Friday, May 25, 2012

New Romania PM eyes tax cuts to boost growth

By Sam Cage
BUCHAREST | Fri May 25, 2012

Romania's new government will stick to this year's budget plan but aim to combine growth with austerity in 2013 by cutting personal income and sales taxes should it win an election in November, the prime minister said.

Tapping into a Europe-wide debate over how to maintain fiscal discipline while kick-starting a moribund economy, Victor Ponta told Reuters he wanted to gradually ease Romanians' tax burden but also stick to commitments made to international lenders.

His left wing-dominated Social Liberal Union (USL) alliance took charge earlier this month after toppling its predecessor in a confidence vote and, with backing of about 50 percent in opinion polls, looks set to consolidate power after the parliamentary ballot.

"We are committed, after the parliamentary elections, to relax the taxation of labor and strengthen the ties with the business community," the 39-year-old former champion rally driver said in written answers to questions on Friday.

"Financial prudence and the commitment to Romania's international agreements must be complemented by measures that show more flexibility and have the capacity of promoting sustainable economic growth."

Romania's economy was booming until a property bubble burst in 2008 and, after shrinking by more than 8 percent, it is recovering painfully slowly and slipped back into recession in the first quarter.

That could raise questions over revenue generation, especially if the euro zone's troubles continue to suppress growth.

Concerns whether Romania, the European Union's second-poorest member, would stick with its 5 billion euro International Monetary Fund-led aid deal after the government switch sent the leu currency sliding to record lows.

"Important changes in taxation are not feasible without measures to offset the impact," said Ionut Dumitru, chief economist at ING in Bucharest.

While Ponta gave no details on how he aimed to square that circle, Dumitru said proposals to raise government royalties from natural resources and a tax for high wealth individuals could help.


The previous centre-right coalition cut public salaries by a quarter and raised value-added tax under a previous IMF deal, which left it deeply unpopular and eventually felled two prime ministers.

Ponta has since reassured markets by sealing IMF endorsement to restore public wages to pre-austerity levels while sticking to a targeted budget gap of 3 percent of gross domestic product, though the euro zone's woes are keeping pressure on the leu.

Ponta, who speaks five languages, represents a change of guard for his Social Democrat Party (PSD), the successor to Romania's communists and the dominant force in the USL.

The group also includes centrists and rightists and should it win a majority in November, one of Ponta's biggest challenges would be to keep the diverse alliance content.

It will honor this year's budget commitments and, starting in 2013, stick with 16 percent as the country's main income tax rate but introduce two bands of 12 percent and 8 percent at lower pay scales. Corporation tax will remain at 16 percent, Ponta said.

The USL is also mulling cutting value added tax from the current 24 percent over several years. The effect of raising VAT had lopped half a percentage point off potential GDP growth and hence the new administration wanted to "remedy this mistake", Ponta said.

"A careful and intelligent mix of policies promoting responsibility and growth at the same time can be the hallmarks of Romania's path towards prosperity."

(Editing by John Stonestreet/Catherine Evans)

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