The Government of Moldova faced serious problems in 2023 in terms of budget revenues, especially VAT, and 5 factors led to a decrease in treasury revenues by 2.7 billion lei - Veaceslav Ionita.
This opinion was expressed by economic policy expert at the Institute for Development and Social Initiatives (IDIS) Viitorul, noting that these problems have become so obvious that in October the government had to ask parliament to amend the state budget in order to redistribute VAT collections and correct the situation by the end of the year. The expert noted that in 2023 Moldova had many problems, including in terms of budget revenues. Veaceslav Ionita hopes that his analysis will help the authorities make the right decisions that will determine the development of events in 2024 and in subsequent years. The analyst drew attention to the fact that budget revenues from VAT grew steadily until the first quarter of 2023, when they reached 30 billion lei in annual terms. This was followed by six months of stagnation and even a slight decline in revenues, a rare occurrence in fiscal history, with the exception of 2020 during the COVID-19 pandemic. “To understand the scale and significance of the phenomenon, it must be said that in previous years, VAT revenues to the state budget amounted to 15.1% of the total income of the population, and this year they decreased to 13.8%. This decrease of 1.3 percentage points means that the budget will lose 2.7 billion lei in VAT revenue this year,” noted Veaceslav Ionita. The expert said that to counter this phenomenon, it is important to understand the reasons for negative trends. According to him, it is necessary to analyze 5 potential reasons that could affect budget revenues, and thus identify solutions that will help stop the negative phenomenon. Veaceslav Ionita named the first reason as a reduction or slowdown in spending of the population. The expert says this is the most obvious reason. If the population reduces spending, budget revenues from VAT also decrease. This phenomenon became evident in 2020 amid the COVID-19 pandemic. Net savings of the population in banks over the 9 months of this year increased by 3.3 billion lei. Another 3.5 billion lei are savings kept at home. In total, about 6.8 billion lei were saved and not spent on consumption. “This trend means that the loss of budget revenue from VAT will amount to about 1 billion lei. After 2 years of crisis, it is now necessary to promote a clear policy to stimulate consumption, without which budget revenues will be seriously affected. However, moderation of consumption and an increase in the propensity to save are not something specific to this year and have a lesser impact on the shortfall of funds in the budget. At the same time, revenues from the State Tax Service increased moderately - from 2.5 billion lei in the third quarter of 2022 to 2.9 billion lei in the third quarter of 2023. And revenues from customs decreased significantly: from 6.5 billion lei in the third quarter 2022 to 5.3 billion lei in the third quarter of 2023. Thus, moderate consumption affected budget revenues, but the reduction in customs cannot be explained by this factor,” the expert emphasized. The second factor he named was the transition to products with reduced VAT. Veaceslav Ionita explained that the energy crisis of 2021-2023 greatly affected budget revenues from VAT. Expenditures of the population and economic agents on natural gas increased from 3 billion lei in 2020 to 13 billion lei in 2022. Consequently, the population had to reduce their expenses through regular goods, where VAT is 20%, in order to pay the natural gas bill, where VAT is 8%. This transition led to a reduction in budget revenues by 900 million lei. This factor was active in 2022, but to a lesser extent in 2023. Moreover, budget revenues began to decline from the second quarter of 2023, after the heating season. “For this reason, I think it is important to note that the influence of this factor this year is insignificant and can be neglected,” the expert said. Veaceslav Ionita named the third factor as the increase in demand for goods with a zero VAT rate: we have goods with increased fiscal benefits or a zero VAT rate. The largest in volume and most common is the zero rate when purchasing real estate. The Moldovan government offers this benefit to all citizens every year, but no one ever mentions this opportunity. “In 2023, the tax exemption for the purchase of apartments will be at least 640 million lei. Essentially, this is a hidden subsidy offered by the government to all those who buy apartments or houses. Since the number of new houses put into operation this year has doubled compared to last year, the arrears to the budget caused by this increase amount to about 350 million lei,” the analyst noted. According to him, the fourth factor is the transition to the non-observable (shadow) economy. It refers to those sales of goods and services that occur without paying taxes, but for which the government does not require any payment. For example, individuals selling agricultural products in markets are exempt from VAT. During the crisis, a certain part of consumers switched from organized trade, where VAT is paid, to purchases on the market, where goods are cheaper and VAT is not paid. “I believe that this phenomenon, even if it exists, is no different from other periods and its influence is extremely insignificant,” emphasized Veaceslav Ionita. The fifth factor he named is the growth of illegal trade, which is any economic activity of importing, producing or selling goods and services without fulfilling, in whole or in part, financial obligations to the budget. According to the expert, this factor is the main one in everything related to the negative dynamics of budget revenues this year. The expert believes that it is illegal trade that should attract the most attention to solve the problem of budget revenues. He cited the illicit trade in tobacco products, especially electronic cigarettes, as the most striking example. “This is explained by the fact that there is no other large-scale product that, with such a small volume, would allow such large-scale tax fraud. For example, in a bag weighing 16 kg you can store electronic cigarettes, the cost of which is 35 thousand lei. Thus, for every kilogram of illegally sold electronic cigarettes, tax fraud amounts to 2.2 thousand lei. There is no other product in Moldova that would give rise to tax fraud with such a small volume. Even if the topic of illegal trade is on the agenda of the government and parliament, countering this would be best done by the Ministry of Finance. It must take responsibility. The Ministry of Finance is the institution that first feels the consequences of this phenomenon, and its scale directly affects budget revenues. By coordinating its actions with other regulatory and law enforcement institutions, the Ministry of Finance can develop and promote long-term viable policies that will reduce this negative phenomenon and ensure an increase in budget revenues,” emphasized Veaceslav Ionita. // 28.11.2023 — InfoMarket
