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| Romania to Raise VAT to Meet IMF-Imposed Deficit Goal |
| Bucharest, 26.06.2010 |
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| (Adds inflation, GDP forecasts in fourth paragraph.)
By Irina Savu
June 26 (Bloomberg) -- Romania will raise the value-added tax to 24 percent from 19 percent to plug a budget hole after a court threw out its plan to cut pensions by 15 percent and meet an International Monetary Fund-mandated budget-deficit target.
“I am profoundly disappointed that we had to raise the VAT today,” said Finance Minister Sebastian Vladescu. “This is not the best solution we could have had. It’s not what we wanted.”
The government, which is relying on a 20 billion-euro ($24.6 billion) loan from the European Union and the IMF to stay afloat, will submit the changes to the lenders to avert a second freeze on loan payments. The Constitutional Court yesterday said the proposed 15 percent cut in pensions was illegal, though it upheld a 25 percent reduction in wages. Parliament must now amend the law, which had been approved by the IMF.
The government’s gross domestic product and inflation forecasts will have to be adjusted because of the VAT increase, which will probably bring between 3.5 billion lei ($1 billion) to 4 billion lei in additional revenue to the state budget, Vladescu said. The IMF and the government predict the economy will contract as much as 0.5 percent this year, after shrinking a record 7.1 percent in 2009, while the central bank forecasts the year-end inflation will end at 3.7 percent.
Possible Inflation
The VAT increase may lead to 10 percent inflation if correct measures aren’t taken to prevent it, Adrian Vasilescu, an adviser to Central Bank Governor Mugur Isarescu, told Realitatea television station today.
The loan payments will probably be disrupted and that puts the country’s credit rating at risk, Moody’s Investors Service said after the court ruling. The government’s flat tax rate of 16 percent will remain unchanged.
It’s likely “that the IMF Board will postpone discussing Romania’s review, and therefore the next tranche of the IMF loan will also be delayed,” Moody’s analyst Kenneth Orchard said in an e-mailed response to questions. “However, Moody’s perceives this as a temporary issue and not a fundamental break.”
The Washington-based lender was due to meet on June 28 to review Romania’s progress toward consolidating its budget and decide on about 850 million euros in payments.
It postponed that meeting until June 30, said Prime Minister Emil Boc today. He said he wants the tax increase implemented as of July 1. He also said he expects Parliament to pass his wage cuts next week.
First Freeze
The package was first frozen on Nov. 6 after political infighting toppled the previous government. The IMF resumed payments in February after Boc’s Cabinet passed a budget for this year.
Moody’s, the only agency that rates Romania investment grade at Baa3, with a stable outlook, said Boc’s government will probably raise some taxes after the court ruled against the pension cuts, which are equivalent to 1.3 percent of GDP.
“Although it is not Moody’s central scenario, the rating would come under negative pressure if the government is unable to reduce the budget deficit to 6.8 percent of gross domestic product as per its revised agreement with the IMF and EU,” Orchard said.
Opposition lawmakers appealed the austerity measures to the Constitutional Court after the government survived a vote of no confidence on June 15.
The opposition may ask for a further confidence vote next week because “state employees will be severely affected by the decision to cut wages,” Social Democrat leader Victor Ponta said today in a speech on Realitatea television.
The austerity program has provoked a storm of protest, with dozens of people trying to storm the presidential palace earlier today.
--Editors: James M. Gomez, Kristen Hallam
To contact the reporter on this story: Irina Savu in Bucharest at isavu@bloomberg.net.
To contact the editor responsible for this story: James M. Gomez in Prague at jagomez@bloomberg.net
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