The art of self-distruction!

One year and a half ago the Romanian Government announced the first set of anti-crisis measures. I’ve considered them wrong and I estimated their effects will be opposite and will deepen the crisis, respectively I wrote several articles about it at that time.

One year and a half ago the Romanian Government announced the first set of anti-crisis measures. I’ve considered them wrong and I estimated their effects will be opposite and will deepen the crisis, respectively I wrote several articles about it at that time.

Later on, silence … more than a year no other “remedy” measures were applied, although it was obvious that we were going in the wrong direction. Finally, with July 1, 2010, the second “anti-crisis” program will come into practice. As a university teacher, who taught economic disciplines for 13 years, as entrepreneur and manager, and not least as a business consultant I have studied this program carefully and I can say with conviction that it is much worse than the first and will have devastating effects for the economy. It is exactly the opposite of what Romania would currently need to overcome the current economic crisis.

Since the effects of the new measures will be felt only in the coming months I’ll make a brief evaluation of the first set of anti-crisis measure’s effects, a boomerang that strongly hit the still very fragile economic environment of Romania.

At the beginning of 2009 the Romanian government cancelled a series of tax incentives intended to diminish the effects of the just installed economic crisis, which were just published a month before by the previous government. Even more, they increased the social security contributions, implicitly increasing labor cost (in a moment when maintenance of the jobs in the private sector should have been crucial). To be noted also the fact that Romania already had at that time the highest taxation of the wages throughout Eastern Europe.

In May 2009, when the effects of the crisis were already strongly felt by the private sector, the Government introduced new taxes and reduced a number of deductibilities, giving a new death blow to this environment. Thus the flat tax was introduced, the VAT deductibility on purchase of cars and the deductibility of the expenses related to the use of automobiles were eliminated, and respectively the non recognition of the reserves resulted from revaluation.

The effects of these measures? Devastating!

• Over 195,751 firms closed only in 2009, most of them SME’s
• Nearly 700,000 jobless, of which about 500,000 have lost their jobs in 2009!
• The strongest fall of the car market among all European countries, up to 78% for some brands of automobiles, returning to 2003/2004 market values

In addition, the strong contraction of the private environment was not correlated with a decrease of the public spending, which, incredibly noted even a slight increase.

It was so obvious that a strong budgetary imbalance will follow, namely that collected revenues will drop dramatically, which obviously will result in incapacity of sustaining financially the same public cost.

Solutions? Even for a novice in economy it was obvious that an urgent intervention was required, on two directions: rapid stimulation of private environment to generate additional revenue to the state budget and reduction of public costs by immediately restructuring and even abolition of many unnecessary institutions (which would implicitly help the private environment, currently suffocated by bureaucracy).

What actually happened? Exactly the opposite! Private sector received new strokes, being completely thrown to the ground, while public environment well maintained it’s cost, till now, when severe measures against him were imposed, and unfortunately not even this time the right ones.

Private sector thus receives another stroke in early 2010 by abolishment of the micro companies. This measure, coupled with maintenance of the flat tax rate and the general effects of the crisis, lead to the closure of other 62,000 companies from the beginning of this year. Thus, in a country where when the crisis began about 1940 large companies and 800 000 SME’s were registered, we have witnessed after a year and a half to the disappearance of about 250 000 companies, almost all of the SME.

Moreover, unemployment has continued to increase, for 2010 being estimated that 300,000 more people will lose their jobs.

What measures are taken in the current context?

• For the private sector: tax increases and elimination of deductibilities, the most harmful measures, with direct impact on the dramatic decline of the consumption tax, being the increase of VAT to 24%, taxation of meal tickets (subsistence source for approximately 90% of those receiving them) by 16%, and assimilation of the revenues from liberal professions to the salary revenues, leading to a over-taxation. Moreover, in the middle of a liquidity crisis we introduce a tax on the banking deposits, leading to migration of capital from financial investment firms from the Romanian market into other markets.

The effects of these measures? Certainly not the increase of the budget revenues, but rather their decrease and a cascade of bankruptcies among the private companies, leading to a new wave of layoffs. Not to mention the increasing lack of trust of the foreign investors in the Romanian economic environment, in a context where the rules change dramatically during the fiscal year, thus creating total uncertainty for any potential investor.

• For the public environment: the revenues of all the public employees decreased by 25%, a brutal measure, which doesn’t leads to any reform in the public system but “punishes” the entire public sector for the incompetence of the Govern, respectively a measure that will lead to a dramatic decrease of the consumption and thereby leading to a decrease of the tax collection (not to mention the indirect effects on the private environment).

Nothing related to restructuring of unnecessary institutions, nothing about simplifying bureaucracy, on the contrary, new institutions have been just set up, such as the Registry of the Intracomunitary Operators, which will generate new costs in the public system and will complicate life of Romanian companies doing business in the EU even more. Nothing related to “optimizing” costs of public tenders, namely giving up unnecessary expenditure in the public system. Instead, procedures related to the Trade Register are becoming even more difficult, putting the business people’s patience under a great pressure.

What comes next? A disaster! Romania still resisted because of deepening public indebtedness, but this is also reducing our chance to recover for many years to come. And unfortunately none of the measures taken will have any positive effect, on the contrary, at the latest in the autumn we will realize that we counter major slippages, that we will lead us to take new measures, most likely, if the trend is maintained, consisting in new tax increases!

Personally I’m astounded by so much incompetence and lack of vision. And I start to think we have a real self-destructive vocation, or eventually we chose to test the endurance limits of a nation in terms of incompetence. The result, unfortunately, will be only one: VAE victis!