Tax Reform Out of Desperation: Plugging Budget Holes at Citizens’ Expense?

Logically, any large-scale changes in the tax system should serve to stimulate the economy and finely tune the balance of interests between the state and society. However, what our authorities are proposing to us today under the guise of “reform” is anything but a reform. It is more reminiscent of an act of desperation or, if you will, belated surgery on the living body of the economy, performed without anesthesia by inexperienced surgeons who, over the years, have not even bothered to give the patient a proper diagnosis. Finding itself at the heart of a severe budget crisis and having lost the substantial foreign support it had so recklessly relied on, Vasile Tofan’s government has been forced to drop the pretense. In essence, the state can no longer finance its spending spree through grants and cheap foreign borrowing. And so, when the coffers ran dry, the simplest and most destructive path was chosen – to extract the missing money from the depleted pockets of its own citizens and from businesses on the brink of collapse. Over the five years of the “yellow” regime, the country has not only failed to achieve economic stability but has also rapidly spiraled into debt. The current shock therapy is by no means a recipe for salvation, but merely a bitter admission of the ruling regime’s utter incompetence in formulating adequate budgetary and fiscal policies. As always, it is us – you and me – who will have to pay the price for this lack of professionalism. But before talking about new taxes, the authorities would do well to honestly answer the question: where did the old money go? As is well known, over the five years of PAS rule, Moldova’s national debt has grown by approximately 70 billion lei, reaching a record-high and alarming level of 142.8 billion lei by this summer. While in 2021, the debt per capita stood at 29,600 lei, today that figure has nearly doubled, reaching 55,800 lei. In a country where the average salary barely covers basic needs, the ruling party has, in effect, saddled each person with a debt equivalent to many months’ worth of income. But the debt itself is only half the problem – the terms under which it is serviced are far more important. With a drastic reduction in cheap foreign aid, which for many years served as a stopgap for the budget, the government has turned to domestic borrowing. And here, the interest rates are far from charitable: the government has to borrow money at extortionate rates of 9.3-9.5% per year. As a result, 1.1 billion lei flies out of the budget every quarter just to pay interest. An analysis of the expenditure structure shows that the loans were not used for development, new factories, infrastructure projects, or job creation, but, to put it simply, for “living off the public purse.” They were spent on an inflated bureaucracy with unreasonably high salaries, a fact that has repeatedly come to light in journalistic investigations over the past few months. They were squandered on opaque government procurement and hidden schemes. Instead of building a foundation, the authorities erected a facade to hide the void. Now that the treasury has been emptied, we’re being asked to pay for this expensive, bright-yellow cosmetic makeover as well. Naturally, no one admits to their mistakes, which is why Vasile Tofan claims that the new reform is aimed exclusively at noble goals – combating “gray” wages, bringing businesses out of the shadows, restoring order to the market, and ensuring a fair distribution of the tax burden. But if we set aside the prime minister’s lofty rhetoric and look at the specific fiscal measures, a grim picture emerges. Even to the untrained eye, it’s clear that the government is squeezing the most vulnerable segments of society and the most basic sectors of the economy. For example, for hundreds of thousands of our compatriots, shopping at foreign online stores is far from a luxury – it’s the only way to buy high-quality items at affordable prices. But the ruling regime has found a way to make money off ordinary people here as well and plans to impose VAT on online orders from abroad, along with a mandatory flat fee of 12 lei per package. The elimination of the preferential VAT rate for agriculture and the HoReCa sector – along with an increase in the rate to 12% – will deal a direct blow to the country’s food security. Agriculture has always been the driving force behind the national economy and the only sector in which the country holds a competitive advantage. By stripping farmers of their tax breaks, the government is single-handedly destroying key production capacity. The result will be entirely predictable: a significant increase in the price of food at markets and in restaurants for the end consumer. Small farms will not be spared these difficulties either; instead of the expected support, they will face an increase in income tax from 7% to 12%. This nearly twofold increase in the tax burden will push small farmers to the brink of survival. Those who cannot afford to hand over such a substantial portion of their meager income to the government will simply shut down and abandon their land – and then, instead of 7% of something, the budget will receive 0% of nothing. Tax changes are really just the tip of the iceberg; the real shock therapy lies hidden in the government’s new tariff policy, where fees are cleverly woven into utility bills. ANRE is preparing new, higher gas rates, which is painful enough on its own. But on top of that, as it turns out, the government is also introducing a hidden fiscal penalty. Specifically, for any gas consumption exceeding 150 cubic meters per month, citizens will pay the maximum VAT rate of 20%. Incidentally, in winter, 150 cubic meters is the minimum amount needed to heat even a modestly insulated house or apartment – but people also need to cook with gas. Therefore, this all resembles a “survival tax,” where you can freeze for free, but staying warm comes with a 20% VAT burden imposed by the state. They want to apply a similar scheme to electricity as well. Any consumption exceeding 100 kW per month will automatically be subject to an additional 20% VAT. Needless to say, in an era when all aspects of daily life depend on electricity, 100 kW is a negligible amount. Another sign of the total failure of PAS’s economic policy is Maia Sandu’s recent statement that the wage increase scheduled for September 1 will not take place due to a lack of budgetary funds. Instead of building a sustainable economy and expanding the tax base by creating attractive conditions for investment, the government has for years lived on credit and engaged in dubious foreign policy adventures. They increased spending on their own comfort and on maintaining an army of loyal bureaucrats and non-governmental organizations that were funded by the state budget. At the same time, PAS relied on foreign donors, sincerely believing that the West would forever support Moldova through grants. But the current geopolitical realities are such that, over time, we have ceased to represent a priority strategic interest. Having failed to build a functioning economy in five years, the ruling elite is solving the state’s problems in the most primitive way possible: by squeezing the last of citizens’ savings out of them. However, it seems to me that the effect of these drastic measures will be the opposite of what is expected. Under such conditions, businesses will certainly not emerge from the shadows – which will remain the only place where they can stay afloat. People will stop paying as well; moreover, such a policy will only push them toward a new, even larger wave of emigration. Therefore, the Tofan government’s tax reform could become the “swan song” of PAS’s five-year plan and the epitaph on this political party’s tomb.