Get the balance right
With the Government's financial policy meandering all over the place, The Diplomat takes a brief look at the pros and cons of budgetary legislation
Imports are way exceeding exports. The current account deficit is rising. The flat tax is working, but has not yet pulled enough cash to the state budget. Floods. Widening gap between rich and poor. Financial policy u-turns. The state needs more money. The state always needs more money. But Romania does not want to go bankrupt. This Government has been called a leadership of business-people, so how can they balance their books to ensure they do not go under?
“For Romanian exporters and domestic companies, the current account deficit is the biggest problem,” says Joerg Menzer, attorney-at-law at Norr Stiefenhofer Lutz. “For internationals, the stronger the currency gets, the harder it is. The main problem of Romania is that it has to change its thinking into becoming the production site of this region, south-eastern Europe.”
But eastern Europe has been here before, and survived.
“As long as the current account deficit is caused by importing capital goods instead of consumer goods it is a normal thing, which all ex-communist countries experienced,” says Florin Pogonaru, president of Romanian Businessmen's Association (AOAR). “It reflects the positive expectations of Romania's economic development. It is in the end the price of success.”
KEEPING THE FLAT TAX
The big idea of the leading DA Alliance, a flat tax of 16 per cent on incomes and profits, was introduced earlier this year to act as an incentive to investment and to bring salaries out of the black economy. Tariceanu's Government proposes to keep it at the same rate.
Having a flat tax of 16 per cent is good if one looks at the effects it had on companies active in Romania,” says Florin Pogonaru, president of Romanian Businessmen's Associa-tion. “It can be a beneficial thing, especially if we take into account the fact that over 6,000 billion old lei (172 million Euro) was attracted to the budget since its introduction…This flat tax has to be applied to all activities that are taxed in Romania.”
Joerg Menzer, attorney-at-law at Norr Stiefenhofer Lutz adds: “The main advantage of the 16 per cent flat tax is that taxes can now be paid easily, as well as forming an easy way to know the tax burden. There is a clear structure in place now.”
The flat tax cannot do very much on its own. “It did not manage to collect enough money,” says Menzer.
In June the Government proposed a VAT hike from 19 to 22 per cent to stop rampant consumption, which was helping increase the current account deficit to scary proportions. But new Minister of Public Finance Sebastian Vladescu will not raise VAT. Retaining the current rate aims to encourage foreign investment and bring business out of the grey and black market. Meanwhile the IMF has suggested a rise to counter-balance other tax-cutting measures.
This would bring in a steady cash flow to the Government's piggy bank. “VAT is the budget's driver, so that the state budget has the certainty some funds are coming its way. Increasing VAT is an economic policy decision,” says Bogdan Ion, a partner with Haarmann Hemmelrath.
“It is not a good idea to increase the VAT in the current context of the market,” says Pogonaru. “The energy market is exploding; we were hit by foods, all of these leading to an increased inflation rate.” Menzer adds: “If it is increased, the consumers with less money would really feel it.”
REDUCING SOCIAL CONTRIBUTIONS
Social insurance contributions that employers have to make as a proportion of employees' income could decrease next year, although such a move is subject to agreement by all members of the DA Alliance.
Benefits employees and companies, especially micro-enterprises who have to pay sometimes over 50 per cent of salaries in total tax. “If the CAS (social contributions) were to be reduced by a significant percentage it would help alleviate the 'black working market',” says Pogonaru
Meanwhile Catalin Grigorescu, also a partner with Haarmann Hemmelrath who says it should be reduced, does not think it will be done. “For it to make sense it would have to be backed up by other incomes [into the budget] or by a reduction in public spending,” he says. There may not be enough money left in the state to counterbalance the move.
Higher taxes are likely to be imposed on luxury products and activities, says Finance Minister Vladescu, such as tobacco and gambling, in a move which could see a packet of cigarettes double in price.
More money in the budget. People are being taxed on pleasure, not necessity, so they should not complain.
“It doesn't seem normal to me to increase the tax for luxury products when we are heralding the benefits of the flat tax,” says Pogonaru. This also hits cigarette smokers with low incomes, who may try to buy cheaper cigarettes on the black market. This would encourage cigarette smuggling.