Tax reforms launched by the Bucharest authorities were made without prior consultation with the International Monetary Fund. Statements made by its officials recently reveal their dissatisfaction and concern. The Prime Minister of Romanian replies quite vehemently, claiming that “it’s not the IMF which decides the policy in Romania…” In the meantime, the new Minister for Public Finances thoroughly does his homework in view of proposing a budget in conformity with IMF requirements.
In an interview to Mediafax, Minister for Public Finances Ionuţ Popescu said that in order to recover losses in revenues, put at some 1% of the GDP, additional measures will be taken apart from the ones already approved, namely doubling the micro-enterprise tax from 1.5 to 3% of the turnover, raising the tax on dividends from 5 to 10% for population and deferring the cut down in contributions to social security funds. “We are trying to identify further means to bring money to the budget or to cut down some expenses,” the Minister for Public Finances said, without offering other details. The means that Ionuţ Popescu was speaking about, and which will be presented to IMF officials will include, according to governmental sources, an increase in taxes on real estate transactions, currently standing at 1%. The measure comes at a time when the real estate market is developing significantly. Also, the tax on banking interest rates will go up from 1 to 2%. The inflation rate is scheduled to fall to 7% and economic growth to reach 5.5% in 2005.
A change in trend
Once again, the idea is confirmed that the new administration will transfer the burden of taxation from companies to citizens. Whereas taxes for companies are cut, direct or indirect taxes levied on taxpayers go up. The reason is self-evident: citizens are good tax payers and the citizen tax collection rate is better than the enterprise tax collection rate.
The conduct of the new Power thus appears to be somewhat suicidal, given that the change affects precisely those who have voted for the Alliance. They have voted for the right-wing hoping it will cut down their taxes and thus their incomes will go up, and what do they find: not only are their taxes not lower, but new ones are being charged! And this time the new administration cannot put forth the excuse “This is what the EU/IMF asked us to do!”
The stuttering caused by the introduction of the flat tax quota – considering that it had been announced (and, we assume, thought out) a long time ago – raises major question marks regarding the expertise and abilities of the new administration to efficiently manage economic policies. Remedial actions announced at a high pace, one or two of them every day,prove that effects of introducing the flat tax quota have not been adequately calculated and anticipated and every day some official or another wakes up and says “we should do this…”, “we could do that…”
“Transition is over, Romania has the first Liberal Government “…
For the time being, transition goes on, and the Government is far from being Liberal. The only attribute that could be attached to it is “amateur.”
PSD had the great chance of a positive economic trend, which generated economic growth in spite of the Government’s abilities and in stark opposition to the measures it took. The new Government is also offered the chance of an economy moving on by itself.
Naturally, all measures taken for the companies are positive and they are likely to have a beneficial impact. Only that the Government keeps its eyes on the approx. ROL 30,000 bln less coming into the State Budget in the short run. And instead of finding a solution to cut budgetary expenditure in order to cope with this decrease, it takes it out on individual taxpayers, who, for the additional ROL 500,000 in their wages, will see their incomes lowered by ROL 1,000,000 at least…
Through these measures, combined with the recently launched idea of having everybody submit wealth statements – the Government conveys some quite interesting signals:
1. It is not convinced that the “tax revolution” will surface the grey economy. Which is obvious, as the 4 per cent cut down is not enough to tempt anybody.
2. Through the idea that “the means assets are obtained by until 2005 will not be investigated” the Government sanctions all the over 90% of the citizens who have been honest and paid their dues in time.
3. The fiscal policy will continue to be based on individual taxpayers and indirect taxes (VAT, excises) rather than on strengthening companies’ fiscal discipline.
Which means the current Government will carry on the economic stalemate of the previous Government. Oh, plus, of course, the 16% flat tax quota denied by the former President.Therefore, if Romanians do live better, they will do so in spite of the Government, and not due to the Government.
So what’s BNR doing these days?
In the fifteen years of transition so far, the National Bank of Romania has led Romania’s macro-economic policy. Forced by the amateurism of the Ministers for Finances – although some of them were quite knowledgeable, but unfortunately their knowledge had no connection with real life – BNR implemented a conservative, inconspicuous and very cautious economy protection policy. Fortunately, the stubbornness with which it stuck to macroeconomic indices benefited Romania and saved it from the economic collapse it would have entered because of the irresponsibility of some faulty policies.
For 2005, BNR announced it would step out of the macroeconomic “battle,” to focus on inflation exclusively. Unfortunately, so far the central bank has launched rather confusing messages, to say the least. One example: the surplus of cash in the monetary market drove interest rates in the inter-banking market down to close to 0. BNR has a means to eliminate excessive cash in the banking system, namely the monthly tenders. Except that BNR has made close to zero moves in this respect, and amounts were attracted for interest rates between 14,59 and 13,60%, although BNR had only cut down the reference interest rate by 0.5%. Therefore, interest rates accepted by BNR are approx. 2% below the reference interest!
For the time being, Mugur Isărescu has not taken a public stand on the new economic policy in Romania and the way it is to influence inflation. Inflation targets are expected to be adjusted by at least 1%, as most banks in Romania predict an inflation rate of some 8%, i.e. approx. one per cent above the official target, and an intervention interest rate of approx. 15%, i.e. quite close to what the central bank offers at present.
A nice surprise
Mr. Ionuţ Popescu’s performance is quite a nice surprise. Signals so far tend to suggest that economic facts defy electoral campaign plans, and apparently the one to be used as a scapegoat is the fresh Minister for Public Finances. But he stands up quite courageously, and for the time being, at least, manages to keep up with the Liberal leaders who probably didn’t expect him to be this dedicated. For the Alliance, however, Ionuţ Popescu might turn out to be an important aid in preserving the macroeconomic balance, and it would be a shame for him to be sacrificed for political interests. His performance is a lot more balanced and conservative.
We are now beginning to see that the Alliance’s economic programme was somewhat concocted in a hurry, and that the Government really rushed into introducing the 16% flat tax. It is clear now that it would have been a lot wiser for the project to be first discussed and analysed thoroughly, jointly with BNR and international financial institutions. The Government would have thus avoided the stuttering this January, which brought the Tariceanu Cabinet many poor marks.
The IMF blessing
The IMF mission cannot bring about major changes, if only because there have few people to talk with… The appointment of Secretaries of State in the Ministry for Public Finances is not yet completed, so this visit will have a rather diplomatic purpose, of getting to meet the new administration and their ideas in a face-to-face discussion.
Since we already know what the IMF mission will say, the replies given by the Bucharest authorities and the measures the new administration will take in the aftermath of this meeting are a lot more interesting.
The only concrete talks are those to be held with the central bank, except that at the time being the BNR policy is itself in sort of a stand-by, until the budget is finalised.
For the moment, the IMF bought the “16%” idea. But tax abatement is pointless as long as key problems of the Romanian economy are not tackled: the arrears and financial discipline.
And, in terms of fiscal discipline, the only idea the new Executive has is for everybody to file wealth statements, not only the public dignitaries.
Niggardly master will invite servants to steal
Another rushed initiative of the Government is that of wealth statements. Fortunately, this is still under discussion, so it can take any form, or be even dropped altogether, which would be the wise thing to do…
Because, for a long time now, the Romanian State behaved like a not only stingy master, but also as an arrogant and despising one with his servants. Consequently, Romanians got used to dodging. Today, the new administration tries to change things. But as long as they will be forced to accept being humiliated in public institutions, when paying their taxes to the State Budget, Romanians’ answer to an excessive fiscal regime and to the frequent use of public money for private groups’ interests will be the same: evasion.
The hesitating conduct of the new administration makes it difficult for Romanians to change their behaviour. The announced fiscal revolution is not that revolutionary after all. On the whole, for a company, the tax burden was only cut by four per cent. Gains are similar for employees. If the announced “corrective” measures had been also implemented (the VAT and excise raise), we would have reached a stage where nothing would have actually been lost or gained.
It’s true that introduction of the flat tax gets taxpayers free from the bureaucracy of the aggregated income tax system, which the State failed to manage throughout this period… Only that we now have this issue of the wealth statements, which involves at least a comparable amount of bureaucracy.
Leaving logistics issues aside (which are very difficult, not to say impossible to overcome), the new initiative raises a range of questions:
– It is not at all clear what will happen to the assets obtained until 2005. Are they all to be labelled as “clean”? If so, we have a big problem. Because it is neither fair, nor ethical, and it will hardly motivate honest citizens. Before asking honest citizens to do their duty (as they have been doing so far), the administration must first solve its own problems;
– the State is quite in a position to settle this very easily, because it has all the information it needs, it only has to centralise the respective data. Fiscal administration offices have records on all salary incomes. The Pensions Agency has records on pensions. Local authorities can supply data on real estate and landed property. The National Securities Commission or the Shareholders’ Registry can supply data on stockholders, etc. It only takes some goodwill and a slightly higher work volume. But, of course, it’s a lot easier to force 17,000,000 people to produce these statements, than to have some 2,000 people work;
– It’s not very clear what the State will use these statements for… The official motivation is that a reference level must be identified. OK. But on the other hand, these data are highly important, and can be used for various other purposes. For instance, to identify new incomes to levy taxes on.
– Who will manage this database? With what personnel? For how much money? How much will this whole thing cost? At least roughly…
In order to change taxpayers’ behaviour, the State should first change its own conduct. The new administration must win the citizens’ trust, through clear and concrete measures. Going halfway into things or simply beautifying facts will not only preserve the dodging drive, but could even reinforce it. Until people start feeling that they are gaining something, they will keep dodging the State, because… a niggardly master will invite servants to steal.
