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The new fiscal code – economic context andimpact on the budget
Ionut DumitruPresident of the Fiscal Council
June 2015
A booming economy before the crisis
Source: Eurostat
BG
CZ
EE
LVLT
HU
PL
RO
SI
SKHR
2
3
4
5
6
7
8
9
10
2 4 6 8 10
An
nu
al g
row
th r
ate
fo
r d
om
esti
c d
ema
nd
(ave
rag
e 2
00
1-2
00
8)
Annual growth rate for real GDP (average2001-2008)
GDP growth drivenby domesticdemand
GDP growth drivenby exports
1.82.1
3.3
4.04.3 4.3
5.76.0 6.2
6.5
7.4 7.5
EA
EU 2
7
HU PL
HR
CZ
BG EE SK RO LV LT
Annual average GDP growth(2001-2008)
Scarce net inflows of foreign capital toprivate sector, slow recovery pace
Source: National Bank of Romania, National Institute of Statistics
Note: net inflows of foreign capital in the private sector; portfolio inflows excluded
-9
-6
-3
0
3
6
9
12
01Q
1
02Q
1
03Q
1
04Q
1
05Q
1
06Q
1
07Q
1
08Q
1
09Q
1
10Q
1
11Q
1
12Q
1
13Q
1
14Q
1
15Q
1e
Real GDP excluding agriculture (% yoy)
6.9% per year
2.6% per year
-10
-5
0
5
10
15
20
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Jan
-Ma
r 2
01
5
Net FDIs (% of GDP)
Net loans, deposits (% of GDP)
Total inflows of foreign capital in private sector (% of GDP)
Economic growth is strengthening
Source: National Institute of Statistics, Eurostat
Economic activity re-entered on an upward trend in 2011, but GDP growth rates weremuch below pre-crisis’ levels.
Pace of economic growth strengthened in 2014 and GDP dynamics in Q1 2015 (1.6%qoq, 4.3% yoy) came in much above our expectations and analysts’ consensus.
-9
-6
-3
0
3
6
9
12
01Q
1
02Q
1
03Q
1
04Q
1
05Q
1
06Q
1
07Q
1
08Q
1
09Q
1
10Q
1
11Q
1
12Q
1
13Q
1
14Q
1
15Q
1e
Real GDP excluding agriculture (% yoy)
6.9% per year
2.6% per year
-2
-1
0
1
2
3
4
5
6
7
8
EA HU PL HR CZ BG RS EE SK RO LV LT HR EA RS CZ BG HU SK PL RO EE LT LV
Annual GDP growth rate,average 2001-2008
Annual GDP growth rate,average 2012-2014
Improving consumption drives GDP
Note: Net wage fund = (number of employees * net wage ) in private companies with at least four employees and in the public sectorSource: National Institute of Statistics, European Commission, GfK
In 2014, households started to show an increasing appetite for consumption after several years in which they were quiteprudent in spending.
Improving labor market conditions (lower unemployment rate, decent growth of real wages and of real disposableincome) fuelled a rapid increase in the consumer confidence index starting Q4 2014.
Fast increase of private consumption (4.9%) was the key driver of GDP growth in 2014. Private consumption shouldremain the major driver of GDP growth in 2015 as well.
-70
-60
-50
-40
-30
-20
-10
0
10
May-05 May-07 May-09 May-11 May-13 May-15
Consumer confidence indicator
Savings over next 12 monthsFinancial situation over next 12 monthsGeneral economic situation over next 12 monthsUnemployment expectations over next 12 monthsConsumer confidence
-15
-10
-5
0
5
10
15
20
Apr-05
Apr-07
Apr-09
Apr-11
Apr-13
Apr-15
Net wages fund(real terms, % yoy)
Private sector Total economy
90
100
110
120
130
140
11Q1 12Q1 13Q1 14Q1 15Q1
Households' spending(11Q1=100)
Nominal sales of durable consumer goods
Real retail sales
Real private consumption
Investments are lagging behind
12
18
24
30
36
42
48
12
16
20
24
28
32
36
04Q4 06Q4 08Q4 10Q4 12Q4 14Q4
Gross fixed capital formationin the private sector
As % of GDP Current RON bn
0
2
4
6
8
10
0
2
4
6
8
10
04Q4 06Q4 08Q4 10Q4 12Q4 14Q4
Gross fixed capital formationin the public sector
As % of GDP Current RON bn
Note: In-house seasonally adjusted data for gross fixed capital formation in the private sector and in thepublic sectorSource: Eurostat, National Institute of Statistics, Ministry of Finance
Private fixed capital formation had a very poor performance starting mid-2012, while the government has also restrainedinvestment spending as to keep the public budget deficit at a low level.
Private investments have a large potential to rebound if the investors’ confidence would improve, due to: their current lowbase, low interest rates, and favorable taxation conditions (profits reinvested in equipments are tax exempted, socialcontributions paid by employers were reduced in Q4 2014).
Public authorities should increase the use of EU Funds, as 2015 is the last year to use 2007-2013 allocations.
5.2%
6.3%
6.7%
6.0%5.7%
5.4%
4.8%4.5%
4.3%
3%
4%
5%
6%
7%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Public sector investments (% of GDP)
20
30
40
50
60
70
80
90
100
110
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Gross fixed capital formation at 2010 prices
Consumption at 2010 prices
GDP at 2010 prices
Very week performance of investment activity (2008=100)
Source: EUROSTAT
Contribution to GDP growth by uses (pp)
Source: EUROSTAT
Cut of taxes to help domestic demand,but likely to increase macro imbalances Measures aimed to cut taxes that were already enforced in 2014-2015:
Profits reinvested in equipments are tax exempted Social contributions paid by employers were reduced by five percentage points Tax on special constructions was reduced from 1.5% to 1.0% VAT rate for food products was cut to 9%
The new Fiscal Code that is under debate in Parliament aims for broad based cut of taxesduring 2016-2019: Among the measures planned to be implemented in 2016 there are:
• Cut of standard VAT rate from 24% to 20%• Removal of tax on special constructions• Cut of tax on dividends from 16% to 5%• Adjustment of excises for fuels and alcoholic beverages• Change in taxation of microenterprises (as to take into account the number of
employees)• Adjustment of local taxes (increase)• Enlargement of taxation base in case of social contributions, while capping the
payments (the maximum level of contributions will be determined based on amountof five gross wages in the economy)
Among the measures planned to be implemented in 2017-2019 there are:• Cut of social contributions in 2018• Cut of VAT rate from 20% to 18% in 2018• Cut of flat tax on profit and income from 16% to 14% in 2019
Full enforcement of the draft of the new Fiscal Code should generate upward pressures on thepublic budget deficit, reversing the consolidation trend from the past years
Source: Fiscal Council
The impact of the new fiscal code on budget deficit (% of GDP)
-1.9
-2.9-2.6
-4.6
-5.3
-8.6 -8.8
-5.9
-3.3
-2.1
-1.5
-1.0-1.3
-3.2 -3.3
-4.7
-5.5
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
Effective Deficit (ESA 2010)
Structural balance
Medium term objective (MTO)
Maastricht criteria
Unrealistic assumptions of the Government on second– round effects
Medium term objective is very challenging for Romania
Source: AMECO, Fiscal Council* For 2015-2016 – European Commission** Fiscal Council calculation (average economic growth at 4% during 2015-2020, potential growth at 3%)
-4.7
-3.5
-2.0-1.5 -1.2 -1.2
-2.2-2.9
-5.6
-8.9
-6.6
-5.3
-2.9-2.2
-1.5 -1.6
-3.5-3.0
-2.0-1.2
-0.6
0.6 0.41.2 1.3
2.0
-1.1
-1.8 -1.9
-2.3 -1.7 -1.4-0.9 -0.4 -0.1
0.20.6 0.9
-10
-8
-6
-4
-2
0
2
4
6
8
10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
e
2016
p
2017
p
2018
p
2019
p
2020
p
output gapHeadline deficit*Headline deficit requered for structural deficit of 1% of GDP**Maastricht criterion
Low level of competitiveness
Source: The Global Competitiveness report, World Economic Forum, 2014-2015
Note: Red lines denote scores for Romania
World Economic Forum World Competitiveness Report – Ranking(out of 144 countries)
Source: The Global Competitiveness report, World Economic Forum, 2014-2015
Romania Bulgaria Czech Republic Hungary Poland Slovak Republic 7.05 Effect of taxation on incentives to work, 1-7 (best) 140 91 110 128 88 119 6.04 Effect of taxation on incentives to invest, 1-7 (best) 128 81 107 133 102 114 7.08 Country capacity to retain talent, 1-7 (best) 128 142 80 122 117 130 7.07 Reliance on professional management, 1-7 (best) 126 113 47 114 71 74 7.01 Cooperation in labor-employer relations, 1-7 (best) 125 111 52 71 100 105 2.02 Quality of roads, 1-7 (best) 121 106 81 58 89 82 6.01 Intensity of local competition, 1-7 (best) 120 75 17 47 51 32 6.09 Prevalence of trade barriers, 1-7 (best) 117 99 72 30 66 38 1.08 Wastefulness of government spending, 1-7 (best) 116 98 7 96 85 126 7.09 Country capacity to attract talent, 1-7 (best) 115 142 93 118 124 117 1.07 Favoritism in decisions of government officials, 1-7 (best) 114 134 106 122 67 141 4.10 Primary education enrollment, net %* 114 66 55 95 49 n/a 1.17 Ethical behavior of firms, 1-7 (best) 112 101 94 96 57 123 1. Corporate ethics 112 101 94 96 57 123
…. 5.06 Internet access in schools, 1-7 (best) 53 45 27 35 50 31 2.09 Fixed telephone lines/100 pop.* 52 42 63 37 78 68 9.03 FDI and technology transfer, 1-7 (best) 49 91 36 19 68 18 6.07 No. days to start a business* 48 84 92 14 111 87 1.21 Strength of investor protection, 0–10 (best)* 45 45 83 105 45 98 10.01 Domestic market size index, 1–7 (best)* 44 66 48 56 20 61 9.05 Fixed broadband Internet subscriptions/100 pop.* 40 39 41 31 46 47 6.06 No. procedures to start a business* 32 22 106 22 22 78 5.04 Quality of math and science education, 1-7 (best) 31 54 74 60 50 75 9.06 Int’l Internet bandwidth, kb/s per user* 19 27 25 75 37 93 8.08 Legal rights index, 0–10 (best)* 11 11 63 43 11 29 7.04 Redundancy costs, weeks of salary* 7 21 95 61 89 89
WOR
STBE
ST
Very low public revenues. . .
Source: EUROSTAT
Public revenues and fiscal revenues (% of GDP, ESA 2010, 2014)
33,4
45,2
27.6
39,9
202530354045505560
Dane
mar
caFr
anța
Belg
iaSu
edia
Finl
anda
Aust
riaIta
liaLu
xem
burg
Ger
man
iaU
ngar
iaG
reci
aO
land
aPo
rtug
alia
Slov
enia
Croa
țiaM
alta
Mar
ea B
ritan
ieCi
pru
R. C
ehă
Span
iaEs
toni
aPo
loni
aSl
ovac
iaIrl
anda
Leto
nia
Bulg
aria
Litu
ania
Rom
ânia
UE
28Zo
na e
uro
Venituri bugetare Venituri fiscale
… and very poor tax collection
7.9%8.0%
7.8%
6.5%
7.5%
8.6%8.4%
8.3%
7.8%
6%
7%
8%
9%
2006 2007 2008 2009 2010 2011 2012 2013 2014
VAT revenues (% of GDP)19% VAT rate 24% VAT rate
VAT rate (2015)
17
18 18
19 19
20 20 20 20 20 20
21 21 21 21 21 21
22 22
23 23 23 23
24 24
25 25 25
27
15
17
19
21
23
25
27
29
Luxe
mbo
urg
Rom
ania
201
7
Mal
ta
Germ
any
Cypr
us
Bulg
aria
Esto
nia
Fran
ce
Aust
ria
Slov
akia
Unite
d Ki
ngdo
m
Belg
ium
Czec
h Re
publ
ic
Spai
n
Latv
ia
Lithu
ania
Neth
erla
nds
Italy
Slov
enia
Gree
ce
Irela
nd
Pola
nd
Port
ugal
Rom
ania
Finl
and
Denm
ark
Croa
tia
Swed
en
Hung
ary
EU average: 21.5
Source: European Commission
Top corporate income tax (2014)
10
12.512.5
1415 15
1617
19 1920 20 20
20.6 21 2122 22
24.5 25 2526
27
29.230 30.2
31.431.5
3435
38
10
15
20
25
30
35
40
Bulg
aria
Irela
nd
Cypr
us
Rom
ania
201
9
Latv
ia
Lithu
ania
Rom
ania
Slov
enia
Czec
h Re
publ
ic
Pola
nd
Croa
tia
Finl
and
Icela
nd
Hung
ary
Esto
nia
Unite
d Ki
ngdo
m
Slov
akia
Swed
en
Denm
ark
Neth
erla
nds
Aust
ria
Gree
ce
Norw
ay
Luxe
mbo
urg
Spai
n
Germ
any
Italy
Port
ugal
Belg
ium
Mal
ta
Fran
ce
EU average: 21.3
Source: KPMG
Top personal income tax (2014)
10
1415
16 16
2122
2425
32
35 35
39
43.645
46 46.247.247.547.9 48
50 50 50.351.5 52 52
53.755.656.556.9
10
15
20
25
30
35
40
45
50
55
60
Bulg
aria
Rom
ania
201
9
Lithu
ania
Hung
ary
Rom
ania
Esto
nia
Czec
h Re
publ
ic
Latv
ia
Slov
akia
Pola
nd
Cypr
us
Mal
ta
Norw
ay
Luxe
mbo
urg
Unite
d Ki
ngdo
m
Gree
ce
Icela
nd
Croa
tia
Germ
any
Italy
Irela
nd
Aust
ria
Slov
enia
Fran
ce
Finl
and
Spai
n
Neth
erla
nds
Belg
ium
Denm
ark
Port
ugal
Swed
en
EU average: 37.9
Source: KPMG
Top social security contributions (2014)
14.7515.819.3 20
22.3
27.34
31 32.0234.0934.4534.6534.75 36 36.2537.2 38.238.4239.7139.940.4940.98
43.9644.95 4547 48.0748.649.96
68
10
20
30
40
50
60
70
80
Irela
nd
Unite
d Ki
ngdo
m
Cypr
us
Mal
ta
Norw
ay
Luxe
mbo
urg
Bulg
aria
Finl
and
Latv
ia
Pola
nd
Rom
ania
201
7
Port
ugal
Esto
nia
Spai
n
Croa
tia
Slov
enia
Swed
en
Germ
any
Aust
ria
Italy
Lithu
ania
Gree
ce
Rom
ania
Czec
h Re
publ
ic
Hung
ary
Belg
ium
Slov
akia
Neth
erla
nds
Fran
ce
EU average: 36.6
Source: KPMG
Unsustainable deficit in the social protection sector
Public deficit in the social protection sector (pension, healthcare and unemployment) - ESA2010 (% din PIB)
1.45 1.34 1.49 1.07
-0.08
0.34 0.69 0.42
-1.12
-3.12
-4.46-4.15 -3.30 -3.01 -3.28
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.0020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Deficit sisteme de asigurări sociale (% din PIB)
Deficit bugetar (% din PIB)
Source: EUROSTAT, Ministry of Finance
Dividend tax (2014)
0 0 0 0 0 0 0
5
12
15 15 15 15 1516
1920 20
21
25 25 25 25 25 2526
27
30 30
0
5
10
15
20
25
30
35
Cypr
us
Esto
nia
Hung
ary
Latv
ia
Slov
akia
Unite
d Ki
ngdo
m
Rom
ania
201
6
Bulg
aria
Croa
tia
Czec
h Re
publ
ic
Lithu
ania
Luxe
mbo
urg
Neth
erla
nds
Slov
enia
Rom
ania
Pola
nd
Finl
and
Irela
nd
Spai
n
Aust
ria
Belg
ium
Germ
any
Gree
ce
Norw
ay
Port
ugal
Italy
Denm
ark
Fran
ce
Swed
en
EU average: 16.1
Source: Deloitte