Budget can afford some fiscal relaxation

The Finance Ministry has got the budgetary reserves to keep reducing taxation in 2005. The main source is a budget revenue surplus estimated at 25,000 ROL (610 million euros), derived from a 5% GDP growth in real terms alone, with the current taxation system in place, ministry sources say. The possible scenarios are to be completed this month.

It remains to be seen whether the tax cut will take precedence over supplementary fund allocation to public infrastructure investments, though.

“We will set part of this money aside to cover the loss of revenue on the account of tax cuts. We need to see where this relaxation is most helpful and the talks we’ve had with the business circles and unions show the most important would be as substantial a reduction in social security contributions (CAS) as possible,” the quoted sources said.

The Finance Ministry has run simulations of how much it would cost the budget to have the CAS cut by two, three or even four percentage points from the current 49.5% level, still much higher than in the neighbouring countries.

A significant CAS reduction would mean dropping the promised profit tax cut from 25% to 20%. The Finance Ministry, however, feels that acknowledging as fiscally deductible the expenses on accelerated amortisation starting this year, besides the accounting treatment of such expenses, provides companies with significant room to manoeuvre to sustain investment projects, without caring too much about profit taxation. Therefore the accelerated amortisation allows a company that invests in buying technology to have half of the purchase value deducted in the first month in service for the equipment bought, no matter if makes profit or not.

Also prompted by the need to relax payroll taxation, the Finance Ministry is considering the possibility to reimburse employers for 50% of the contributions deducted at source for any new jobs created. Such an incentive is expected to cost 5,000bn ROL of the budget’s revenues.

According to the talks with the IMF, the extent of the adjustment of the 2004 budget deficit set at 3% of GDP by the law, depends on a more disciplined behaviour from the large state-owned enterprises. These enterprises need to have their expenses covered as best as they can to reduce debts to the budget, Finance Ministry sources say.

“The budget deficit reduction will be dictated by the development of the quasi-fiscal deficit by this summer. We’re thinking of an up to 2.4% of GDP adjustment, but it might go to 2%, if arrears do not go down enough,” the quoted sources told Ziarul Financiar.
razvan.voican@zf.ro