The fiscal policies included in the Government’s plans for the period 2017 – 2020, such as the implementation of the unified wage bill, reduction of social security contribution rates, and further tax cuts, could raise the deficit by 6 percent of GDP by 2022, according to the document drawn up by the International Monetary Fund (IMF) experts following the spring visit to Bucharest.
“Under current policies, the deficit is projected to deteriorate to 3.9 percent of GDP in 2018, accounting for the full-year effect of the pension increase scheduled to enter into effect in July 2017. This does not reflect measures included in the governments 2017-2020 plan (such as the implementation of the unified wage bill, reduction of social security contribution rates, and further tax cuts) which have not been finalized but if adopted could raise the deficit by 6 percent of GDP by 2022. This calculation does not factor in any potential second-round effects that may reduce the cost by expanding the economy,” points out the IMF document released following the consultations with Romania based on Article IV of the international financial institution statute.
According to the document, the highest fiscal cost, of 2.6 percent of the GDP, will come from implementing the unified wage law, a measure that should be implemented in accordance with the existence of the necessary fiscal space and should be supported by efforts to reform public administration. A possible cut in social contributions would result in a 1 percent of the GDP cost, according to the IMF staff, and the authorities in Bucharest should avoid implementing such measures without a broader revision of the pension system. The VAT cut to 18 percent would cost the budget 0.4 percent of the GDP, and the authorities should avoid any other tax cuts in the context in which, according to the IMF, changes in the taxation quotas should be part of a wider programme of tax revision.
According to the document the IMF released on Thursday, the Romanian economy will register a 4.2 percent advance in 2017, the main risk to the prospect being a perception of fiscal prudence relaxation that might negatively affect the markets’ confidence.
A possible fiscal relaxation, in addition to increasing political tensions, might affect consumption and investments, could increase costs of loans and could put pressures on the exchange rate, which would affect the banks’ balance, the source mentions.
The IMF staff hails Romania’s progress in reducing the economic imbalances after the global financial crisis, however recommends a reorientation of policies from stimulating consumption to supporting investment in order to protect buffers and sustainably increase living standards.
“Romania made important progress with reforms after the global financial crisis. However, successive tax cuts, wage increases in excess of productivity, and limited high-quality public investment are beginning to threaten these gains. It is imperative to reorient polices from focusing on fueling consumption to supporting investment,” the IMF maintains.
The IMF mission conducted the annual assessment of the Romanian economy in March this year, in Bucharest. Based on the information available at the time of discussions, an IMF Staff Report was drawn up on 4 May, 2017, which was analyzed by the Executive Board on 22 May, 2017.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year, aimed at assessing the financial and economic situation on a national level and formulating some general recommendations referring to monetary policies, financial and economic policies to follow to ensure stability and a positive evolution of the economy.