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Romania to raise VAT to 24 pct to curb deficit

International desk |
Update: 2010-06-25 21:26:14

BUCHAREST: Romania will raise the VAT tax levied on goods and services to 24 percent from 19 percent to curb the public deficit and obtain a crucial IMF loan disbursement, Prime Minister Emil Boc said Saturday.

The move comes after a court on Friday blocked the government`s plan to cut pensions by 15 percent in 2010, leading the International Monetary Fund to postpone the unlocking of a new tranche that was due on Monday.

"The government has decided to raise the VAT tax by five points", Boc told a press conference.

"Under these conditions, the agreement with the IMF will continue", he said, adding that the IMF board was now expected to meet on Wednesday to give the green light to a new disbursement for the crisis-hit Balkan country.

Romania has previously agreed with the IMF and the European Commission to narrow its public deficit from 7.2 percent of output to 6.8 percent in 2010.
The VAT-tax hike will be implemented from July 1, Boc said. It should ensure between 3.5 to 4 billion-lei extra revenues in 2010 (820 to 940 million euros), Finance minister Sebastian Vladescu told reporters.

It will be coupled with a 25-percent slash of salaries in the public sector, a key plank of the initial austerity plan validated by the Constitutional court but that still needs to go through parliament.

The flat-rate income tax will remain unchanged at 16 percent.

Boc underlined that he still considers his initial austerity plan "the best solution for Romania`s economy."

Several economists have warned that a VAT hike could hamper an already sluggish Romanian economy.

"An increase of VAT will be bad for consumption", Nicolae Chidesciuc, chief economist at ING Bank Romania told AFP, stressing the need to "adjust spending in the public sector."

The prime minister said the VAT-tax rise would be "closely coordinated with the National Bank of Romania in order to avoid inflationist effects."

BDST:1806 HRS , June 26, 2010

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