Romania's new Government promises fiscal consolidation without tax hikes

Romania's new Government, led by former finance minister Florin Citu, promises under the Ruling Program to bring the budget deficit down to under 3% of GDP by 2024 and keep the public debt to GDP ratio under 60% while not charging new taxes or hiking the current ones.

Romania added 9% of GDP to its public debt this year and will likely throw another 7%-of-GDP burden on the public budget in 2021. The ruling strategy explains only in broad terms its plan to bring down these imbalances: transparency, flexibility, efficiency, participative budgeting, multi-annual budgeting, and green budgeting. These are the ingredients that should keep the public debt from rising above 60% of GDP. Avoiding the excessive deficit procedure is not mentioned in the Ruling Program, although it is a higher and more pressing target.

The Governing Program's Public Finance chapter lacks clarity in some places and goes beyond its scope in others. The "fiscal consolidation" (reducing the budget deficit, not to be confused with a broad process of putting the public finance on strong foundations) is mentioned alongside increasing the budget transparency and public spending efficiency as a facilitator for economic growth. In principle, these two must be balanced. Separately, the chapter touches upon the competition area (regarding small farmers) and the euro adoption - without mentioning a specific calendar, though.

Some parts of the Program raise concerns. The State Treasury's operations are planned to be outsourced to private entities. Meanwhile, the Treasury could be transferred to the Finance Ministry as a public debt management department.

The Government's core driver for boosting the budget revenues to GDP ratio remains improving the tax collection. Three instruments should help achieve this goal: eliminating the loopholes used for fiscal optimization; regulatory simplification to encourage voluntary compliance; and "implementing a fairer fiscal system, more efficient, simpler and more transparent" that will support the economic activities.

The first measure regards fiscal optimization and not tax evasion. The second is based on tax payer's fundamental good faith (that is hindered from surfacing by bureaucracy). The third has only a broad, long-term connection with increasing the budget revenues.

As regards the VAT gap, the widest in Europe, it will be narrowed by "monitoring the imports of risky merchandise and modernizing the custom points."

The rating agencies expect more concrete steps. For instance, the S&P rating agency expects Romania's Government to bring the budget revenues to GDP ratio up from 30.8% in 2020 (this includes the transfers from the EU budget, a couple of percentage points) to 34% in 2021 and 35% in 2022.