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August 9, 2022

No one to blame

There is no surprise for anyone that the Government acts like a firefighter, trying to put off the flames wherever it can, without a wide scale vision that will give credibility and hope to the economy. There is also no surprise in its lack of coherence, as the present cabinet proved it has no sectorial economic strategy. The incoherence is so obvious that even the Financial Times recently wrote that “Romania has a government that is at best dysfunctional, and at worst incompetent.” Like in many other situations, nobody – not even the political leaders – should bear the blame for the direction we took. In its public statements, President Traian Basescu hints to a discrepancy between his vision and that of the government. The VAT hike from 19 to 24 pc seems to have opened a gap between the Cotroceni and Victoria Palaces, though some analysts reject the idea of Premier Emil Boc daring to oppose the president’s commands.

In their turn, some ministers are voicing their own disaccord with the premier and approval for the president. The interview granted last week by Finance Minister Sebastian Vladescu, who mentioned this idea along with that of a progressive tax, was the least academic way of expressing ideas that will displease the prime minister. But the Finance Minister too did not take any direct responsibility for how things are going. These days, Economics Minister Adriean Videanu said that, “if it were not for the unfortunate events with the floods and for the VAT increase to 24 pc, which did not depend only on the Government, I believe we would have reached zero growth this quarter, which would allow us to optimistically think about economic recovery.” So, the VAT increase did not depend only on the government (on retirees, perhaps?) and conceiving the economic recovery can only be made when we reach the zero growth, instead of a decline. This is an interesting way of thinking, yet understandable, as long as the present government took no measures against the crisis, according to most economic experts.

Faced with such intense unrest (we should not forget about the vehement protest of the business environment), Premier Emil Boc came with a piece of news that made some rejoice. Authorities will drop the minimum tax this fall. If, until now, we thought the minimum tax as being the lump tax, now we learn this is a different kind of tax. Perhaps the minimum tax will disappear, but the lump tax will stay in certain sectors, like tourism, restaurants, services etc. When will the minimum tax be canceled? It is still unclear, as even Minister Videanu sees it somewhere between October 1 and November 1. According to Maria Grapini, the president of the Light Industry Employers’ Federation, only next year will the companies feel the effects of removing the minimum tax. “But there is one problem: I believe it will not be eliminated, as the premier’s statement was vague.” The secretary general of the Businessmen’s Association of Romania (AOAR), Cristian Parvan agrees: “Eventually, authorities will tell us – we really wished to do it, but it was impossible.”

Legal instability and fiscal incoherence are getting chronic. If, until recently, changes were only “annoying,” now they tend to become unbearable. We wonder what foreign investor who did not come to Romania yet will dare to risk, from now on. In the first five months of the year, foreign direct investments went down 31.5 pc from a year ago, to EUR 1.4 bln, even though 2009 was by no means a good year for the economy.

But who will sound the alarm at the government? The economic crisis affects Europe, not just Romania, and this is easy to understand. Less palatable is the lack of the coherence needed by economic development. Since December 2003, when the Fiscal Code was published in the Official Journal, the document was modified and completed no less than 40 times. In such conditions, who might still trust what? First they cut salaries and pensions, then pensions are spared; first they leave the VAT untouched, then they change mind and increase it; now they announce they will drop the minimum tax, but it will be no surprise if they will renounce this idea.

This chain of hesitations and useless changes comes at a price. According to the ‘Capital’ magazine, Romania was unable to maintain a low level of sovereign risk (CDS) in Q2 this year. The risk of defaulting on its public debt doubled from an approximate 200 points, up to 412.8 points. Romania thus entered a top of 10 riskiest economies in the world, according to Global Sovereign Credit Risk Report, made by CMA Data Vision. The same group includes Bulgaria, with a risk of 363.7 points. Both states are newcomers in the group of 10.

Obviously, nobody is to blame for this as well. For the time being, the government is busy with restructuring ministries and prefect’s offices. But the people released from these jobs are quickly transferred to other positions, also paid by the state. How will the government save money? We may never learn it.

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