High level of corruption, low competition and tax compliance, major challenges ahead for Romania


The European Commission issued eight recommendations to help our country improve its economic performance within 2014-2015.

Romania still faces a high number of bottlenecks hampering the business environment and further economic development: fiscal consolidation challenges, low tax compliance, low labour market participation, high levels of poverty and social exclusion, low educational outcomes, inefficient and low quality health care, ineffective public administration, high levels of corruption, low competition and efficiency in energy and transport, European Commission warns.
The European Commission has on Monday adopted a series of economic policy recommendations to individual Member States to strengthen the recovery that began a year ago. On the other hand, the country overview made by EC shows that Romania has succeeded in restoring macroeconomic stability, re-establishing market access for the government, and safeguarding financial stability. The public finances situation has improved and the excessive deficit procedure was abrogated in July 2013. Youth unemployment is high while the employment rate remains overall low. Some progress has been recorded in key structural areas: energy price deregulation has kept up pace, the absorption of EU funds has significantly improved, health care reform has continued, while the business environment has been strengthened. In addition, the authorities took steps towards improving tax collection, reforming the judicial system and equalising pensionable age for men and women.
The objective of the budgetary strategy outlined in the 2014 Convergence Programme is to achieve the medium-term objective of a structural deficit of 1% of GDP in 2015, which reflects the requirement of the Stability and Growth Pact, and to remain at it thereafter. The programme plans a stabilisation of the (recalculated) structural balance in 2014 and an improvement of 0.8% of GDP in 2015. Expenditure is forecast to grow at a pace consistent with the expenditure benchmark in both 2014 and 2015. The debt to GDP ratio is forecast to reach 40% in 2015, and to decrease in 2016-2017. “However the potential GDP estimate underlying the Convergence Programme is slightly higher, mainly on account of a more optimistic labour market outlook. There are downside risks to the 2014 budgetary plans related to expenditure control and lower-than-envisaged tax collection (…) Moreover, Romania is forecast to deviate from the expenditure benchmark in 2015.
In EC’s view, tax fraud and tax avoidance in the areas of VAT, including cross border schemes, excises, social security contributions and income taxation remain a major challenge. “Tangible progress in fighting undeclared work is limited, while the effectiveness of the tax compliance strategy is hampered by the lack of realistic and binding implementation measures and insufficient focus on prevention. The tax wedge on low and middle-income wage earners remains high and encourages undeclared work and under-declared earnings (…) Romania faces long-term sustainability risks, mainly due to age-related expenditure,” EC puts down.
Inefficient use of resources and poor management increase the fiscal sustainability risk in the health sector (…) Reducing the excessive use of hospital in-patient care and strengthening primary care and referral systems will increase cost-effectiveness, the Commission recommends.
According to the European Commission, high inactivity, insufficient utilisation of labour potential and the need to increase the quality and productivity of the work force remain key challenges of the Romanian labour market. “The quality of public job search and retraining services is still low, while Romania has a high and increasing percentage of young people not in employment, education or training (17.3% in 2013)”.
Regarding EU funds, EC writes that, despite important progress, the absorption rate for EU funds remains one of the lowest in the EU. “Continuously weak management and control systems and public procurement practices may negatively impact the preparations for and implementation of the next generation of programmes. Public procurement legislation suffers from instability and a lack of coherence. Corruption and conflicts of interests continue to be concerns for contracting authorities.”
The European body also blames ‘the underdeveloped basic transport infrastructure’ that continues to be a bottleneck to growth in Romania. “High growth of the vehicle fleet and the low quality of the road infrastructure hamper businesses and the economy. Poor maintenance of the railway network has affected safety and reliability. Freight transport on inland waterways remains far below its potential, particularly on the Danube,” EC explains.
Consequently, the Commission has issued eight -specific recommendations for Romania to help it improve its economic performance within 2014-2015. Among them, implementing the budgetary strategy for 2014, significantly strengthening the budgetary effort, improving tax collection by continuing to implement a comprehensive tax compliance strategy, stepping up efforts to reduce VAT fraud, fighting undeclared work, reducing tax burden for low- and middle-income, finalising the pension reform by equalising the pensionable age for men and women. Other recommendations refer to increasing the quality and access to vocational education, to increasing the efficiency and effectiveness of social transfers, particularly for children, in order to alleviate poverty, stepping up efforts to strengthen the capacity of public administration, in particular by improving efficiency, human resource management, the decision-making tools, tackling persisting shortcomings in public procurement and promoting competition and efficiency in energy and transport industries.
Prime Minister Victor Ponta said on Tuesday that Romania has made significant progress in the economic field, in fighting corruption and tax evasion.
‘Romania has made substantial progress in the economic field. I’ve seen the recommendations, yet there is (progress – ed. n.) to be further made. As well as in the fight against corruption, I noted today and I wish to congratulate the state bodies – the Prosector’s Office, the Police – which carried out operations aimed at fighting tax evasion. This is already palpable as far as budget revenues are concerned and this kind of effort should never be stopped. … The health reform process should not be stopped either, there is a need for higher investments, higher wages for the staff – doctors, nurses – and respect that is essential for the beneficiary of medical services. The same in education. Romania is a vivid country, constantly changing, but maintaining its strong institutions,’ Ponta said.