The new fiscal code economic context and impact on the budget. Ionut Dumitru President of the Fiscal Council June 2015

Transcription

1 The new fiscal code economic context and impact on the budget Ionut Dumitru President of the Fiscal Council June 2015

2 A booming economy before the crisis Annual average GDP growth ( ) Annual growth rate for domestic demand (average ) GDP growth driven by domestic demand HU PL HR SI CZ BG RO EE SK LV LT GDP growth driven by exports EA EU 27 HU PL HR CZ BG EE SK RO LV LT Annual growth rate for real GDP (average ) Source: Eurostat

3 Scarce net inflows of foreign capital to private sector, slow recovery pace % per year % per year Net FDIs (% of GDP) Net loans, deposits (% of GDP) Jan-Mar Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 Q1 11Q1 12Q1 13Q1 14Q1 Real GDP excluding agriculture (% yoy) 15Q1e Total inflows of foreign capital in private sector (% of GDP) Note: net inflows of foreign capital in the private sector; portfolio inflows excluded Source: National Bank of Romania, National Institute of Statistics

4 Economic growth is strengthening Economic activity re-entered on an upward trend in 2011, but GDP growth rates were much below pre-crisis levels. Pace of economic growth strengthened in 2014 and GDP dynamics in Q (1.6% qoq, 4.3% yoy) came in much above our expectations and analysts consensus % per year % per year Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 Q1 11Q1 12Q1 13Q1 14Q1 Real GDP excluding agriculture (% yoy) 15Q1e -2 EA HU PL HR CZ BG RS EE SK RO LV LT Annual GDP growth rate, average HR EA RS CZ BG HU SK PL RO EE LT LV Annual GDP growth rate, average Source: National Institute of Statistics, Eurostat

5 Improving consumption drives GDP In 2014, households started to show an increasing appetite for consumption after several years in which they were quite prudent in spending. Improving labor market conditions (lower unemployment rate, decent growth of real wages and of real disposable income) fuelled a rapid increase in the consumer confidence index starting Q Fast increase of private consumption (4.9%) was the key driver of GDP growth in Private consumption should remain the major driver of GDP growth in 2015 as well. 20 Net wages fund (real terms, % yoy) 0 Consumer confidence indicator 140 Households' spending (11Q1=0) Apr- 05 Apr- 07 Apr- 09 Private sector Apr- 11 Apr- 13 Total economy Apr May-05 May-07 May-09 May-11 May-13 May-15 Savings over next 12 months Financial situation over next 12 months General economic situation over next 12 months Unemployment expectations over next 12 months Consumer confidence 90 11Q1 12Q1 13Q1 14Q1 15Q1 Nominal sales of durable consumer goods Real retail sales Real private consumption Note: Net wage fund = (number of employees * net wage ) in private companies with at least four employees and in the public sector Source: National Institute of Statistics, European Commission, GfK

6 Investments are lagging behind Private fixed capital formation had a very poor performance starting mid-2012, while the government has also restrained investment 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 low base, low interest rates, and favorable taxation conditions (profits reinvested in equipments are tax exempted, social contributions 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 allocations. 36 Gross fixed capital formation in the private sector 48 Gross fixed capital formation in the public sector 7% Public sector investments (% of GDP) 6.7% % 5.2% 6.3% 6.0% 5.7% 5.4% % 4.8% 4.5% 4.3% % Q4 06Q4 08Q4 Q4 12Q4 14Q4 As % of GDP Current RON bn Q4 06Q4 08Q4 Q4 12Q4 14Q4 As % of GDP Current RON bn 3% Note: In-house seasonally adjusted data for gross fixed capital formation in the private sector and in the public sector Source: Eurostat, National Institute of Statistics, Ministry of Finance

7 Very week performance of investment activity (2008=0) Gross fixed capital formation at 20 prices Consumption at 20 prices GDP at 20 prices Source: EUROSTAT

8 Contribution to GDP growth by uses (pp) Source: EUROSTAT

9 Cut of taxes to help domestic demand, but likely to increase macro imbalances Measures aimed to cut taxes that were already enforced in : 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 taxes during : 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 amount of five gross wages in the economy) Among the measures planned to be implemented in 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 the public budget deficit, reversing the consolidation trend from the past years

10 The impact of the new fiscal code on budget deficit (% of GDP) Effective Deficit (ESA 20) Structural balance Medium term objective (MTO) Maastricht criteria Source: Fiscal Council

11 Unrealistic assumptions of the Government on second round effects

12 Medium term objective is very challenging for Romania output gap -6.6 Headline deficit* Headline deficit requered for structural deficit of 1% of GDP** -8.9 Maastricht criterion e 2016p 2017p 2018p p 2020p Source: AMECO, Fiscal Council * For European Commission ** Fiscal Council calculation (average economic growth at 4% during , potential growth at 3%)

13 Low level of competitiveness Note: Red lines denote scores for Romania Source: The Global Competitiveness report, World Economic Forum,

14 World Economic Forum World Competitiveness Report Ranking (out of 144 countries) WORST BEST Romania Bulgaria Czech Republic Hungary Poland Slovak Republic 7.05 Effect of taxation on incentives to work, 1-7 (best) Effect of taxation on incentives to invest, 1-7 (best) Country capacity to retain talent, 1-7 (best) Reliance on professional management, 1-7 (best) Cooperation in labor-employer relations, 1-7 (best) Quality of roads, 1-7 (best) Intensity of local competition, 1-7 (best) Prevalence of trade barriers, 1-7 (best) Wastefulness of government spending, 1-7 (best) Country capacity to attract talent, 1-7 (best) Favoritism in decisions of government officials, 1-7 (best) Primary education enrollment, net %* n/a 1.17 Ethical behavior of firms, 1-7 (best) Corporate ethics Internet access in schools, 1-7 (best) Fixed telephone lines/0 pop.* FDI and technology transfer, 1-7 (best) No. days to start a business* Strength of investor protection, 0 (best)* Domestic market size index, 1 7 (best)* Fixed broadband Internet subscriptions/0 pop.* No. procedures to start a business* Quality of math and science education, 1-7 (best) Int l Internet bandwidth, kb/s per user* Legal rights index, 0 (best)* Redundancy costs, weeks of salary* Source: The Global Competitiveness report, World Economic Forum,

15 Very low public revenues... Public revenues and fiscal revenues (% of GDP, ESA 20, 2014) Danemarca Franța Belgia Suedia Finlanda Austria Italia Luxemburg Germania Ungaria Grecia Olanda Portugalia Slovenia Croația Malta Marea Britanie Cipru R. Cehă Spania Estonia Polonia Slovacia Irlanda Letonia Bulgaria Lituania România Venituri bugetare Venituri fiscale 33, ,2 39,9 UE 28 Zona euro Source: EUROSTAT

16 and very poor tax collection 9% VAT revenues (% of GDP) 19% VAT rate 24% VAT rate 8.6% 8.4% 8.3% 8% 7.9% 8.0% 7.8% 7.8% 7.5% 7% 6.5% 6%

17 VAT rate (2015) EU average: Luxembourg Romania 2017 Malta Germany Cyprus Bulgaria Estonia France Austria Slovakia United Kingdom Belgium Czech Republic Spain Latvia Lithuania Netherlands Italy Slovenia Greece Ireland Poland Portugal Romania Finland Denmark Croatia Sweden Hungary Source: European Commission

18 Top corporate income tax (2014) EU average: Bulgaria Ireland Cyprus Romania 2019 Latvia Lithuania Romania Slovenia Czech Republic Poland Croatia Finland Iceland Hungary Estonia United Kingdom Slovakia Sweden Denmark Netherlands Austria Greece Norway Luxembourg Spain Germany Italy Portugal Belgium Source: KPMG Malta France

19 Top personal income tax (2014) EU average: Bulgaria Romania 2019 Lithuania Hungary Romania Estonia Czech Republic Latvia Slovakia Poland Cyprus Malta Norway Luxembourg United Kingdom Greece Iceland Croatia Germany Italy Ireland Austria Slovenia France Finland Spain Netherlands Belgium Source: KPMG Denmark Portugal Sweden

20 Top social security contributions (2014) EU average: Ireland United Kingdom Cyprus Malta Norway Luxembourg Bulgaria Finland Latvia Poland Romania 2017 Portugal Estonia Spain Croatia Slovenia Sweden Germany Austria Italy Lithuania Greece Romania Czech Republic Hungary Belgium Source: KPMG Slovakia Netherlands France

21 Unsustainable deficit in the social protection sector Public deficit in the social protection sector (pension, healthcare and unemployment) - ESA 20 (% din PIB) Deficit sisteme de asigurări sociale (% din PIB) Deficit bugetar (% din PIB) Source: EUROSTAT, Ministry of Finance

22 Dividend tax (2014) EU average: Cyprus Estonia Hungary Latvia Slovakia United Kingdom Romania 2016 Bulgaria Croatia Czech Republic Lithuania Luxembourg Netherlands Slovenia Romania Poland Finland Ireland Spain Austria Belgium Germany Greece Norway Portugal Italy Denmark France Sweden Source: Deloitte