Gabriel Biris
The renowned tax expert Gabriel Biriș, lawyer and partner at Biriș Goran SPARL, gave us the traditional interview at the beginning of the year in which we invite him to tell us his opinion on Romania’s economy at the moment and a forecast for the whole year 2025. What are the problems our economy has?, What should we worry about?, How does the political-economic environment present itself in the eyes of investors?, What are the main economic predictions for the end of this year?, are just a few questions to which Gabriel Biriș tries to find an answer. A must read…
Recently, the National Statistical Institute released some worrying figures on Romania’s economy: Stagnant GDP (even down 0.1% in Q3 2024 compared to the same period last year) while the trade deficit is up 17.7% in the first 11 months of 2024, we have high inflation (the highest in the EU), political instability and tax changes made without solid grounds that will exacerbate the economic mess we are in. How bad is it really?
The figures for 2024 don’t look good at all. In addition to the major slowdown in economic growth (from 3.1% initially forecast to only 1.4%, saved only by consumption), high inflation (5.1%, the highest in the EU) and the huge trade deficit (almost 18%), we also have a huge budget deficit of about 9% of GDP – possibly even higher, almost double the deficit initially forecast of “only” 5% of GDP. What is more serious is that 2024 did not also bring the completion of the 4 rounds of elections and the “steroids” we were talking about last year, massively injected by the Government into the market to win the goodwill of voters, failed to bring the votes that the rulers were counting on, and now we are in the worst political crisis since 1990, with over a third of the Parliament represented by extremist, anti-European parties and presidential elections canceled and postponed to May 2025. The fact that 2025 is also an electoral year limits the measures that can be taken by the government to redress the deficit, putting additional pressure on the cost of borrowing, which has also reached a high of the last few years (8%), this cost putting even more pressure on the cost of borrowing for households and companies. We have also seen demonstrations against “austerity measures” (which are not really austerity measures, but normality measures!), demonstrations that will certainly be repeated and will even increase in intensity before the elections. The result of this political instability was not long in coming, with both Fitch and Standard&Poors changing the country’s rating outlook from “stable” to “negative”, foreshadowing what I consider to be a “worst-case scenario“, namely downgrade to junk and the impossibility of deficit financing. In conclusion, the situation is very, very bad!
Increasing taxes and duties in the private sector and freezing the incomes of public servants and possibly a slight decrease in their number (the so-called streamlining of the bureaucratic apparatus) are the main measures of the Ciolacu 2 Government, through which the authorities believe they will “save” the economy in the short term…Do you consider this year as a lost one from the economic point of view? What would you have done had you got the chance?
2024 brought increases for most taxes (payroll tax, pension and health insurance contributions – by eliminating some exemptions, limiting or eliminating some deductions, VAT – by eliminating some reduced rates, excise taxes) and collected more than 70 billion lei, the deficit doubled through the almost double increase in spending, an increase that is expected to spread to 2025 (e.g. increase in pensions due to recalculation, increase in the number of public sector employees and wages, even without indexation). The measures taken at the end of the year only create an appearance of deficit recovery, but the pressure put on the economy by the measures taken last year (IMCA, ICAS), by the rapid introduction of RO e-Factura, SAF-t, RO e-Transport, RO e-TVA which put huge pressure on the operational and compliance costs of companies, but also by the reintroduction of the construction tax from 2025 (the infamous “pillar tax” introduced in 2014 and abolished in 2017) will significantly affect both active companies, but more importantly, will block any appetite for new investments, investments so much needed in the economy.
What would I have done? I would have introduced as early as 2023 measures that would have had results in reducing the huge VAT GAP (over €8 billion) – such as generalized reverse charge in B2B – I would have taken measures to increase compliance and reduce evasion, I would have prepared the reduction of the administrative apparatus immediately after the elections. And most importantly, I would have abolished IMCA, ICAS and not introduced the construction tax, all of which simply block investment in the economy.
Inflation and the lack of VAT collection (the Romanian state cannot collect about one third of the VAT) are the main problems of the Romanian economy, plus, of course, the lack of reforms in the central and local apparatus where we have around 1.2 million public servants (the largest budgetary apparatus in the EU). Could we be in a vicious circle? Have politicians not yet got the courage to do the right thing and will that affect us all? Does this finally end in 2025? How much longer we will tolerate this situation… with contextual measures? Do we still have money for the increased pensions and salaries of civil servants? Is the IMF coming this year to save us from ourselves?
All these problems are self-potentiating. It seems to me that our political decision-makers have not learned anything from the lesson they received from the electorate in the elections for the Parliament and the President… They have not taken and are not taking any measures to fight evasion, they see the increase in revenues only by increasing taxes or administrative burdens. The best example is the introduction of all these “RO e-Diverse” in the name of the need to reduce the huge VAT GAP, when they had all the information to see from the start that the problem was not in the declaration, but in the payment. The budget execution confirms what I said before, that these measures are a mere dance, that do not solve anything and, even worse, they protect the great VAT fraud – fraud in no way affected by the measures taken and whose implementation has cost us billions of euros…
I don’t think there will be any more pay rises for the civil servants, new jobs or pension increases in 2025. Equally I don’t think these measures will help us enough to avoid a downgrade to junk… If we are downgraded to junk, a (very) hard landing will be inevitable, including IMF loans, loans that usually come with extremely tough measures both in terms of spending cuts and tax increases (the most handy one being VAT increase).
What is the worst measure in the Train Ordinance? Is Ciolacu raising VAT after all? What do foreign investors think about what’s happening here? You work with big, important companies from abroad, how do they find the economic-political-social environment here?
By far the worst measure is the reintroduction of the building tax. This, like the IMCA, is a toxic tax, a tax on investment, which denies us the chance to attract new investments in Romania.
I work with both large and medium-sized companies, with both Romanian and foreign capital. For all of them, the economic environment is damaged by fiscal policies, lack of predictability and unpredictability.
What do you think will happen to the Romanian economy if Călin Georgescu wins the upcoming presidential elections?
Not a question I want to answer. A warning of what could be to come came from the stock markets and the pressure on the leu immediately after the 1st round. If we do not understand that the prosperity (albeit insufficiently distributed) in which we live is almost exclusively due to our membership of the EU, and our security to our NATO membership, we are left with nothing but darkness. I think a lot of people simply seek for the worse for them!
What are your main economic predictions for the end of this year?
I can’t take any chances, far too much depends on how we vote in May. If we choose to keep the course, we have a chance to correct some of the excesses of the recent past and have a better 2025 than we now expect. Otherwise there will be chaos, the results are impossible to predict today.
