The unavoidable is about to happen: as of January 1, 2006, the standard VAT quota will be upped from 19% to 22%, while the low VAT will increase from 9% to 11%, Finance Ministry sources told Ziarul Financiar, quoting the latest version of the fiscal strategy currently discussed with the experts of the International Monetary Fund.
Finance Minister Ionut Popescu said on BBC yesterday morning that the VAT will be upped by two or three percent, with the exact level set to be discussed with the IMF.
Upon conclusion of the talks with the Fund''s mission, which were held at the Finance Ministry yesterday afternoon, Popescu said the measure was part of a fiscal strategy for the next three years, which the Government was set to endorse soon.
At the same time, the Minister says that all his statements dismissing an increase in the VAT only regarded 2005. Which means things are completely different for 2006. And the explanation offered by Ionut Popescu is in no way related to the need to boost budget revenues in order to contain the deficit at much less than 1%, as required by the IMF, but the by need to contain consumption, which made the current account deficit soar to 889 million euros in the first three months of the year. The VAT increase had been looming ever since the first talks with the Fund in February, when this measure was suggested as a solution to make up for the loss of budgetary revenue caused by the flat tax introduction. The authorities, from Premier Calin Popescu Tariceanu to NBR Governor Mugur Isarescu kept on rejecting this option in the course of a couple of months. After all, it was the NBR officials that were among the most adamant to speak against the VAT increase, considering its powerful inflationary impact. NBR suggests a 4% inflationary target for the end of 2006, which will be subjected to a lot of pressure from the increase of the VAT by no less than three percent.
By accepting this measure proposed by the IMF, the Government implicitly admits it had no solid grounds to underlie the introduction of the 16% flat tax, and now will have to bear the costs of a completely unpopular measure considering the overall price rise effect it will have on goods and services after January 1, 2006.
"The VAT increase will make an undifferentiated impact on all consumer categories, while the flat tax only benefited certain segments of the population," comments Radu Craciun, ABN Amro Romania analyst.
He believes this is a measure that, on the one hand, is intended to boost budgetary revenues whilst expenses will increase significantly as of 2006 as a result of the needs to co-finance European funds and, on the other hand, targets a limitation of consumption growth, which is already causing trouble in terms of current account deficit.
"It had become obvious that they needed higher revenues to the budget, considering the co-financing needs," says Mihail Ion, the head of the research department of Raiffeisen Bank''s Treasury in his turn.
razvan.voican@zf.ro
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