IMF warns Romanian parliament on “crucial decision” about Fiscal Code

Newsroom 04/08/2015 | 15:05

Romania has made progress in recent years in terms of improving public finances but the new Fiscal Code could jeopardize these achievements and lead to an increase of the budget deficit to at least 3 percentof GDP in 2016, and to an increase in public debt, reads an opinion by Andrea Schaechter, head of the International Monetary Fund (IMF) mission for Romania, and Guillermo Tolosa, IMF representative for Romania and Bulgaria.

 

The two IMF officials argue that the review of the Fiscal Code in Parliament is an opportunity to underscore the medium-term fiscal priorities and to resize accordingly the proposed cuts in taxes and fees.

“Alternatively, in order to keep the deficits under control, cuts in government spending and 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, if the range and tempo of the fiscal measures and the new expenditure plans are tempered,” the piece states.

They believe that fiscal stimuli should be applied at the right time and that it is not clear such stimuli would be desirable if they are to be financed through higher debt. Romania has a fast-growing economy and wages have increased this year by more than seven percent, although the economic situation is still very difficult for many Romanians.

“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,” the IMF officials show.

The economists stress that 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”.
They conclude that the review by Parliament of the Fiscal 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. The opinion piece stresses the fact that “it will be a crucial decision to preserve the achievements so hardly obtained in terms of macroeconomic stability”.

The Fiscal Code will be evaluated in an extraordinary session at the end of August by the Ministry of Finance, the National Bank of Romania (BNR) and representatives of political parties. However, Finance Minister Eugen Teodorovici said a few days ago that the package will not be changed in any way, it will be adopted in the current version. He stated that the draft budget for next year will be built so that the deficit falls to 2 percent of the GDP.

The Fiscal Council and National Bank have warned that the fiscal relaxation measures are many and too aggressive to be implemented all at once. According to the BNR governor, Mugur Isarescu, the current package will generate a budget deficit of 3 percent next year leading Romania back to an excessive deficit, which it had left in 2013.

The most important measure, with the largest impact on the deficit is to reduce the standard rate of VAT from 24 percent to 19 percent.

Natalia Martian

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