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OECD's Cormann: Romania could consider a progressive tax system
Romania's economy could grow by 3.1 percent this year and 3.3 percent next year, secretary general of the Organization for Economic Cooperation and Development Mathias Cormann said on Tuesday at the Romanian gov't Hqs., the Victoria Palace, at the launch event of the second consecutive Economic Study for Romania, conducted by the OECD.
Recently, Romania's economy has been hampered by significant levels of inflation, the energy crisis. Russia's war in Ukraine has contributed to supply chain disruption and difficulties in fiscal policies. Inflation in 2022 peaked at 16.8%. Inflation is still very high, including in services, and we are also seeing increases in the cost of labour. Policy monitoring will need to remain restrictive for inflation to return to desired targets. Following the policies imposed by the National Bank of Romania, inflation has been kept at an acceptable level to avoid too much burden on economic activities, Cormann explained.
Romania needs a clear medium-term plan for fiscal consolidation. Romania's budget deficit has decreased over the past year. Last year it was at 6% or is probably approaching 6% this year, too, so the budget deficit is still too high and the government needs to focus on both revenue and spending. We also have unpredictable revenues in terms of implemented fiscal measures. We must also invest in reducing public debt as a foundation for sustainable growth. At the same time, we have increasing spending pressures, such as demographic ageing, we have fiscal pressures, as more and more people depend on pensions and it is also necessary to find ways to ensure proper social protection in view of additional spending and in the area of defence. We are seeing positive measures, Mathias Cormann said.
According to the OECD secretary-general, keeping the working population active for longer would have positive effects on the economy.
It is also necessary, said Cormann, to have a higher degree of tax compliance, so that we have a digitized financial administration that can enforce tax compliance. Tax exemptions must also be considered, we are considering reductions in income tax deductions and so on. Then, we have to look at the productivity area, an area where Romania has had a very good performance in the past, especially compared to the other states in the area. In 2010, productivity grew by more than 6 percent, but now it stands at 3 percent, OECD's secgen stressed.
According to him, it is important to fully use European funds to increase productivity. Romania receives EUR 28.5 billion in recovery funds, an enormous percentage of GDP and must be invested in infrastructure and transport.
The progress made to reduce corruption and improve governance must also continue. Corruption control is relatively lower for the region, much stricter lobbying rules and much more significant anti-corruption measures need to be introduced to support the reduction of corruption and the application of the rule of law. Also, the use of emergency ordinances must be reduced and such measures are indeed useful to support the capacity of public institutions in Romania, Mathias Cormann assessed.
Romania could consider a progressive tax system to reduce the gap between people with very high incomes and people with very low incomes, Mathias Cormann also said on Tuesday, at the launch event of the Economic Study 2024 for Romania developed by the OECD, at the gov't venue.
As far as the tax and transfer system is concerned, we are also looking at the area of poverty. We see that the level of poverty is still decreasing, but it is still much higher than other countries in the area, in the OECD. Romania should take into account income disparities in order to reduce poverty, especially in view of the unitary taxation system, and perhaps the introduction of a progressive tax system could also be considered to reduce the gap between people with very high incomes and people with very low incomes. However, there are very high, disproportionate expenditures of social protection, and these things have an effect on the degrees of disparity in the economy. It is an aspect that must be taken into account, Mathias Cormann said.
He said women's participation in the labour market must be increased. According to him, only 54% of women of working age were employed, compared to more than 70% of the OECD average. At the same time, increasing women's participation would have the effect of sustaining the economy and would also be able to cover labour needs in the economy.
On the other hand, Mathias Cormann also stressed that the reforms to be implemented must take into account Romania's objective of reaching carbon neutrality by 2050.
Another important pillar is improving fiscal support to move forward with the energy transition.
In conclusion, Romania's reforms are proceeding at a good pace. You are a beautiful country, on the right track to conform to living standards in OECD countries. We support you in your efforts to continue on the right path and we look forward to continuing to work alongside you and the Romanian Government, both now and in the future, to help you achieve the best results for your people, Mathias Cormann concluded.