RSS
IMF's Reza Baqir: it would be recommendable to scrap or postpone the measures planned for 2017
The tax relief measures approved by the Romanian authorities are procyclical and will result in increased public debt, therefore it would be recommendable to scrap or postpone the measures that are supposed to come in effect next year in order to allow budget savings and bring public debt back to a downward trend, argues head of the International Monetary Fund's mission to Romania Reza Baqir.
In the report of our experts on Article IV - about to be released - we explained that the tax measures approved last year are procyclical, placing public debt on an upward trend. Further tax cuts are announced and they will come at a time when private consumption is already strong, and this is in essence the definition of procyclicality. In the expert report we suggest that in order to achieve the goal of making budget savings for difficult times, in order to bring public debt back to a downward trend, the authorities must give up enforcing the fiscal measures scheduled for coming into effect next year or postpone them until the results from the improvement of the tax management become visible, Reza Baqir said on Tuesday, during a debate organized by the Ministry of Public Finance.
According to him, the reform of the wage system can generate savings of 1.5 percent of GDP. Savings can also be made at capital expenditures, because in Romania they are higher than on other segments, but the quality of the infrastructure produced on these expenses is low.
At the same time, the IMF representative argues that large projects must be prioritized, and this measure should be extended to medium-sized and local projects. In addition, funds from inefficient projects should be reallocated to higher efficiency projects.
Investment planning should be based on satisfactory risk assessments and then a fund engagement control system must be run for all the public entities to avoid budget execution issues, said Baqir.
In addition, in certain sectors such as education and health care, Romania's performance is low compared to other countries and there is room for improvement, according to the IMF representative. However, the decline in budget revenues amid tax cuts will put higher pressure on spending at a time when health care and education perform poorly, he argued.
At the same time, Reza Baqir cautioned against the evolution of the budget execution over the entire year, which can seriously impact the quality of spending.
When you look at the budgetary execution, a noticeable paradigm is that whereas for several months there is a surplus or a slight deficit, there will typically be massive spending in the last two months. A question that arises naturally is whether this actually speeds up spending, which reflects in low quality, added the IMF representative.
Apart from the VAT reduction from 20 to 19 percent, another Tax Code provision for 2017 is the scrapping of the special construction tax and of the additional fuel excise.
The consolidated budget execution over the first four months of 2016 ended with a surplus of 130 million lei, which represent 0.02 percent of GDP, compared to 5.96 billion lei, or 0.84 percent of GDP in the same period of 2015, the Public Finance Ministry informed.
At the end of Q1 2016 the budget surplus reached 3 billion lei, or 0.4 percent of GDP.