One month after the Finance Minister dropped the subject of the VAT increase from 19% to 22% as of January 1, 2006, President Traian Basescu says he will back such a plan if the government reduces the social security contributions at the same time.
"Romania will have to secure additional resources to the state budget in view of the accession in 2007, which will cost more than one billion euros in the first year. This means a higher VAT would be inevitable," Basescu was quoted by Bloomberg as saying during a meeting with the foreign press in Bucharest.
He expressed concern over the high level of social contributions the employers have to pay for their employees, feeling a higher VAT would be a solution for the budget to afford the cut of those contributions.
Proposed by the IMF as early as February as a way to boost budgetary revenue, but adamantly rejected by the government at the time, the VAT increase was first mentioned officially by Finance Minister Ionut Popescu on June 22 in a statement that was quickly met with protests from the entire business community.
Actually, Popescu''s statement was only setting the stage for a commitment taken by the Tariceanu Government during the talks with the Fund''s mission in Bucharest at the time. Although initially described in the economic policies memorandum that was to be submitted to the IMF''s Board for approval, the VAT increase was removed from the list overnight due to the lack of political support.
Now that President Basescu is supportive of a VAT increase, the political support problem could be more readily addressed.
Ionut Popescu has avoided mentioning anything about a VAT increase since his June 22 statement, although having claimed he was working on a three-year fiscal strategy. He merely said the social security cut was for certain, without adding that the budget could not afford such a step in the absence of a VAT raise. As long as his name in constantly mentioned in connection to the list of ministers on their way out, his statements could be less credible. However, when President Basescu says he will support a plan to raise the VAT coupled with a social security contribution cut, things are completely different.
NBR Governor Mugur Isarescu has recently joined the supporters of this measure, saying it would be an effective solution, because the budget would make money fast and the effects could be easily measured. Isarescu added that there hardly were any alternatives, explaining the IMF was promoting it precisely because it was a simple, effective measure that would help contain consumption demand, which was a good thing at a time like this.
"The diagnosis has been made: the government needs additional resources to take the budgetary revenues to more than 30% of GDP. Where will it find them?" the head of the central bank rhetorically wondered.
The budgetary situation for the first five months has already shown a change in the revenue structure towards a greater share of the indirect taxes, especially of the VAT, as well as of the customs duties in the total, due the strong import growth.
Whereas the flat tax has benefited mostly companies and small segments of the population, the VAT increase will make an undifferentiated impact on every category of consumers.
The whole idea would be to have the cash surplus the companies and individuals get reflect in a higher consumption and in indirect taxes implicitly. Only that the VAT is at the same time promoted as a consumption curbing measure.
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