Romania’s flat tax has helped business, finance minister says

BUCHAREST (Reuters) – Romania’s newly introduced flat tax has brought in more revenues and helped to reduce registered unemployment by teasing business out of the shadow economy, Finance Minister Ionut Popescu said on Friday. Popescu told Reuters in an interview that fast growth and good revenues would allow the government to bring down the budget deficit to 0.7 percent of gross domestic product from 1.5 percent foreseen last year for 2005. «From an original budget deficit target of 1.5 percent of GDP this year, we aim to adopt a budget revision which sets a 0.7 percent deficit,» Popescu said. «This reflects higher budget revenues from introducing a flat tax in January and strengthening the law against tax evasion.» Romania’s centrist government introduced in January a 16 percent flat corporate and income tax, replacing an 18-40 income scale and a 25 percent tax on business in a bid to limit the gray economy and spur foreign investment. The government is, however, under pressure from a visiting IMF mission reviewing its two-year standby accord to reduce the deficit even further, to about 0.5 percent of GDP, to prevent the booming economy from overheating. The IMF has warned that the tax cuts would fan already buoyant domestic demand, threatening inflation and current account targets. Popescu said this strategy had worked so far, additionally producing a spike in officially registered employment. «The flat tax triggered a steep rise in employment. In the first quarter, the number of employees rose by 153,000, which is almost double from the same period a year ago,» he said. Government figures show the jobless rate hit a 13-year low of 5.5 percent in May. Popescu and his deputy in charge of treasury operations, Dragos Neacsu, said that as part of Romania’s drive to attract foreign investment it would overhaul its debt management and improve liquidity of domestic bond offerings. Neacsu said Romania, with a debt to GDP ratio of about 20 percent – the lowest among new EU entrants and candidate countries – offered limited opportunities to financial investors. In order to improve liquidity, the treasury will gradually replace the existing debt issues with fewer, benchmark issues which could be reopened in the future. Domestic bond issues would take priority over international offerings. Neascu said the government would have its debt management strategy ready by the fourth quarter when it also plans to set up a debt management agency.

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