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December 4, 2022

Zero coherence

During January-May 2010, foreign direct investments (FDI) dwindled by 31.5 pc against the same interval of 2009, down to EUR 1.43 bln, according to data released by the Central Bank (BNR) – yet another unwanted warning signal.

Maybe the figures, by themselves, are not so shocking, but they still clearly show that economic situation is getting increasingly difficult, in terms of both the budget incomes at home and money coming from abroad. Strongly denied in 2008 and 2009, because of election campaigning, the economic crisis did not go away as easy as promised by those who won elections. On the contrary, each day we see how money depletes, while the recovery signs are nowhere to be seen. The state badly needs cash, as the recent VAT hike does not seem to make things better. The economic experts of ING Bank are not the only analysts to warn that Romanians have not reached the bottom yet.

In this unfortunate context, political themes focus on toppling the government – which is natural for opposition parties. On the other hand, the ruling power sees how things are getting worse each day, and political risks increase at an exponential rate. As a consequence, it is trying hard to look concerned with the budget and the population’s living standards. This is what gives new “working themes.”

President Traian Basescu preached the victims of recent floods about how VAT should return to 19 pc, instead of the current 24 pc, while authorities should tax all incomes, pensions included. It is hard to say what the poor villagers understood from this lecture, given the VAT has just been increased on July 1st. Yet, we are almost certain they are not concerned – like politicians and analysts – about the president substituting himself to the government in such fiscal policies.

Rumours about Sebastian Vladescu, the minister of Finance, say he is a close friend of Traian Basescu. Some even say he is in cards for prime minister, this fall, if Emil Boc is replaced, following the recent presidential warnings. It is still obvious that Mr. Vladescu had some initiatives of late – something unusual for him in the past. Add to this the “spicy” move of hiring a showman and a singer in the ministry – who both left, meanwhile. Tuesday, Sebastian Vladescu stirred fresh controversy, by saying in an interview that Romania should drop the flat tax and adopt a progressive taxation system, since January 1st 2011. According to the minister, the flat tax has become obsolete and the state cannot afford it, if it really wants to have economic recovery. “Everything has its lifetime. The flat tax was an epoch, but it ended now. I am not saying this for the sake of sparking a political debate, because my draft progressive tax on global income is neither against PD-L (which initiated the flat tax and still supports it), nor in favour of PSD (a traditional supporter of the progressive tax). It is a strictly professional option, based on calculations made by ministry experts,” Vladescu stated.

In fact, what Mr. Vladescu brought forward is a wide economic and financial approach, an incipient fiscal approach aimed at countering the crisis, based on elements mentioned by the president (decreasing the VAT to its initial value, tax on all incomes), enriched with “test balloons.”

One must not be a trained psychologist to see how the minister checks how the market would react. His ministry must find money after January 1, 2011, but keeping the VAT at 24 pc and salaries cut by 25 pc beyond this limit would go against the promises made by the Democrat-Liberals. Hence, the minister relied upon the thesis voiced by the president – the taxation of all incomes. This also includes pensions – the most painful issue of all, because two thirds of retirees are living on small pensions. The fiscal system is “cynical, not human” because all incomes must be taxed – says Vladescu.

Another sensitive topic is the flat tax. Abandoning it would encourage the Social-Democratic arch-enemies, who have always criticised the idea that everyone should pay the same tax of 16 pc. On the other hand, President Traian Basescu said in 2008 that he and the government should go home if the flat tax were dropped. Such a proposal thus endangers the very “spine” of the Democratic-Liberal economic conception, also embraced by the head of state. Furthermore, this approach does not take into account the opinions of experts, who claim that renouncing the flat tax would boost tax evasion. Finally, just like President Basescu, the Finance minister said the VAT increase was an economic mistake. “The latest calculations about the VAT increase to 24 pc show the GDP decline will be more severe than 1.5 pc this year,” Sebastian Vladescu explained. The acceptable variant remains taxing all pensions. The new fiscal system would also leave in place the controversial lump-sum tax, despite the premier saying – at some moment in the past – that he might abandon it. The lack of coherence reached its maximum. A new topic of debate will make the headlines, for a few days at least. The opposition will probably demolish the project, analysts will target the test balloons launched by the minister of Finance. This project was precisely what was still needed to prove the acting power’s lack of coherence. It no longer approaches the fiscal system as a true right-wing party should, and instead mixes ideas taken from the whole political spectrum. And the worst issue is that the major ruling party, PDL has not even analysed the plan yet. Premier Emil Boc expressly forbade ministers to go public with initiatives that have not been approached by the party. Even the cautious vice-president of PDL, Theodor Stolojan claimed the party did not talk about the possibility of dropping the flat tax and appreciated that it is “completely counter-productive for Government people to go public on such ideas.”

The minister of Finance is not the kind of man to take the bull by the horns alone. What looks like a personal initiative could be, in fact, a well-considered attempt that will serve someone. “We must return Romania on the map of foreign investors,” Sebastian Vladescu stressed in an interview, giving the impression that he is the sacrificial pawn who takes the whole risk, trying to change something that will make us attractive for investment. But the minister – a possible candidate to the post of premier, as mentioned earlier in this column – rather looks like “an intention bearer” of President Traian Basescu. Let nobody say that the head of state does what should be the Cabinet’s job. Without coherence, we are still moving forward.

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