2022 ended on a rather unpleasant note for the business environment in Romania, as an important fiscal change was introduced in the last days of the year.

Violation of the simplest norms of transparency and predictability, which are absolutely necessary in any stable multi-year budget projection. Even if the EU Regulation (which has to be transposed as it came from the Commission) was behind the change, the haste with which it was handled and the way in which any public debate on the subject, especially with those directly concerned, was avoided raises serious questions at the level of all economic sectors of Romania, which make large contributions to the state budget.

This year’s budget structure features a number of extremely sensitive elements stemming from Romania’s structural problems

The law on the state budget was adopted before the end of the year, which is good (we had years when this budget was not adopted several months after the beginning of the year in question). Even if the debates in the parliament were more simulated on its part, even if the assumptions that started this construction of the budget are extremely debatable, Romania started the year with a budget.

However, in the construction of the budget for this year, there are a number of extremely sensitive elements that come from Romania’s structural problems (which we are solving only with successive reforms) and which deserve to be discussed, especially when compared with the implementation of the budget for the year just ended.

Although we currently have only 11 months of published MFF, the percentages of the various budget categories are generally relevant for the entire year and can be compared with the current year and projected figures for 2024-2026.

Sensitive elements of the 2023 budget that could jeopardize this year’s fiscal consolidation

Here are, from my point of view, those sensitive elements of the 2023 budget that could jeopardize fiscal consolidation for this year, deficit reduction and its pressure on public debt, the sustainability of public investment and co-financing European funding:

• A decrease in the value of tax revenues in the total revenues to the state budget (65.7% in 2023 compared to more than 69% of total revenues to the state budget in 2022). In the fiscal strategy of the government, the collection of fees and taxes is becoming less and less important in the annual construction of the budget, more and more attention is paid to non-fiscal revenues (8.53% of total revenues to the state budget in 2023 consist of dividends of state-owned companies, profits of the central bank, etc.) and to “revenues “, transferred from the European Union (21.09% of total revenues to the state budget in 2023, 1/5 of them, compared to only 13.4% in 2023 2022).

• Almost half of the revenues to the state budget are achieved through only two taxes, and both indirect taxes are collected and reported exclusively by the efforts of legal entities: VAT and excise duty. In 2023, it is estimated that about 38.43% of the total revenue of the state budget will be obtained from two taxes, of which 24.44% of the total revenue is provided by VAT and 13.99% of the total revenue is provided by excise taxes. If we add to this percentage 12% of the total income as an income tax and 13.48% as an income tax (at best 10% of the tax on income from salaries), then it turns out that only four taxes support even in 2023 the income to of the state budget in proportion to more than 2/3 of revenues to the state budget.

• Considering that the state budget is based on more than 50% of three taxes collected by the business environment (VAT, excise and income tax accumulate in the draft budget for 2023 as a percentage of 50.43% of total revenues), the dependence on the evolution of the main sectors activities that pay these taxes and on the financial condition of the main companies in these sectors is extremely high. According to the data provided by COFACE Romania, about 37% of this percentage of 50.43% is currently provided by 10 sectors of activity: wholesale trade of tobacco products (12%), retail trade of fuel for vehicles in specialized stores (9%), retail trade in non-specialized stores (4%), custom software development activities (2%), electricity production (2%), crude oil production (2%), production of electrical equipment and electronics for cars and motor vehicles (2%), production of other parts and accessories for cars and motor vehicles (2%), construction of residential and non-residential buildings (2%) and transportation of goods (2%). In fact, the top two sectors (tobacco and fuel) together generate 1.5 times more taxes than the other 8 sectors in the top ten. In addition, the importance of these two sectors is equal to the importance of all European funds (including PNRR) for the formation of revenues to the state budget.

• In addition to the dependence of state budget revenues on a very limited number of industries, we also have a significant dependence on a small number of large and very large companies (many transnational). The top three companies providing the state budget are dominated by one company from the tobacco sector (first place) and two companies from the fuel sector (second and third places). The 10 largest companies provide 1/10 of the revenues to the state budget, which is equivalent to half of the funds that come to Romania from the European Union (including PNRR). According to the government’s forecasts for 2023-2026 in the State Budget Law, this situation does not appear to have changed significantly in the coming years.

• The state continues its campaign of over-taxing capital over labor, and this is evident in the state budget for 2023 and projections for the following years. For example, income from labor (wages) is taxed at 10%, while profits are taxed at 10%, and then dividends distributed to Romanian resident shareholders are 8%, i.e. double taxation of labor. We excluded health and pension contributions from the calculation for both categories of income. That is, the state today taxes capital twice as much as labor, and it seems that it wants to continue in this harmful direction in the long run, labor, in the absence of capital, remains unused or underutilized. These things can also be seen in the execution and construction of the budget today and in the years to come: income tax and taxes on all incomes except wage income have a weight of almost 17% of the total receipts for the state budget, while employees contribute to these income from only 8.42% of total income; mainly the contribution of labor to half of the contribution of capital in the formation of state budget revenues. This increasingly disproportionate approach, which has accelerated in recent years, will significantly reduce the entrepreneurial appetite in Romania, hitting hard at healthy capital accumulation, the most important pillar of any nation’s development.

• The state continues to lose significant percentages of the VAT it collects thanks to the efforts of the aforementioned companies and sectors. In 2023, the collected VAT has an estimated contribution of 41.33% of total revenues. However, due to the amounts broken down into VAT, the collection percentage is significantly reduced to only 24% (the amount remaining in government accounts is estimated to be 40% lower than originally collected). The main reason is that many public institutions (eg municipalities) are not actually VAT payers. The reform could consist in the fact that all business entities (private/state) became VAT payers and that there would be no more such failures in the state budget. The level of collection and collection will be much more visible and the amounts will be very important (the differences deducted from these VAT breakdowns are equivalent to the amounts received from the EU, including those through the PNRR);

• Capital receipts become increasingly insignificant in this budget, which means that many investments made by the state are not sources of income, but rather assimilated to consumption rather than investment (for example, a flower parade or wrapping a city in a hall).

We have a budget that is 2/3 dependent on 4 taxes and 1/2 on three taxes that are collected exclusively from legal entities.

Bottom line: We’ve had a state budget that’s been approved for a few weeks now and it’s working, and it’s looking positive. In reality, we have a budget that is 2/3 dependent on 4 taxes and 1/2 on three taxes that are collected exclusively from the economic activity of legal entities.

We have a budget that is built more and more on non-tax revenues and funds of the European Union and less and less on tax revenues. The budget, which is 40% dependent on ten sectors of the economy, two sectors of the economy (tobacco and fuel) transfer 1/5 of the total revenues to the state budget (two sectors are as important as all European funds combined).

We have a budget in which 10 companies (one tobacco and two oil and gas companies in the first place) transfer 1/10 of the money from the budget, about half of non-returnable funds.

We have a government budget that taxes capital twice as much as labor, wanting an even higher tax on capital that is already suffocating and creating more and more negative equity in small and very small companies.

We have a budget in which capital income (from the investments the government says it is making year after year) is increasingly paler or non-existent. The year, unfortunately, does not bode well.