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IMF warns new Tax Code endangers Romania’s economic progress, may bring about renewed austerity

IMF warns new Tax Code endangers Romania’s economic progress, may bring about renewed austerity
Bucharest, August 4, 2015/ Independent Balkan News Agency

By Daniel Stroe

The Tax Code as approved by the Romanian Parliament would generate an increase of the budget deficit to 3pct of the Gross Domestic Product (GDP), would endanger the economic achievements obtained by Romania in the past years and cause a return to austerity, reads the document "A Critical Decision" signed by Andrea Schaechter, International Monetary Fund mission chief for Romania, and Guillermo Tolosa, IMF resident representative for Bulgaria and Romania.

The text was published on the web page of the Resident Representative Office in Romania, and was dated August 2. "Romania has made significant strides over the last seven years to fix its embattled public finances. We are concerned that the Fiscal Code in its current form would put these achievements at risk. It would entail a yearly loss of revenues of about 2. 2 percent of GDP and an increase in the fiscal deficit to at least 3 percent of GDP, putting public debt on an upward trajectory. Alternatively, to keep the deficit in check it would require a downsizing of government expenditure as well as forgoing new spending initiatives, including for infrastructure, defense, wages, health or education”, the document reads.

Fiscal policy should be sustainable, it further highlights. After many years of belt — tightening. Romania reached a sustainable structural deficit in 2014, and will not require further deficit reductions in 2015 or 2016. Public debt, which is now nearly two and a half times higher than before the crisis, when measured as a share of the economy. In the eyes of investors this can be a significant strength, in particular given the remaining uncertainty surrounding countries in the region, the experts add.

Fiscal stimulus measures should be well — timed, IMF points out. While the economic situation is still very difficult for many Romanians, the country is now growing at full speed and wages have risen this year by more than 7 percent. It is not evident that further stimulus is desirable at this point. “If financed with more debt, austerity would inevitably be needed when cheap and abundant financing stops and debt has reached higher levels. Romania has gone through such an unfortunate cycle of excessive stimulus in good times and strict austerity in bad times in the past decade. It should not be repeated”, it further warns.

“However, to create fiscal space for prudent tax cuts requires more concrete actions, more time, and close coordination by all line ministries and ANAF, in particular: better tax collection, more efficient public spending and shifts from nationally financed investment toward EU — funded projects. In all three areas progress is under way, but when assessing the actual numbers they do not yet add up to the sizable amounts needed to finance the Fiscal Code proposals”, the text recommends.

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