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After being approved and then rejected by the President, Romania this week finally achieved cross-party agreement on the extent of VAT cuts; it will drop to 20% from next year, and to 19% from 2017.
After being approved and then rejected by the President,
Romania this week finally achieved cross-party agreement on the
extent of VAT cuts; it will drop to 20% from next year, and to 19%
from 2017. Romanian lawmakers agreed to shave 4.4 billion lei ($1.1
billion) off planned tax cuts, amid worries the proposals may blow
a hole in the budget next year.
The original package included a cut in value added tax to 19%
from 24%, as well as reduced levies on fuel and dividends. However,
MPs across parties agreed to cut
VAT to 20% from next year and to 19% from 2017.
The European Commission, International Monetary Fund, and
Romania's own central bank and Fiscal Council watchdog had all
raised concerns over the scope of the initial proposed tax cuts. To
address those concerns, the MPs agreed to cut VAT in steps and
delay lowering excise tax on fuels until 2017.
The Prime Minister believes the cuts will help to boost growth
and fight tax evasion.
Impact of the VAT change
Positive
impact
Negative
impact
Finance Minister Eugen Teodorovici said the postponed
fuel tax cut and the smaller VAT cut would save around 4.4 billion
lei next year
It was argued the cuts would swell the budget deficit and
public debt while fanning consumption in one of European
Union's fastest growing economies
The cut in Romanian VAT will increase the Romanian
deficit to 2% in 2016 compared to the forecast 2015 figure of 1.8%
- but is lower than the Maastricht ceiling of 3% - this may prove
optimistic
There is also a risk of adding to high growth in
consumption and retail, and a rise in inflation. Romania had
previously promised to creditors a GDP to deficit ratio of
1.2%
The central bank's stance is that the package does
not destabilise macroeconomic stability and deficit; and public
debt targets are agreed with international lenders
A 2% deficit does not seem feasible especially if one
takes planned wage hikes into account; this could lead to a
reduction of credibility, problems with the debt cost, and the
monetary policy will suffer
Our experts say...
Romania once held the second-highest rate in the region (after
Hungary's 27% rate) but this reduction brings its VAT in line
with its neighbours. It will be interesting to see whether this
decrease will ultimately lead to an increase in consumption, better
compliance and economic growth.
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