Romania Given More Time To Tackle Deficit

by Ulrika Lomas, Tax-News.com, Brussels

09 February 2010

Due to a more-severe-than-expected recession in Romania during 2009, the European Commission - as part of its excessive deficit procedure - has recommended that the country’s deadline, for bringing its budget deficit to within the Maastricht Criterion of 3% of GDP, is extended to 2012.

Economic and Monetary Affairs Commissioner, Joaquín Almunia, commented: “Romania has made a serious effort to limit the deterioration of its budget deficit and to preserve macro-economic stability during the past year. The worsening of the economic situation since the initial recommendations were made justifies extending the deadline by one year.”

“The consolidation effort must continue – in line with the conditions attached to the multilateral financial assistance package – to ensure the correction of the deficit by 2012."

In July 2009, the Council endorsed a Commission proposal to open the excessive deficit procedure (EDP) for Romania, on the basis of a government deficit above 3% of GDP in 2008, and recommended the correction below 3% took place by 2011. The Council decision established a deadline of January 7, 2010, for effective action.

As part of measures to tackle the deficit, Romania reduced the public wage bill and cut public expenditure on goods and services in 2009, in line with the recommendation. The 2010 budget also includes a package of measures cutting expenditure by around 2% of GDP and raising revenue by around 0.5% of GDP.

These measures included:

• Removing deductions afforded on fuel against taxpayers’ VAT and personal income tax liability;
• The introduction of a mandatory minimum tax on small businesses to try to encourage tax compliance;
• VAT refunds were deferred for longer periods, although this unpopular decision was recently reversed;
• The introduction of a tax exemption on reinvested profit; and
• A general crackdown on the grey economy that is thought to be worth around 11.3% of GDP annually.

Romania experienced a recession estimated at around 7% in 2009, against the Commission’s 4% forecast in Spring 2009. According to the Commission, this was due to a large drop in exports and a contraction in domestic demand caused by the global economic and financial crisis. Despite the aforementioned measures, the general government deficit in 2009 is now expected to have reached 7.8% of GDP. The 2010 budget contains a target of 5.9%.

The Stability and Growth Pact foresees that where recommendations are complied with but the economic situation deteriorates significantly and beyond the control of the country concerned, the Council can revise the recommendations and the deadline for the correction of the excessive deficit, as has been recommended by the Commission.

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