Romania’s fiscal policy lacks continuity, predictability and strategic planning, while the collection rate of VAT remains a concern, reads the European Commission country report for Romania 2015.
The report shows that during 2014 social security contributions were reduced by 5 percentage points and tax on special constructions was introduced, amended and reduced in January 2015. In addition a tax exemption on reinvested profits was set up for technological equipment that is applicable for the period July 2014 to the end of 2016.
The European Commission notes that such incentives are usually used more as tools in times of economic downturn. Furthermore, consultations with the social partners related to some of these measures have been limited, having short deadlines for lodging.
The reduction in social security contributions is expected to yield a net loss of tax revenues of around 0.75 % of GDP for 2015, the EC says.
The government intends to offset this impact primarily through expenditure cuts in the fourth quarter of last year and in 2015. The sustainability of this approach remains to be verified during the year 2015, the report reads.
Another concern mentioned by the European Commission is complying with VAT payment. Thus, since 2000, the average difference in VAT collection exceeded 40%, with a level of 44% in 2012, the highest in the EU and well above the average of 16% across the 26 member states. However, the report notes that the authorities gradually introduced measures to improve the collection of VAT, such as electronic payments, a new procedure for VAT registration and lottery tax bills.
The report refers also to the restructuring of loans for people with low or medium income, introduced in June 2014, which could have a negative impact on credit discipline and may result in the need for additional reserves from banks. Accessing this program is still limited, but the authorities intend to amend the eligibility criteria in order to make it more attractive.
The discrepancy between the relative level of labour taxation and real income from labour taxation suggests a high level of unreported income. The report notes the annual report issued by the Fiscal Council in 2013, according to which about 1.57 million people in Romania were working without legal documents in 2012.
According to the EC, court decisions and unprofitable state-owned companies represent risks to future budget deficits.
In the field of public expenditure, significant inefficiencies still affects the growth potential of Romania. Locally funded projects sometimes lack appropriate training, according to the Commission. Nevertheless, the absorption of EU funds is low, only 52.2% of the structural and cohesion funds were made available by the end of 2014.
However, further fiscal adjustment and the external debt financing contributes to comfortable financing conditions. All three major rating agencies have granted Romania the recommended investment rating, while the risk of default insurance is the lowest level since mid-2007.