Romania Responds To IMF/EC Consultation

by Ulrika Lomas, Tax-News.com, Brussels

12 August 2009

The Romanian government has announced that, in line with recommendations from the joint International Monetary Fund/European Commission (IMF/EC) investigation into Romanian fiscal reform, it will target its pensions system and cut public sector wages in order to offset falling revenues as a result of a larger-than-expected contraction in the economy this year.

On August 10, the European Commission published the results of its consultation on austerity measures introduced by Romanian authorities, as a prerequisite to receiving international financial assistance. In its report, it noted that to date Romania’s economic program to reduce its budget gap was "satisfactory", but underlined that further measures would be needed to ensure its fiscal sustainability in light of its spiraling state debt.

In order to receive the second tranche of the EUR5bn medium-term financial assistance loan to the Romanian balance of payments agreed by the EU on a Commission proposal, the government will need to review public sector employment, pass the Fiscal Responsibility Law, and review public sector wages and reform pensions under a unified system.

In response to the IMF/EC investigation, the Romanian government has underscored its commitment to appeasing its prospective creditors, and has announced that it will redouble efforts to pass two vital pieces of legislation to carry out the reforms.

Whilst reassuring that it fully supports the proposed changes to Romanian policy, Romanian Prime Minister Emil Boc has noted that the government will take a tough stance on certain areas of tax policy, particularly Romania’s flat-rate income tax system and the value-added tax rate. He also noted that the budget for infrastructure projects would not be reduced as a result of the negotiations.

Concluding, Boc disclosed that the government, in collaboration with the National Agency of Tax Administration, is continuing its efforts to crack down on tax evasion. Boc announced that the government has commissioned a report from the Ministry of Finance to investigate the methods used by non-compliant taxpayers to avoid paying tax, and has asked the Ministry to submit proposed legislative amendments to close potential loopholes.

According to the Commission’s report, real GDP contracted by 6.2% year on year in the first quarter – more than expected when the Romanian economic adjustment program was agreed in June – as a result of worse-than-expected domestic demand and external environment. Growth projections for this year have been downgraded to around minus 8-8.5% from minus 4% previously, with only a modest recovery expected in 2010.

The Commission has announced that it will launch its own assessment in October, ahead of the payment of the second installment of the EUR5bn loan. In July, it paid a first installment of EUR1.5bn.

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