New Year Tax Cuts Take Force in Romania

Despite energetic campaigns promoting cut-priced products, most shopping malls in Bucharest have been half-empty during the first days of this year, as people recover from the New Year shopping frenzy.

"Starting on Monday, prices dropped following the 4-per-cent cut in VAT decreed by the government - but people aren't queueing, not yet, at least," Maria Ungureanu, a representative of a retail outlet, said. "Many people spent a lot of money over Christmas and New Year," she added.

Starting January 1, several tax cuts have come into force in Romania. The most important one is the cut in VAT from 24 to 20 per cent.

The cut, initiated by the former leftist government of Prime Minister Victor Ponta, aimed to boost growth by encouraging people to spend more.

Estimates say it will cost the budget about 8 billion lei (some 1.7 billion euro) a year, widening the fiscal gap to as much as 2.8 per cent of economic output from a planned 1.2 per cent.

Two other tax cuts are designed to help the business community. Taxes on dividends have dropped from 16 per cent to 5 per cent. This measure will also affect the state budget, costing the government more than 1 billion lei in lost revenue.  

Finally, in a bid to boost employment, small enterprises with at least two employees will pay less income tax - 1 per cent, down from 3 per cent.

Analysts say it will not be easy for the new technocratic government of Dacian Ciolos to accomodate all these cuts in taxes.

"Romania is right to try to reverse one of the EU's harshest austerity drives and to boost consumption and bring up purchasing power, closer to levels seen in western EU states," economic analyst Stelian Miscalu said.

"But the package of tax cuts...