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January 19, 2021
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Government determined to lower VAT. IMF recommends caution

Romania does not have room to lower taxes until it improves tax collection and revenue management, according to the report approved by the IMF Board after consultations with the Romanian authorities, a report that points out that imbalances have been reduced but reforms have slowed down against the backdrop of political uncertainties.

 

The Government of Romania should reconsider the timing and the size of planned tax cuts, Andrea Schaechter, IMF mission chief for Romania, told a conference call on the release of the 2015 Article IV Consultations with Romania.

“We are asking the question of what offsetting measures could be arranged to meet the fiscal targets over the medium term. So any tax cut plans should be accompanied by better achievement in terms of tax compliance, revenue collection, or offsetting measures. We think that at this stage the deficit target that is laid out in the budget is well in line with the targets that were also set out under the Standby Arrangement. For any additional tax cuts, offsetting measures need to be carefully considered so that these budget targets, which are a priority, can be achieved,” underscored Andrea Schaechter quoted by Agerpres.

The head of the IMF mission also said that the global lender supports the measures aimed at reducing the compliance gap between planned VAT collections and what is actually collected, cautioning that narrowing this gap takes both time and finding a compromise between aggressive tax cuts and the improvement of tax collections.

“Only about half of VAT is collected of what should be collected. So we are very supportive of measures that help reduce this compliance gap. But we also would like to caution that reducing this compliance gap takes time. So there’s a tradeoff here of going ahead with a very aggressive large reduction in a tax cut as long as maybe not all conditions are yet in place; at the same time to improve the compliance and the tax collections. So one would have to very carefully balance these,” Schaechter mentioned.

The IMF official also explained that deciding to cut taxes based on the budget execution for only the first two months of the year is premature.

“Tax cuts are important changes to the fiscal environment, these are changes that are to be there a while and also improve the predictability of the economic actors. So we would think that making that decision based on two months of data is premature. Nevertheless, we do see that indeed in the first two months of the year the cash deficit recorded a surplus. We would also have to caution that most of the surplus was registered because spending was much lower as laid out in the budgetary plans. So what would be important for tax cuts would be to see that indeed these gains are indeed permanent improvements,” stressed the IMF mission chief for Romania.

Premier Victor Ponta said on March 24 that the Government will weigh in April the variants to cut the VAT as of this year, and that it will decide on one of the two envisaged possibilities: cutting the VAT rate overall from 24 to 20, or slashing the VAT on food to 9 percent; if adopted next month, this measure is likely to come into effect on June 1, six months earlier than initially planned.

IMF and EC teams were in Bucharest between January 27 and February 10, 2015 to discuss with the Romanian authorities the third review of the precautionary Stand-By Arrangement with the IMF. The annual consultations on Article IV of the IMF Articles of Agreement took place on the same occasion.

Under Article IV, the IMF holds bilateral discussions with member states, usually every year. A staff team visits the country (typically on an annual basis) to collect economic and financial information and hold discussions with officials on the country’s economic developments and policies. Subsequently, the staff prepares a report, which forms the basis for discussion by the Executive Board.

The IMF Executive Board reviewed on Wednesday, March 25, the report prepared by the IMF team of experts following their visit to Bucharest.

 

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