Romania May Push VAT Cut Forward to 2015 to Spur Consumption

Romania plans to lower the value-added tax rate by year-end “at the latest” to boost domestic consumption and economic growth, Finance Minister Darius Valcov said.

The government will cut VAT to 20 percent from 24 percent and to 9 percent for basic food products such as meat and vegetables once budget revenue increases sufficiently to allow a reduction without affecting the deficit target of 1.8 percent of gross domestic product, Valcov said Thursday. Romania may also trim some excise duties before a previously planned date of January next year, he said.

“When we have the extra revenue, we’ll put money aside and carry out the tax cuts a month later to give companies time to prepare,” Valcov said. While he put the immediate impact of the measures on the budget at 4.4 billion lei ($1.1 billion), he said the eventual fiscal loss may only be 2 billion lei as the VAT reduction helps discourage tax evasion.

After implementing one of the European Union’s harshest austerity drives, Romania plans to have the bloc’s most relaxed fiscal policy by 2018, according to Valcov. The government brought the budget shortfall back to 1.8 percent of GDP last year from 7.2 percent in 2009, using measures including cuts in state salaries, limits in public employment and tax increases.

Budget Spending

The leu gained 0.2 percent to 4.4443 against the euro at 5.10 p.m. in Bucharest, having strengthened 0.8 percent in 2015. The yield on benchmark 10-year euro-denominated bonds was little changed at 1.84 percent.

The country’s economy expanded 2.6 percent from a year earlier in the fourth quarter, compared with 3.3 percent in the previous three months. Expansion slowed less than economists predicted as the government used an October budget surplus to boost public spending in the last two months of 2014.

The proposed tax cuts will give the economy a boost of about 8 billion euros through 2020, according to Valcov. Revenue collection exceeded government projections in the first two months of this year, he said.

“We have a higher budget surplus in February than in January,” Valcov said.

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