Tax policy Under the Curse of Low Revenue. The Case of Romania

Romania has registered persistently low budget revenues over the years. The Romanian tax revenue-to-GDP ratio has been far below the average level of both the European Union (EU-27) 2 and the New Member States (NMSs ) for many years. The decade long growth cycle hid significant structural imbalances in the public budget. The global financial crisis, which erupted in 2007, has had a strong negative impact on the Romanian economy. The ensuing fall in GDP growth lowered tax revenues and forced the authorities to come up with a fiscal consolidation package. A choice made for financing the mounting budget deficit and securing financial stability was an international loan package, which was agreed upon in May 2009. The attached economic programme aimed at stabilising and consolidating Romania’s fiscal position. But measures for raising tax revenues, which are particularly low in Romania, are still to work their way, or are awaited. This paper attempts to identify reasons why tax revenues in Romania are the lowest (as a share of GDP) among the EU-27 countries. It takes a broader perspective by looking at the main sources of tax revenues over the last two decades. Implications of the policy regime change following the introduction of flat tax in 2005 are considered. It also does a few comparisons with other countries from Central and Eastern Europe by looking at the main tax revenue components. The analysis looks at effects of the shadow economy on fiscal revenues by attempting to quantify the revenue loss due to economic activities, which are not taxed. After examining EU wide responses to the current crisis a basic part deals with dynamics of Romanian public budget revenues. The last section lists policy recommendations.