Romania’s new government to maintain tax rate cuts decided by predecessor

Romania’s new government to maintain tax rate cuts decided by predecessor
By Iulian Ernst in Bucharest November 17, 2015

The tax rate cuts envisaged by the outgoing government of Prime Minister Victor Ponta will be maintained, and new budget deficit targets will be negotiated with the European Commission (EC), according to the Ruling Strategy released by the prime minister designate, Dacian Ciolos.

The Medium Term Objective [for the budget deficit] will be re-negotiated, within the limits of sustainable public debt, according to the document.

The new government will keep the cash deficit below 3% of GDP next year, finance minister candidate Anca Paliu Dragu said during her hearing with the parliamentary expert committee. Such a deficit secures the sustainability of the public finance and can be financed, she explained to lawmakers.

Revising the fiscal provisions would send a negative message to investors and would hurt the growth outlook, she added.

Under the Fiscal Code drafted by the government and already endorsed by parliament, the VAT rate will be cut to 20% as of January 2016, from 24% currently. Beside other tax rate cuts and public wage hikes, the outgoing government was expecting a deficit of some 2.5% of GDP – while the Fiscal Council warned that the gap might be nearer to 3% of GDP next year.

Technically, it is impossible to re-negotiate the MTO target, set under the Fiscal Compact signed by Romania, the head of the Fiscal Council Ionut Dumitru explained to Ziarul Financiar daily. The Ruling Strategy is unclear in this regard, he added.

Under the Fiscal Compact, the signatory countries pledged to observe structural deficit targets – of 1% of GDP in the case of Romania, which means a cash budget deficit of below 1% of GDP. The real problem is that Romania entered the Fiscal Compact in 2012 from an already low level of deficit [compared to the other signatory countries], Dumitru said.