Dodon’s Initiatives Likely to Break a Hole of Billions Lei in Public Budget
This is translation from Romanian. The original text is HERE.
At the time of launching his initiative, President Dodon said in mid-September: "For the purpose of enhancing the social protection of our citizens and giving a boos to the economic development of our country, I have prepared a set of initiatives of social-economic nature […] The package has been elaborated with the contribution of the Presidential Economic Board and with consultancy from the business environment."
A competition between Cabinet, Parliament, and President
Cabinet seniors and civil society leaders described the new initiatives of Mr. Dodon as populist proposals that are part of the competition between the Cabinet, the Parliament, and the President in demonstrating their concern for ordinary citizens and for business.” Prime Minister Pavel Filip, too, earlier expressed his disappointment over the slow pace of reforms and blamed the head of state for failing to sign a number of bills into law.
Mold-Street has reviewed a number of Dodon’s initiatives, HERE. Below is the reaction of the government branches to the presidential proposals.
Tax Zero for reinvested revenue – minus 1.6 billion lei in the budget
The Finance Ministry advised the cabinet to turn down the initiatives, citing „a growing budgetary deficit as a result of their implementation and insufficient compensating incomes to cover the losses.” Pointing to the proposal to introduce the so-called Tax Zero on reinvested revenues in the case of businesses (legal entities), it reminded that Moldova maintained the lowest revenue tax (12%) after Bulgaria (10%), compared to other countries in the region: Romania (16%), Ukraine (18%), Russia (20%), Slovenia (19%).
Tax Zero is a fiscal facility, which are introduced periodically to stimulate a certain branch or industry for a limited time, while Mr. Dodon’s proposal covers all businesses, irrespective of their welfare and field of activity, the Finance Ministry explained.
The worst though, it added, is the fact that the measure would inflict approximately 1.6 billion lei in losses in the public budget.
Discriminating the banks and stimulating shadow economy
With reference to a proposal to introduce a 36% duty for the earnings obtained by the banks from the currency exchange difference, the Finance Ministry described it as “discriminating and limiting.”
„It could produce an unforeseeable effect in the financial-banking sector, for the reason that it restricts banks in currency exchange services to the joy of exchange offices. The mechanism of formation of the price of a foreign currency is based on the free fluctuation between the demand and the supply. The proposed duty would distort the currency market and would paralyze the domestic institutions in terms of absorption and injection of foreign currencies. The measure could also play well for the shadow economy in exchange operations while diminishing the taxable basis and exerting additional pressure on public finances,” the Government said in a note to the president’s proposal.
The profits from exchange rates are generated by the daily re-evaluation of foreign currencies on banks’ and clients’ accounts, as well as by the sales of foreign cash at banks and exchange offices.
Taxation of earnings from state bonds
Another proposal is to raise duties from state bonds, also called securities, which were never under taxation in Moldova. The most likely outcome of such a measure would be the increase of the interest rate for this financial instrument, exactly in the same amount as the duty. As a consequence, the public spending for the internal debt service would increase as well. The government’s internal debt has increased almost three fold in the past two years and is currently around 22 billion lei.
The interest rates for state bonds are benchmarks for various central public authorities and other entities in taking a decision about asking for a loan, depositing the available resources in a bank, or issuing new bonds.
Larger personal tax exemption
In response to Mr. Dodon’s proposal to increase the personal tax exemption amount up to the size of the annual minimum subsistence sum, the Government said the measure could harm its capacity in taking decisions about the financing of certain social, health or cultural programs.
The present-day model of personal tax exemption based on the annual inflation gives the authorities a kind of predictability without creating economic turbulences, it explained.
“In the case we increase the personal tax exemption from 10,620 lei a year now, up to the annual minimum subsistence sum that is calculated for the precedent year, the public revenue inflow would reduce by approximately 700 million lei. The Government is currently weighting a number of scenarios – and this one is among them – and seeking a modality to cover the above-mentioned losses,” the note reads.
Standard VAT for vegetal and animal produce
President Igor Dodon also proposed to apply the standard VAT for vegetal and animal produce deliveries, with the full restitution of payments within five days.
The Finance Ministry though believes that such a mechanism would be “an instrument for indirect state-sponsored subvention of agriculture.” In this context, all sectorial needs have to be examined as part of the Agriculture Subvention Fund and other public financing programs.
“…the mechanism of VAT restitution implies a fiscal control that depends on the risks in the sector while the five-day term for restitution isn’t really applicable through the fiscal administration establishment. Also, the procedure [of restitution] contains unclear wording and this fact may encourage a different treatment for different entities, given that the proposed document does not state what the payments are made off and how they are paid back,” the note reads.
Then, taking into consideration the fact that the fiscal period for VAT is the ordinary calendar month, the restitution may take place only after the submission of a formal request for VAT restitution for the periods that need to be specified. Therefore, it is necessary to indicate when the restitution period is expected to begin.
As for the proposal to reduce the VAT for natural gases and liquefied gases, from 8% down to 5%, such a measure would increase the burden on the national budget and the losses would soar to approximately 162 million lei. Balancing the spending for development of social programs requires other methods than fiscal measures.
Duty on depositors’ cash in banks
Another proposal from the head of state of fiscal nature is to levy a duty from the bank deposits of individual clients. The move would apply to deposits smaller than 10,000 lei and thus would be discriminatory, the Finance Ministry argued. It’s not clear if the measure would apply to the cash deposited before the proposed date of enforcement – 1 January 2018. At present the deposits of individual clients in banks are not subjected to taxation – the provision is due to stay in effect until 2020.
“We believe that this provision should be analyzed from the perspective of fair treatment, given that the proposal would take away a benefit for a category of persons […] There is also a risk to get something different from what is expected, making it possible to disperse the beneficiaries (between family members, for example),” the Finance Ministry explained.
The change would also affect the capital market and especially the bank sector, because it would cut down investments in financial instruments and would trigger a premature withdrawal of deposits from banks.
The Finance Ministry also pointed out that the president’s proposal on taxation of deposits would reduce the credibility of the state and then could increase the expenses for reparations for depositors who felt harmed by the change.
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This article has been published thanks to the support of the National Endowment for Democracy as part of the Promoting Government Accountability Project and may be shared, republished or quoted without limitations. Reference to the source is mandatory.