Analysis: Romania's share of tax revenues in GDP, lowest in region, 1995 to 2022

 The average share of general consolidated budget revenues in GDP from 1995 to 2022 was 32.6%, with tax revenues making up 27.3%, positioning Romania last in the region, according to an analysis by Ella Kallai, Chief Economist at Alpha Bank Romania."For many years, there has been talk about the low share of general consolidated budget revenues in GDP in Romania compared to other EU member states. The European Commission's database on tax and tax revenues from 1995 to 2022 allows for a comparison of Romania's situation with countries in the region. Between 1995 and 2022, the average share of general consolidated budget revenues in GDP was 32.6% and the share of tax revenues was 27.3%. The 5.3 percentage point difference represents non-tax revenues. With these figures, Romania ranks last in the region. The average share of general consolidated budget revenues in GDP ranged between 44.3% in Hungary and 36.6% in Bulgaria, which is 11.7 percentage points and 4 percentage points higher than Romania, respectively. The average share of tax revenues in GDP ranged between 37.7% in Hungary and 29.1% in Bulgaria, which is 10.4 percentage points and 1.8 percentage points higher than Romania," the Alpha Bank Romania Monthly Bulletin "Macroeconomics 'En Detail'" shows.The analysis notes that, to capture trends from 1995 to 2022, the shares of budget and tax revenues in GDP were calculated as averages over five periods of five years (1995-2019) and one period of three years (2020-2022). According to the source, budget revenues in GDP show stability, while tax revenues show a decline, indicating that the stability of budget revenues around 32-33% of GDP was achieved at the expense of increased non-tax revenues.Which categories of tax revenues decreased? Tax revenues, based on the function of the tax base, are classified into three main categories: revenues from consumption taxes, revenues from labour taxes and revenues from capital taxes. The evolution of the structure of tax revenues shows a decrease in the share of revenues from capital taxes, an increase in the share of revenues from consumption taxes until 2014, followed by a decrease, and a decrease in the share of revenues from labour taxes until 2014, followed by an increase. Between 2020 and 2022, Romania had the lowest share of revenues from capital taxes (16%), the second lowest share of revenues from consumption taxes (38%), after Poland (36%), and the highest share of revenues from labor taxes (46%) in total tax revenues," the analysis says.The average share of revenues from consumption taxes in GDP was 10.9%, comparable to the share in the Czech Republic (10.6%), but lower than in Bulgaria (13.5%), Hungary (13.4%) and Poland (12.2%).According to the quoted document, the trend was a decrease after 2014, with the share dropping to 10% between 2020 and 2022, the lowest in the region. This reduction seems to have been caused by the decline in value-added tax revenues, the largest component of consumption taxes, which dropped from 8% of GDP between 2005 and 2014 to 6% of GDP between 2020 and 2022. In other countries, after 2014, value-added tax revenues relative to GDP either remained stable (in Poland, Bulgaria) or increased (in Hungary and the Czech Republic), reflecting a similar dynamic for consumption tax revenues.Between 1995 and 2022, the average share of revenues from labour taxes in GDP was 11.5%, the second lowest value after Bulgaria (10.9%). The trend was a slight increase after 2014, from 11% in the period 2005-2014 to 12% in the period 2020-2022, due to an increase in revenues from mandatory social security contributions from employees. In Romania, almost all labour taxes are borne by employees (11% of GDP from 12% of GDP in labour taxes between 2020 and 2022). In the Czech Republic, Hungary, and Poland, one-third of labour taxes are borne by employers, and two-thirds by employees. In Bulgaria, labour taxes are split between employers and employees at a 45%-55% ratio.According to the quoted source, the share of capital tax revenues in GDP was 5% between 1995 and 2022, the second lowest after Bulgaria (4.7%). The trend was a decline due to taxes on corporate income until 2014, followed by other components - taxes on household and self-employed incomes and taxes on capital stock. Corporate income taxes represented half of the capital tax revenues in 2020-2022, just like in Bulgaria, the Czech Republic and Hungary. The other half came roughly equally from taxes on household and self-employed income and taxes on capital stock. In Poland, the situation is different: corporate income taxes represent one-third, 44% come from taxes on self-employed income and 22% from taxes on capital stock."In Romania, the share of tax revenues in GDP is low compared to the region and declining, contrary to the regional trend. The reduction in the share of capital and consumption taxes could not be compensated by the increase in the share of labour taxes, which are almost entirely paid by employees, in contrast to the situation in the region where the tax burden is more evenly distributed between employees and employers. In these conditions, for fiscal consolidation from 2025 to 2031, it is crucial to focus budget expenditures on areas that expand the country's development potential and create conditions for increasing tax revenues at least at the same pace as the economy," explains the analysis.