Vladimir Mitev: The fiscal reform will be one of the topics of 2020 in Romania

The founder of the blog “The Bridge of Friendship” has given an interview to the television Bloomberg Bulgaria on the fiscal innovations in Romania over the last few years and on the need for higher level of tax collection

Vladimir Mitev

On 6th January 2020 the founder of the blog “The Bridge of Friendship” Vladimir Mitev was interviewed by Bloomberg Bulgaria TV on the occasion of his article about the fiscal innovations in Romania between 2015 and 2019. The journalist has analysed measures such as the special VAT rate for food, “the fiscal revolution”, which transferred the burden of social securities’ payment upon the employees, the effects of measures such as “the greed tax” over the turnover of the financial institutions or the elimination of the income tax for the greatest part of the programmers. Some of the good sides of these measures were pointed out – increased consumption, economic growth, higher income. Negatives were also mentioned – such as lack of predictability of the business environment, growth of the budget deficit and the current account deficit and insufficient funding of the public services. Vladimir Mitev predicted that the fiscal policy will be a topic of 2020 as well, because the government of PNL intends on doing a fiscal reform, which is expected to raise the tax collection. On 16th January 2020 the famous Romanian political economist Cornel Ban will present his own report, written together with Alexandra Rusu, on the problems with the Romanian fiscal system at the event, organised by the Friedrich Ebert Romania Foundation in hotel “Intercontinental” in Bucharest. Such events shows that probably there will be more discussions and confrontations to take place over the direction of the fiscal policy in Romania.

What follows is a transcription of the interview, which was realised by Delyan Petrishki:

We go on to Vladimir Mitev’s analysis. Vladimir Mitev is a journalist, who follows closely the processes in Romania. Mr. Mitev, good afternoon! Happy New Year! And thank you for the accepted invitation! It is a pleasure!

Good afternoon! It is a pleasure for me too.

Mr. Mitev, let’s start with the political context and the political earthquakes in Romania over the last years. But we will not put the emphasis upon the power struggles, but on the place of fiscal reform in the attraction of electoral support. Is there a reserved place for fiscal policy in this quest for power in Romania?

In my view there is certainly a place for that. There is a self-styled bipolar political system in Romania. On one hand, we have the technocratic institutions, the corporations, the secret services, while on the other hand there are the parties, the oligarchy, whose higher representative is the Social Democratic Party. It ruled until October 2019. We saw their clash in justice – there were protests, and they were reported massively in international media. The fight between those powers with regard to fiscal policy stirred smaller attention.

In societies where the state has withdrawn from the economy and the business is strong, fiscal policy is among the few territories, through which the state can influence the social processes. So, the social democrats used the fiscal system in order to gain influence upon certain parts of the middle class and the business, who see their interest as detrimental to those of the corporations. Social democrats also used the fiscal policy in order to give advantages to the poorer sections of society. For example, this was made through a special TVA rate for foods, medicines and other goods.

The Social Democratic Party was constantly attacked by the business, that it changes the rules, that it doesn’t create good business climate. But it saw in the fiscal policy a possibility to attract the business, which it considers “good”. It can be claimed that for the social democrats there was “bad” business – the banks, the electricity and gas distributors, and “good” productive business.

The Social Democratic Party has never introduced measures against the productive business. We know that the automotive industry is well developed in Romania. It gives 14% of the GDP. It provides 26% of the Romanian export. Social democrats acted in a way, which hit the financial sector through a measure called “the greed tax”, but it didn’t affect the automotive sector. In this sense we observe a fight between two poles in the field of fiscal policy.

“The greed tax”. The fear of its introduction influenced negatively the flow of foreign investment towards Romania and affected the economic activity.

I didn’t see this in the data about the foreign investment in Romania. In June 2019 altogether the foreign investment in Romania were 83,8 billion euro.

It’s true. There is a recovery in the last year, but there was a restraint in 2018.

In 2018 they were at the level of 5,8 billion euro. I don’t think this is so bad. In my view, what matters for the attraction of investment is not the fiscal policy. It might have indeed a negative effect, because of the constant changes, which create a difficult to predict business climate. But what matters is that the state gives state help especially to the productive part of the foreign investments. That is how a model, which led to the big boom of the automotive industry in Romania was created. There could be different analysts with different opinions. As far as I am concerned, I see the effect of the fiscal innovations in other directions.

Good. The last change of the Fiscal Code was in 2015, wasn’t it?

The special TVA rate for food was introduced in 2015. But after that we had for example the so-called “fiscal revolution”. I wrote about it an article, which appeared earlier this year in Investor.bg. It was a more important change, which was related to the social securities. It represented the transfer of the greater part of the burden of social security payments upon the employees. It was introduced in 2018.

What is the final effect of this series of changes in Romania? The goal was to stimulate consumption, wasn’t it? But wasn’t the equilibrium broken?

Exactly. All the time the social democrats followed a policy of economic growth through higher consumption and income. They both reduced various taxes – like VAT and others, and raised the salaries in the budget sector and pensions. The critics, who can be seen in the Romanian National Bank and among the analysts from the financial institutions, warned that this way budget deficit and current account deficit appear, while the greater consumption increases import. This is what was observed. When the new government of PNL came, it started its work by finding holes in the budget, which were not previously known.

The effects cannot be judged easily, because the changes themselves were ambiguous. For example, there was a big economic growth in Romania in the last few years 6-7%. In 2016 it was 6%. In 2017 it was 7%…

But it was said that this growth is unsustainable.

In any case, this was the model at that time. In the conditions, in which the PNL governs now, the philosophy of governance changes. They are fans of the balanced budget. Their financial minister Florin Cîţu comes from the financial sector and is rather a supporter of austerity. He believes that growth can be achieved through austerity.

I suppose that what they are going to try to do will be to increase public and private investment. Perhaps, there comes a period in which growth will not come from higher consumption, but from investment.

It is important for PNL to reform the fiscal service, because Romania saw huge GDP growth over the last few years. In 2015 the GDP was 160 billion euro. In 2018 it became 203 billion euro. But the social democrats couldn’t benefit from this growth through higher tax collection. This is something, which maybe even they admit was a failure.

The fiscal service was not effective in Romania until now. It might be interesting for the spectators of Bloomberg Bulgaria, that the Bulgarian fiscal service is given as an example. I don’t know how it will sound to us, because we are accustomed to seeing Romanians as an example of something positive. But various Romanian analysts point out that the tax collection in Bulgaria has higher level of success that in Romania. They say that a reform must be made so that such an effect is observed in Romania as well.

Let me ask you whether the quality of public services suffered as a result of this philosophy of giving privileges to the consumers through lowered income tax or giving privileges to small companies whose corporate tax is symbolic. Did the quality of public services and goods suffer?

Yes. I couldn’t discuss so far about all the dimensions of the tax innovations. It might be important to say that micro companies with a turnover of up to 1 million euro pay tax of 1%. In this sense it became profitable in Romania to have your own business, to work for yourself, instead of coming home tired after a workday at a corporation. You are right that another criticism against the social democrats’ fiscal policy is that the public services are insufficiently financed. This leads to a tendency that even people with higher income in Romania leave the country, unhappy that the public services are not at a good level. I suppose that this will be one of the topics of the new year, because today I saw that on 16 January 2020 in one of the large hotels in Bucharest there will a presentation of a report by one of the most famous Romanian political economists – Cornel Ban, who discusses namely the problems with taxation, the insufficient tax collection and the insufficiently funded public services.

This will be a topic in the new year. I can predict that there will be a battle over what reform could be made and in what direction the fiscal system should develop.

If we assume that for a fifth year in a row there will be changes to the fiscal laws, it is not a good sign towards the investor. It is easy to realise that the business climate becomes unpredictable…

You oriented yourself well that this is a piece of criticism towards the fiscal policy of the Romanian governments in the last few years. In my view these changes are somewhat inevitable, because in Romania there is competition between the poles for which I speak. In order to stay in power, the social democrats must give something back to society. It is not sufficient simply to propose some candidates and then win the elections as it happens in other countries. They can’t stay in power by way of inertia. The competition presupposes that some fights and changes take place.

However, I think that the PNL has the corporations’ and financial institutions’ trust. Even if there are changes, I believe that they will benefit this sector of the economy. It remains to be seen what will happen. Probably, there are measures for raising tax collection, which don’t presuppose change of rules, but rather better organisation.

In your article you put an emphasis on the effectivity of the income agency in Romania, which doesn’t have good results with regards to profit tax, income tax, etc. It is curious whether these tax stimuli, introduced by the social democrats’s governance, didn’t bring about a better climate. You said that people have been opening their own business. Conditions for the growth of the high tech sector appeared. Is it true?

One of the tax changes, which I didn’t mention, and now will be able to discuss is that the IT specialists, who have income above certain level don’t pay income tax at all. This has surely encouraged the requalification of the employees towards the IT industry. It is also a part of the social democrats’ policy to encourage the productive business. As of 2018 Romania has its first unicorn – a company, whose market capitalisation is over 1 billion dollars. It acts in the field of artificial intelligence and automation. Foreign investors in this domain are many. From the standing point of the development of this sector, the elimination of the income tax for the employees is a plus. There is also a rising turnover in it.

I would point out as a successful measure also the special VAT rate. The social democrats represent in a certain way the poorer part of the population, which lives in smaller towns. So the special VAT rate really increased the purchasing power of the ordinary people. It also brought about the economic growth, which we observe now in Romania. The medium net salary in Romania is approaching 700 euro, which might also be considered a result of the social democrats’ governance.

Mr. Mitev, it was a pleasure to speak with you!

It was a pleasure for me too. I would be happy to be your interlocutor again.

Vladimir Mitev, journalist, discussed about the fiscal initiatives in Romania, which started being applied after 2015. The social democrats introduced them. Now the PNL government will have to deal with a twin deficit and with the danger that the credit rating of Romania is reconsidered as a result of some of the fiscal initiatives, which we discussed with Vladimir Mitev. 

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