It recommends tightening fiscal policy further and suggests that, after eliminating tax incentives for certain incomes, we should transition to progressive taxation.
According to the report, Romania’s economy has performed relatively well in difficult times. “Growth, while slowing, remains fairly robust, and higher than in most peers. Inflation, after peaking at lower levels than in CESEE peers, remains too high but is receding gradually. The impressive convergence to Western European income levels is continuing. At the same time, Romania’s external position in 2022 was substantially weaker than the level implied by fundamentals and desirable policies, although the assessment is subject to considerable uncertainty.”
Growth is expected to recover modestly in 2024, and to return to its potential rate in the medium term, but there are substantial risks, IMF argues. “Escalation of the war in Ukraine, a possible further weakening of activity across Europe, or an abrupt global slowdown could undermine growth and capital flows to emerging markets. Prolonged strong wage growth in Romania could delay the projected fall in core inflation. Finally, the electoral calendar could make fiscal consolidation and structural reforms in 2024 difficult to achieve.”
A weak fiscal position renders Romania vulnerable, the Fund also warns. “The scope to respond to adverse developments is circumscribed by a structural budget deficit well in excess of sustainable levels. Addressing this is a key priority Continued efforts to improve expenditure efficiency and tax collection are needed and welcome, but high spending pressures to address relative poverty and raise productivity imply that revenues must be increased.”
IMF also says that the recently adopted fiscal package offers a welcome improvements in tax policy and should help reduce the fiscal deficit somewhat in 2024; but more will be needed. “In particular, the reduction of some tax exemptions it is a step forward. However, some measures—notably the new turnover taxes—are not in line with good practice and should be reconsidered. Moreover, further tax reforms to raise at least 2 percent of GDP in additional revenue beyond the gains from the recent tax package are needed to put the fiscal deficit on a sustainable medium-term trajectory, while ensuring that all taxpayers pay their fair share. Streamlining VAT and personal income taxes (including the closing of loopholes and the removal of tax privileges) should be key elements of such a reform. Once this is achieved, consideration should be given to re-introduce progressive income taxation.”