Deloitte: The budget deficit reduction plan for seven years, the chance for fiscal predictability for the business environment

The revision of the European Stability and Growth Pact, which allows the member states to operate with the budget deficit and the public debt above the maximum allowed limits, for a period of seven years, provided that they make investments in the key areas of the European economy, may represent the chance Romania has to ensure the fiscal predictability necessary for long-term sustainable development, Deloitte consultant argue.   'The European Commission launched the excessive deficit procedure against Romania as early as 2020 but it was suspended during the pandemic, along with the temporary relaxation of budgetary requirements for all member states, to allow them to manage the effects of the health crisis more efficiently' mentions in an opinion material signed by Vlad Boeriu, Fiscal and Legal Services Coordinating Partner, Deloitte Romania.   In the case of Romania, which ended 2023 witha budget deficit  of 6.6% of GDP and exceeded, after seven months of 2024, 4% of GDP (given the fact that the target for the whole year is 5% of GDP) the new rules are welcome as, in this way, our country has a new chance to embark on a path of gradual budgetary adjustment, more appropraite to the requirements of society, provided that the plan the authorities wil develop for this purpose contains firm intermediate objectives, to be respected, argue the Deloitte consultants.   Currently, the analysis of the main macroeconomic indicators shows that there is slowdown of the economic activity and persistance of the economic growth model based on consumption, mainly coming from imports, a model that is not sustainable in the medium and long term.   The most recent report on inflation  of the National Bank of Romania  (BNR) says that ' there is tempering of the economic activity at the beginning of this year more than expected ' and ' the annual advance of GDP is significantly reduced in the first quarter of 2024, to 0.5% from 3% in the last three months of 2023 and ' the decrease was determined this time by gross fixed capital formation' namely by investments,  which is registered as ' a particularly large decrease  from the double-digit level reached in Q4 2023'  while population consumption continued to grow rapidly.   At the same time, the BNR mentions the increase in the current account deficit (by more than 30% in the first five months of 2024 compared to the same period of 2023) against the background of the decrease in exports of goods and the increase in imports under the impulse of domestic demand.   'These being the conditions. BNR reduced, for the second time this summer, the monetary policy interest rate by 0.25 percent, up to 6.5% in order to stimulate economic activity and, implicitly, domestic production, which would contribute both to boosting exports and fuelling domestic consumption and, thus, to tempering imports' , states the Deloitte analysis.   From the point of view of taxation, Romania has several advantages in relatio to many of the EU countries. These include the 16% profit tax, the 10% income tax and the general VAT rate of 19%.   Moreover, in the present context, characterised by the need to increase investments, especially in domains which can generate added value, there are fiscal facilities to be mentioned - available to active companies on the Romanian market, such as tax exemption for the reinvested profit, the reduction of up to 15% of the profit tax for the increase of the share capital or, perhaps the most important the deduction of 150% for the research and development expenses.   Apart from fiscal facilities, Romanian companies have also at their disposal various financing schemes, from European funds or state aid, which they can access to develop projects in strategic areas, such as energy, environment, agriculture or within the strategy of regional development.   From a fiscal perspective, there are already concrete benchmarkts regarding the necessary reforms, included in the National Recovery and Resilience Plan, used as a reference also in the negotiations for Romania's accession to the Organisation for Economic Cooperation and Development. Keeping these benchmarks, which aim at the same objective, namely the stability of public finances, would contribute both to ensuring a predictable fiscal environment for investments, and to the observance of our country's commitments to European institutions, Deloitte consultants claim.