IMF Confident Romania Won’t Enact Income Tax Cut

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"If enacted into law, this measure would open a significant additional gap in the 2011 budget and its deficit would exceed 4.4% of the gross domestic product, which is a condition for the next IMF and EU disbursements to Romania," said Jeffrey Franks, IMF mission chief to Romania.

Franks said the government's austerity measures implemented in July, including a 25% pay cut for public employees and a five percentage point increase in the sales tax, have just started "to bear fruit" and a new change in the taxation system would create instability in the business climate and undermine the economic recovery.

"Finally, we note that this measure was not discussed with the new Fiscal Council as required by the Fiscal Responsibility Law, and is not consistent with the government's medium-term fiscal strategy," the IMF official said.

On Tuesday, Romanian senators adopted a bill to lower the level of the flat tax levied on income to 10%, a move which stirred loud criticism from the government and the parliament-appointed Fiscal Council.

The Council criticized the senators' decision, saying the measure would endanger the medium-term budget deficit targets.

Romania and the IMF last year signed a EUR13 billion loan agreement, part of a larger EUR20 billion package that includes funds from the EU, the World Bank and other lenders.

So far, Romania has received around EUR11.3 billion in IMF money and another EUR3.65 billion from the EU.

An IMF mission visited Bucharest from October 20 to November 1 to review the country's progress under the loan program and decide whether to disburse new aid, worth around EUR870 million.