The report warns that such a measure would have a negative impact on consumption expenses, and that staff downsizing in the public sector continues to be necessary. Minister of Public Finance Gheorghe Pogea, said that, “considering the current macroeconomic framework and forecasts by the National Prognosis Commission for 2010, MFP [Finance Ministry] is considering maintaining the flat tax and VAT ratios.”
But local analysts interviewed by Business Standard tend to expect higher taxes, as the government failed to cut expenses sufficiently. European Union countries, such as Hungary and Spain, pressured by declining revenues, have recently decided to raise VAT, following the example set by the Baltic countries early this year.
“The government set some measures with the European Commission to narrow the budget deficit to six percent of gross domestic product (or 6.5 percent of GDP according to EU methodology) in 2010, compared to the initial agreement, which indicated a target of 3.6 percent of GDP. The agreement stipulates that the government make significant cuts in public sector salaries. It seems inevitable that the government will be forced to raise VAT or income tax to meet these targets, in spite of the negative impact that the measure will have on consumption expenses,” said the EIU report, quoted by the NewsIn agency.
Tax analysts and advisors contacted by Business Standard said that the increase in taxes next year will be applied only as a last resort, if the government fails to cut expenses to comply with the latest budget revision.
“It was predictable two months ago that a rise in taxes could be inevitable in 2010, considering that the drop pace of revenues is sharper than the decline in budget expenses,” Dan Schwartz, Managing Partner of Scot&Company, told Business Standard.
Ray Breden, Head of the Tax Division of KPMG, said that, due to the wide budget deficit, the government “is running out of options,” and will have no choice but to raise taxes. According to Breden, the best solution is raising VAT by one percentage point, to 20 percent, and the flat tax to 17 percent from 16 percent.
“If the government wants to raise only VAT, this would have to increase by more than one percentage point, which would slow production even more,” the official indicated.