Unless the Government operates the fiscal correction requested by the European Commission and by the markets, the markets themselves will operate the correction instead, and this will be more painful, the National Bank of Romania (BNR) governor Mugur Isarescu warned in the speech given along with the latest quarterly Inflation Report unveiled on August 9.

Isarescu also urged the Government to eliminate the tax exemptions that result, among others, in tax evasion.

When tax incentives are extended over a prolonged period of time, they end by turning into rents that distort the market and create problems in terms of solidarity and cohesion, he added.

"Well, when you have so many tax exemptions, how can there be no evasion? They call it called tax optimization, right? That's what they call it, tax optimization, and it has been accepted for so many years," he said, quoted by Economica.net. He added that it's the Government's job to simplify the tax system so that the tax collection agency can collect more revenues.

Speaking of the correction the markets may operate, Isarescu explained that smaller forex inflows might result in weaker domestic currency, and the interest rates on the money market might increase even in the absence of monetary policy tightening. 

"So it [all] depends on how the fiscal consolidation and correction will be done. We may witness, without moving the monetary policy rate, an increase in market interest rates if we do not have the strength to operate a controlled correction and fiscal consolidation using the tools we have at our disposal. And there are enough [tools] at our disposal," Isarescu said.

Speaking about the ongoing debate over the level of taxation, the BNR governor said that Romanians do not want a minimalist state, and he argued that for the current level of budget revenues, the state cannot provide public services at the required levels. He said that Romania cannot provide EU-type public and social services with the lowest tax rates in Europe. 

(Photo: George Calin/ Inquam Photos)

iulian@romania-insider.com