From lower VAT on foodstuffs to switching to the Euro

The debate on the economic and budgetary impact of a lower VAT on foodstuffs in Romania has inevitably led to issues related to the countrys switching to the Euro.

Ştefan Stoica, 10.04.2015, 12:31

The first stage of an extensive fiscal relaxation program conducted by the Romanian Government has already been announced. As of June 1st, the value-added tax on foodstuffs, non-alcoholic beverages and food industry services in Romania will be cut from 24 to 9%. An argument in favour of this measure was that it is expected to encourage domestic producers to charge competitive prices, reduce tax evasion, encourage consumption and boost economic growth.

The significant drop in the VAT on foodstuffs comes a year and a half after a 9% decrease of the VAT for bread has been enforced, without a major impact on prices, analysts say. The VAT decrease will not translate in a drop in prices this time either, president of the Fiscal Council, Ionut Dumitru has said. Worth mentioning is that the institution he heads has been, since the very beginning, against the Fiscal Code version proposed by Victor Ponta’s Cabinet. Ionut Dumitru believes that the VAT slash will result in price cuts of merely 50% or 60%, which eventually depends on the policy of large retailers.

Ionut Dumitru has admitted that the move will not necessarily lead to an increase in the budget deficit, but has warned it will surely impact public investment, with negative effects on the financing of infrastructure programs, vital to improve the business environment, on attracting new investment and on boosting the economy. The debate around the Government’s decision to slash the VAT on foodstuffs and its possible consequences was continued on Thursday, in a meeting staged by the National Bank of Romania, also in relation to Romania’s switching to the Euro. The Fiscal Council has said that the risks of switching to the single currency must be weighed carefully, as it is a one-way decision.

Ionut Dumitru: “I believe that the deadline we agreed to for the adoption of the euro, which is 2019, has been purely political and declarative. It has never been something we have really committed ourselves to, with a clear program and clear steps to be taken, so as to be prepared to make this switch. It is absolutely clear to me that the new fiscal code which slashes many taxes and might lead to an increased budget deficit, gets us further away from this deadline, set for 2019. “

Moreover, turbulences in the Eurozone have tempered the enthusiasm of adopting the European single currency among both politicians and financial experts.