Romania Speeds VAT Cut for Food to June to Buoy Consumption

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Romania will lower the value-added tax for food six months earlier than planned, as higher budget revenue allows for economic stimulus, Prime Minister Victor Ponta said.

The Bucharest-based government approved a cut to 9 percent from 24 percent, starting in June, and plans to trim VAT for non-food products to 20 percent on Jan. 1, Ponta said Tuesday in Bucharest. Average VAT will fall to about 17.5 percent after the June drop, he told reporters.

“Applying the cut to all food products and the entire distribution chain makes it easier to manage,” Ponta said. “It’s a badly needed measure that will benefit both the rich and the poor as they all eat the same bread.”

Romania is seeking to reverse one of the European Union’s harshest austerity drives to boost consumption and bring purchasing power closer to levels seen in richer western EU states. After narrowing the budget gap to 1.8 percent of economic output last year from 7.2 percent in 2009, the government plans to have the bloc’s most relaxed fiscal policy by 2018, according to Ponta.

Falling Prices

The leu, which has strengthened 1.4 percent this year, gained less than 0.1 percent to 4.4156 against the euro at 4:20 p.m. in Bucharest. The yield on benchmark 10-year euro-denominated bonds fell one basis point to 1.98 percent.

The VAT cut for food may erase 5 billion lei ($1.2 billion) of budget revenue a year, according to Ponta. The move will trigger a one-year decline in consumer prices because food has a high weighting in the inflation basket, Bogdan Olteanu, deputy head of the central bank, said April 2.

With the inflation rate remaining at an all-time low of 0.4 percent in February, policy makers cut the benchmark interest rate to a record 2 percent last month. Economic growth slowed to 2.7 percent from a year earlier in the fourth quarter, from 3 percent in the previous three months.

Ponta also urged his ministers to boost investment spending, especially for infrastructure, as the Finance Ministry has about 18 billion lei in its Treasury account. The account, managed by the central bank, yields an interest rate of only 0.3 percent, he said.

Romania has a 16 percent flat tax for profit and income that the government plans to maintain until at least 2019, according to a draft law on planned fiscal changes, currently under debate in Parliament.

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