IMF blows the whistle: The review of the new Tax Code, a crucial decision

0 42

Romania has made progress in recent years in terms of improving public finances but the new Tax Code would jeopardize these achievements and lead to an increase of the budget deficit to at least 3% of GDP in 2016, and to an increase in public debt, reads an opinion sent to the ‘Adevarul’ newspaper by Andrea Schaechter, head of the IMF mission for Romania, and Guillermo Tolosa, IMF representative for Romania and Bulgaria.
The two IMF officials argue that the review of the Tax Code in Parliament is an opportunity to underscore the medium-term fiscal priorities and to resize accordingly the proposed cuts in taxes and fees.
The opinion signed by two officials reads:
– We are concerned that in its current form the Tax Code would mean an annual loss of revenues of some 2.2% of GDP and an increase of the budget deficit to at least 3% of GDP, thus placing the public debt on a upward trend.
– Alternatively, in order to keep the deficits under control, cuts in government spending and the giving up the new spending initiatives would be required, including the ones for infrastructure, defence, salaries, health and education. Could there be a third alternative that would allow Romania to gradually reduce its public debt in view of easing the tax burden and fund new projects? We believe that there is.
– Fiscal policy must be sustainable. After many years of tight policies, Romania managed to reach in 2014 a sustainable structural deficit, with no need for further deficit cuts in 2015 and 2016. The public debt, which is now nearly two and a half times higher than the level before the crisis, measured as a share of GDP, will stabilize. In investors’ view this could be a very significant point, especially if we consider the ongoing uncertainties in neighbouring countries in the region.
– The fiscal stimulus should be applied at the right time. Although the economic situation is still very difficult for many Romanians, the country is currently growing rapidly, while wages have increased by more than 7 percent this year. It is not obvious that additional fiscal stimulus would be desirable at this stage, if financed through a higher debt. Austerity will inevitably become necessary when cheap and abundant financing will cease and debts will reach higher levels. Romania has already passed in the last decade through such an unfortunate cycle of excessive stimulation during good times and strict austerity during bad times. It should not be repeated.
– In short, the review by Parliament of the Tax Code is an opportunity to specifying medium-term fiscal priorities, for the realistic assessment of fiscal dimension and the speed with which it can be generated, and the consequent resize of tax and fees cuts. It will be a crucial decision to preserve the achievements so hardly obtained in terms of macroeconomic stability.

- Advertisement -

Leave A Reply

Your email address will not be published.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More