When the last PNL government fell in 2012 the incoming Government lead by Victor Ponta was caught by surprise. He was catapulted into the position as Prime Minister and was the youngest Prime Minister in the EU. He had little or no experience of macro or micro economics.
On becoming Prime Minister he made a number of pledges which consisted mainly of reversing the policies of the former Government and increasing the salaries and pension payments to those that they were previously, before they were reduced by the PDL at the insistence of the IMF/World Bank/ EU. He paid little attention to the money supply and therefore won a large majority in the next elections in 2012. He started to reverse the steps taken to stabilise the economy and to reduce VAT on certain items.
Now he is facing the problem that he has increased the states requirement for money at the same time reducing VAT levels and the government’s money supply. Unfortunately the reduction in VAT levels does not seem to have been passed on to the population as a whole. He is now faced with only one possibility and that is to try to raise the tax income of the state.
He has last week end commented that if the amounts recovered from taxation do not increase he will remove the head of the collection department of the Ministry of Finance. So what does this man have to do? There are many companies who do not pay tax or the correct amount of tax because the inspectors are inefficient or are bribed to fix the tax payable at as lower figure. The Ministry concentrates very much on those who already pay tax and pursues them for more tax. These tax payers are an easy target as they are known to the authorities. The Ministry ignores the larger companies or those headed by business men who are “connected”. They ignore many smaller companies because it is not easy to find them and get them to pay taxes. In my opinion if the government pushes too hard they will destroy the emerging entrepreneurs or turn them into tax avoiders. As a former Chancellor of the Exchequer of England once mentioned he will squeeze for taxes until the pips squeak, is this now the aim of the Government!
The recent suggestion that the Government might increase the rate of tax to 18% would be totally the wrong message to send to the emerging middle class and business men in Romania. Romania had become a more welcoming place as there was some stability in this region. I am often asked to talk to incoming business men to tell them what life is really like in Romania, and this has been one of my constant themes.
If this Government wants to destroy the re-birth of inward foreign investment then by changing the taxes and increasing them it will be a good start. The Government needs to remember that other countries need inward investment too. Bulgaria already has a lower tax rate and many Romanian companies are already migrating their headquarters there. So this Government of whom I still have high hopes needs to be very careful before it disturbs what it already has.