Fiscal sustainability challenges in Romania

Transcription

1 Preliminary Draft For discussion only Fiscal sustainability challenges in Romania Bucharest, May 10, 2011 Ionut Dumitru Anca Paliu

2 Agenda 1. Main fiscal sustainability challenges 2. Tax collection issues 3. Expenditure structure and efficiency issues

3 1. Main fiscal sustainability challenges

4 Main fiscal challenges Main task: reducing the high general government structural deficit while generating a reallocation of public expenditure towards growth-enhancing items (including infrastructure), addressing structural bottlenecks to growth, and ensuring longterm sustainability of public finances in view of the population ageing. Fiscal sustainability challenges: below-potential revenue mobilization chronic deficit of the public pension system and expected long-term impact of aging quasi-deficits of the SOEs unsustainable structure of public spending low efficiency of public spending lack of priorities for investments and multiannual budgeting lax fiscal management of local governments

5 Romania s fiscal consolidation plan is very ambitious GR RO ES PT UK IE BG SK NL PL EU27 FR EA CZ BE LT LV IT SI CY FI DE MT AT SE LU HU DK EE Fiscal adjustments in the European countries (% of GDP, ESA 95) Structural budget deficit in 2009 Structural budget deficit in 2012 Fiscal adjustment Fiscal adjustment - primary balance Source: European Commission (forecasts from Autumn 2010)

6 LU GR SI CY NL MT IE RO ES BE CZ LT FI SK DE EA UK EU27 AT BG PT SE DK FR HU IT LV EE PL Romania will need to face the high long term impact of ageing population Increase in age-related public expenditures, , % of GDP 21 unemployment long-term care healthcare pension spending total Source: European Commission

7 2. Tax collection issues

8 Romania has one of the lowest budget revenues in EU27 Norway Denmark Sweden Finland France Belgium Austria Italy Netherlands Hungary Slovenia Germany Portugal Cyprus United Czech Estonia Luxembourg Greece Malta Poland Spain Latvia Ireland Bulgaria Romania Lithuania Slovakia Euro area EU27 Budget revenues in EU countries (% of GDP, ESA 95) Source: Eurostat

9 Development of implicit tax rate for personal income tax Progressive taxation (between 18% and 40%) Flat tax of 16% Implicit tax rate for personal income tax** (rhs) Efficiency index*** ** Implicit tax rate is computed as the ratio between the budget revenues from direct taxes paid by households and gross wages from the national accounts (including the unobserved economy) *** Efficiency index is computed as the ratio between the implicit tax rate and the legal tax rate Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

10 Legal tax rates vs. implicit tax rates for personal income tax in CEE countries Country Standard legal tax rate for personal income tax* Implicit tax rate** Efficiency index*** Rank BG CZ**** EE LV LT HU**** PL RO SI SK * If the legal tax rate was changed during the year, an weighted average was calculated ** Implicit tax rate is computed as the ratio between the budget revenues from direct taxes paid by households and gross wages from the national accounts (including the unobserved economy) *** Efficiency index is computed as the ratio between the implicit tax rate and the legal tax rate **** The tax base is super gross the gross salary plus the social contributions paid by the employer. In the case of the other countries the tax base is the gross salary minus the social contributions paid by the employee Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

11 Development of implicit tax rate for corporate income tax 6.0 Legal tax rate of 25% Flat tax of 16% Implicit tax rate for corporate income tax** Efficiency index*** (rhs) 0.15 ** Implicit tax rate is computed as the ratio between the budget revenues from corporate income tax and gross operating surplus and mixed income from the national accounts (including the unobserved economy) *** Efficiency index is computed as the ratio between the implicit tax rate and the legal tax rate Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

12 Legal tax rates vs. implicit tax rates for corporate tax in CEE countries Country Standard legal rate for corporate income tax Implicit tax rate* Efficiency index** Rank BG CZ EE LV LT HU PL RO SI SK * Implicit tax rate is computed as the ratio between the budget revenues from direct taxes paid by companies and gross operating surplus and mixed income from the national accounts (including the unobserved economy) ** Efficiency index is computed as the ratio between the implicit tax rate and the legal tax rate Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

13 Development of implicit tax rate for VAT Implicit tax rate of VAT** Efficiency index*** (rhs) ** Implicit tax rate is computed as the ratio between the budget revenues from VAT and final consumption expenditure of households and NPISH from the national accounts (including the unobserved economy) *** Efficiency index is computed as the ratio between the implicit tax rate and the legal tax rate 0.45 Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

14 Legal tax rates vs. implicit tax rates for VAT in CEE countries Country Standard rate of VAT* Implicit tax rate** Efficiency index*** Rank BG CZ EE LV LT HU PL RO SI SK * If the legal tax rate was changed during the year, an weighted average was calculated ** Implicit tax rate is computed as the ratio between the budget revenues from VAT and final consumption expenditure of households and NPISH from the national accounts (including the unobserved economy) *** Efficiency index is computed as the ratio between the implicit tax rate and the legal tax rate Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

15 Development of implicit tax rate for social security contributions Implicit tax rate for social security contributions** Legat tax rate for social security contributions Efficiency index*** (rhs) 0.59 ** Implicit tax rate is computed as the ratio between the budget revenues from social security contributions and gross wages from the national accounts (including the unobserved economy) *** Efficiency index is computed as the ratio between the implicit tax rate and the legal tax rate Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

16 Legal tax rates vs. implicit tax rates for social security contributions in CEE countries Country Legal rate of social security contributions* (%) Implicit tax rate** Efficiency index*** Rank BG CZ NA EE LV LT HU PL NA RO SI SK * If the legal tax rate was changed during the year, an weighted average was calculated ** Implicit tax rate is computed as the ratio between the budget revenues from social security contributions and gross wages and salaries from the national accounts (including the unobserved economy) *** Efficiency index is computed as the ratio between the implicit tax rate and the legal tax rate Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

17 Legal social security contributions in NMS10 in 2010, % Social Contributions SK HU CZ RO PL LT SI LV EE BG Employer Employee Old-age pensions Total Employer Unemployment Employee insurance Total Employer Employee Health insurance Total Employer Employee Other Total Employer Employee Total Total Source: European Comission

18 Voluntary tax compliance has decreased lately 85% 75% 65% 55% 45% 35% 35% 33% 31% 29% 27% 25% 23% 21% 25% Share of employees in the underground economy (rhs) Efficiency index personal income tax Efficiency index social security contributions Efficiency index corporate tax (rhs) Efficiency index VAT 19% Source: Eurostat, NIS, Ministry of Finance, Fiscal Council

19 Tax evasion development in Romania RON mn Tax evasion from undeclared work: 9,032 11,298 14,951 19,044 22,055 21,247 - personal income tax (PIT) 1,885 2,358 3,259 4,277 5,238 4,919 - social contributions (SSC) 7,147 8,940 11,692 14,767 16,817 16,328 VAT fraud 7,441 10,684 16,437 18,901 19,548 19,107 Tax evasion from informal economy (households) 1,511 2,158 2,819 3,626 5,062 4,956 Total tax evasion PIT, SSC, and VAT 17,984 24,140 34,207 41,572 46,666 45,310 Non-observed economy (GVA) 35,814 47,849 66,117 83, ,741 97,155 % of GDP Tax evasion from undeclared work 3.7% 3.9% 4.3% 4.6% 4.3% 4.3% - personal income tax (PIT) 0.8% 0.8% 0.9% 1.0% 1.0% 1.0% - social contributions (SSC) 2.9% 3.1% 3.4% 3.5% 3.3% 3.3% VAT fraud 3.0% 3.7% 4.8% 4.5% 3.8% 3.8% Tax evasion from informal economy (households) 0.6% 0.7% 0.8% 0.9% 1.0% 1.0% Total tax evasion PIT, SSC, and VAT 7.3% 8.4% 9.9% 10.0% 9.1% 9.1% Non-observed economy 14.5% 16.6% 19.2% 20.0% 19.6% 19.8% Source: NIS, Fiscal Council

20 VAT gap* in EU countries LU ES IE NL SE SI DK PT FI FR PL EE BG DE MT BE EU25 AT UK CZ LT IT LV HU SK GR RO 40% 35% 30% 25% 20% 15% 10% 5% 0% Data as of 2006 * VAT gap is defined as the ratio between VAT not collected and VAT liability Source: European Commission, Directorate-General for Taxation and Customs Union, Reckon report, 2009, NIS, Fiscal Council

21 VAT gap* Romania vs Bulgaria 45% 40% RO BG 35% 30% 25% 20% 15% 10% 5% 0% * VAT gap is defined as the ratio between VAT not collected and VAT liability Source: NIS, Fiscal Council, World Bank

22 3. Expenditure structure and efficiency issues

23 Very rapid increase in public spending driven mainly by social expenditures 45% 40% 35% 30% 25% 20% 15% 10% 5% Compensation of employees (% of budget revenues) Social benefits (including pensions) (% of budget revenues) Intermediate consumption (% of budget revenues) Investment expenditures (% of budget revenues) Source: Eurostat, National Institute of Statistics

24 High level of social spending* in Romania (ESA 95, % of budget revenues) Greece Lithuania Ireland Spain Portugal Romania Cyprus Latvia Malta Slovenia Poland United Kingdom France Italy Denmark EU27 Slovakia Belgium Finland Estonia Austria Bulgaria Hungary Sweden Germany Luxembourg Czech Republic Norway Netherlands 100% % 80% 70% 60% 50% 40% * Compensation of employees in the public sector and social benefits other than social transfers in kind, payable Source: Eurostat

25 Infrastructure index in 2010 (World Competitiveness Report) High capital expenditures, low efficiency 6.5 DE FR UK DK AT BE IT FI LV SK NL PT CY SI GR HU LT ES EE IE PL BG RO LU CZ Capital expenditure (% of GDP, Annual average, , ESA 95) Source: Eurostat, World Competitiveness Report, 2010

26 No. of employees in the public sector 1,420,000 1,400,000 1,380,000 1,360, ,135: +89,774 local authorities +52,088 central state authorities 1,340,000 1,320,000 1,300, ,083: -48,301 local authorities -30,386 pre-universitary education -31,522 healthcare sector 1,280,000 1,260,000 1,240,000 1,220,000 1,200,000 Source: Ministry of Finance, Fiscal Council

27 Support ratio (contributors/100 pensioners, social security pensions) (percent) IE NL CY ES SE LU LV SK DK MT EA CZ EE EL PL FI FR BE AT LT SI DE IT BG HU PT RO Source: European Commission

28 Policy recommendations for fiscal administration 1. Compliance policy Develop and implement a compliance risk strategy in accordance with best practices in OECD and non-oecd countries The thresholds for large and medium sized taxpayers should be reassessed (multiple threshold based on turnover, assets, no of employees, group of taxpayers) Balance resources vs risks for tax evasion differentiation by taxpayer segments Better selection of cases to be investigated

29 Policy recommendations for fiscal administration 2. Optimizing administrative costs Taxpayer services should be shifted from direct contact in local offices to (centralized) Call Centers and the internet to be more cost effective and to allow for standardized information and quality control mechanisms. The number of territorial offices and overall workforce should be reduced. In the longer run, offices at the county level would be sufficient, in conjunction with specialized offices for large and medium sized taxpayers. Improve IT support and web-based taxpayer services and facilitating e- filing

30 Policy recommendations for fiscal administration 2. Optimizing administrative costs Total costs as a percentage of aggregate revenue Romania scored 0.72% in 2009 below average (this comparison does not take into account that ANAF unlike some of the comparator countries- is not responsible for the administration of taxes like Real Estate Tax, Inheritance Tax, Wealth Tax and Motor vehicle Tax, which tend to be more costly than PIT, CIT and VAT) Citizens /FTEs Labour force/ftes No of branches/mn of citizens No of branches/mn of labour force Romania Bulgaria Czech Republic Latvia Lithuania Slovakia Poland Hungary UK USA 3,316 1, Source: OECD, 2011, data for 2009

31 Policy recommendations for fiscal administration 2. Optimizing administrative costs Average staff usage on major tax functions (% of total, 2009) Client account Audit&other Enforced debt Corporate management verification collection management Other OECD countries All countries (50) Romania Bulgaria ) Taxpayer account management All functions associated with maintaining taxpayers records (e.g. registration, data processing, taxpayer accounting, filing, withholding tax administration, storage etc.); 2) Audit, investigation and other verification functions all staff on functions associated with verifying (either through field visits, office interviews or in writing) the information contained in taxpayers returns for all taxes administered by the revenue body; 3) Corporate overhead management functions: all staff for human resource management, information technology, accommodation, supply, security, internal assurance, and finance functions. Source: OECD, 2011, data for 2009

32 Policy recommendations for fiscal administration 2. Optimizing administrative costs Use of e-filing (% of total, 2009) Personal income tax Corporate income tax VAT Romania <1 2 5 Bulgaria Poland 1.4 na na Czech Republic 1 na na Hungary Estonia Latvia Lithuania 71 na 87 US na UK Source: OECD, 2011, data for 2009

33 Policy recommendations for fiscal administration 3. Reducing compliance costs very large number of tax payments required for taxpayers under the existing procedures. In terms of the number of payments Romania ranks 182 out of 183 in the World Bank Ease of Doing Business Survey. most interactions take place through physical visits to tax offices for both returns filing and payments. Solutions: Simplification by reducing the number of payments Stimulating e-filing and reduce face to face interaction Gradually abolishing cash payments at the tax offices