Romania Increases Taxes and Avoids Slashing Public Expenditure

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Ahead of next year’s elections, the Romanian government has increased the tax burden on business while resisting calls for financial reform to cut state expenditures and refrain from public-sector salary increases.

President Klaus Iohannis on Thursday signed into law a package of tax measures which increase taxes and also eliminate a series of financial concessions for the IT, farming, food and construction sectors.

The Romanian government has insisted that increasing taxes and cutting the budget were the EU’s conditions for granting post-pandemic recovery funds to Romania.

Romanian officials have claimed that the country is being forced to submit to the European Commission’s pressure so that more than 29 billion euros earmarked by Brussels for the country’s Recovery and Resilience Plan can be released in full to Bucharest.

Finance Minister Marcel Bolos said last month that the European Commission wants to see severe cost-cutting as part of deep financial reforms, but argued that this would jeopardise the country.

“Maybe the European Commission wants to, but we can’t sacrifice a country,” Bolos said.

However, the European Commission did not oblige Romania to undertake either the reduction of the budget deficit or to implement spending cuts to be able to receive the funds.

With the new measures, the government has sought to generate additional funds for the budget by further taxing the private sector rather than cutting the expenditures of the state apparatus and refraining from increasing the salaries of the 1.28 million state employees in a country with a population of about 19 million.

“There are reforms they are not undertaking for electoral reasons,” Adrian Codirlasu, vice-president of the Association of Financial and Banking Analysts in Romania, told Radio Free Europe.

“It’s easier to say ‘the European Commission is asking you to do this, we will do it because the EC obliges us to’,” Codirlasu added.

In 2024, Romania will have four types of elections: European Parliament polls, local elections, parliamentary and presidential elections.

In the summer of 2021, the European Commission recommended that Romania reach a public deficit target of 8 per cent of GDP in 2021, 6.2 per cent in 2022, 4.4 per cent in 2023 and 2.9 per cent of GDP in 2024.

But with the government resisting harsh reforms, Romania’s economy is currently in poorer shape. The most recent IMF mission to Romania gave an estimate of the deficit at the end of this year of 6 per cent, with a forecast of 5 per cent for next year.

The budget deficit reached more than 56 billion lei (11.2 billion euros) at the end of September. State expenditures are also rising and are now 14 per cent higher than in 2022. Investments are worth 3 per cent compared to the 7 per cent provided for in the state budget.

According to the new tax measures, micro-enterprises will pay a tax of 1 per cent on turnover for revenues of up to 60,000 euros per year and 3 per cent if revenues exceed this amount.

The government waived the 16 per cent tax on profits if the rate of return exceeds 30 per cent. Companies with more than 50 million euros will pay a minimum tax of 1 per cent on turnover. Banks will pay an additional 2 per cent tax on turnover in 2024 and 2025, and in 2026, they will return to a 1 per cent tax. Oil and gas companies with a turnover above 50 million euros will pay an additional tax of 0.5 per cent on turnover.

The government also eliminated a tax exemption for the IT sector and healthcare contribution exemptions for the construction, agriculture and food industries.

Source : Balkaninsight