those who run (the country) and make the rules, politicians or regulators have, in such times, the temptation to resort to ad hoc measures and address the issues in populist terms,” said Croitoru.

Regarding the social protection measures, the BNR official did not deny the need for them, but he argues they can be fuelled only by the long-term economic growth.