Tax cuts plans pose 'extreme risk' to Romanian finances - watchdog
By Radu-Sorin Marinas
BUCHAREST (Reuters) - Romanian tax cut plans are based on overly optimistic revenue estimates and pose an "extreme risk" of permanent damage to state finances, the country's fiscal watchdog said on Monday.
The warning echoed comments last week by the International Monetary Fund, which came to Romania's rescue during a 2009 financial crisis.
Buoyed by budget surpluses since January and facing a general election in late 2016, Prime Minister Victor Ponta's government has announced tax cuts including a big reduction in value added and income taxes, to be phased in gradually in 2016-2019.
The IMF mission chief to Romania said the cuts risked undermining five years of progress in cutting the fiscal deficit - criticism that could complicate talks in April on the terms of a standby aid agreement that expires in September. Ponta hopes parliament will approve the tax cuts by the end of June.
"Estimates indicate that draft amendments to the Tax Code in its present form involve extreme risk of permanent, large-scale damage of Romania's public finance position," the Fiscal Council said in a statement.
The council was set up after the IMF rescue. It sees Romania's fiscal deficit expanding to 3.1 percent of GDP in 2016, to 2.7 percent in 2017 and to 3.5 and 3.7 respectively in 2018 and 2019. The structural deficit will balloon to 5.5 percent by 2019, it says, against a 1 percent target -- the same level recorded five years ago in the throes of the crisis.
The first tax cuts are envisaged for 2016, when the government will slash the sales tax to 20 percent from the current 24 percent, one of the EU's highest rates. A further cut to 9 percent for basic foods such as meat, fish, fruit and vegetables is also expected.
The plan includes cuts in social security contributions and a further VAT cut to 18 percent from 2018, and lowering the flat tax on income and profit to 14 percent from 16 percent in 2019.
The Fiscal Council also said the goal of adopting the euro in 2019 would be impossible to achieve given the excessive deficits.
(Editing by Matthias Williams/Ruth Pitchford)
