Romania’s top banker – ‘close tax loopholes’

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National Bank of Romania (BNR) chief economist Valentin Lazea warned that the country’s ballooning deficit could make it “the next candidate for IMF assistance and possible suspension of EU funds”.

Lazea wrote that Romania risks achieving an unwanted economic precedent in the EU: “a country that committed to reducing this year’s budget deficit to 4.4% of GDP and which is not able to cut, even marginally, would probably be a first at the EU level,” he underlined.

Writing in the Opinii BNR blog, the BNR’s chief economist notes that “micro-enterprises have benefited from a preferential regime since 2002, computer scientists since 2004, the hotel and restaurant sector since 2017, the construction sector since 2019 and only agriculture and the food industry since 2022”.

Business finds “countless reasons to extend the preferential regime they enjoy”, he said. “Whether we are talking about owners of micro-enterprises, PFAs, real estate companies, computer scientists who do not pay income tax, builders or farmers who do not pay social contributions (but benefit from free medical services), etc, all they find countless reasons to extend the preferential regime they enjoy with arguments such as: ‘We are a branch/sector/type of company at the beginning of the road and we need, at this stage, the support of the state’,” Lazea opined.

Lazea suggests pre-election deficit cut

If measures are not urgently taken this year or next, Romania’s budget deficit at the end of 2023 could exceed 6% of GDP up from 5.7% year-on-year. “Five months into 2023, Romania’s budget deficit was 2.32% of GDP, up 0.8% year-on-year. It is easy to imagine the dismay that such a counter-performance would provoke in Brussels and on the financial markets,” he added.

“From September 1, Romania should implement a fiscal package equivalent to at least 2% of GDP to avoid “the shame of having no fiscal consolidation at all this year. Why 2% of GDP? Because, applying only in the last 4 months of (2023) this package would reduce the budget deficit by around 0.67%, probably enough to marginally put it below last year’s deficit level of 5.7%,” he explained.

“If the package of 2% of GDP were extended throughout 2024 (this) would allow the budget deficit to be cut to 4% of GDP next year, without other additional measures, difficult to take in an election year,” explained Lazea.

Due to its numerous tax exemptions, Romania has a regressive fiscal system, where those who earn more pay less into the budget. Eliminating these exemptions could bring in over 2% of the GDP. If things are so simple – and known to everyone – why don’t we see them put into practice?” Lazea asks.

According to the economist, this is due to “the greed of the business environment… the ideology of many analysts and economists (and) the political class’s fear of the consequences of reform”.