Republic of Moldova Public Finance Review : Towards More Efficient and More Sustainable Public Finances
This report argues that Moldova’s government could reduce fiscal risks to the economy by reducing the size of spending and improving its efficiency, making the tax system simpler, with fewer tax preferences, and strengthening the tax administration...
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| Language: | English en_US |
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Washington, DC
2017
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| Online Access: | http://documents.worldbank.org/curated/en/862181500274376993/Moldova-Public-finance-review-towards-more-efficient-and-more-sustainable-public-finances http://hdl.handle.net/10986/28330 |
| Summary: | This report argues that Moldova’s
government could reduce fiscal risks to the economy by
reducing the size of spending and improving its efficiency,
making the tax system simpler, with fewer tax preferences,
and strengthening the tax administration. After years of
robust performance, in 2015–16 Moldova’s public finances
came under pressure. Fraud in the banking sector and
economic recession have pushed up public debt, reducing
fiscal space and undermining investor confidence. Grants
from donors have fallen. Less revenue has forced the
government into an ad hoc spending adjustment, with an
abrupt reversal of the recent welcome trend of higher
capital spending. The government could address these
challenges along three dimensions: fiscal stance and
sustainability, spending, and revenues. First and foremost,
nonetheless, it should concentrate on gradually reducing
current spending. As experience in other countries has
demonstrated, fiscal consolidation based on spending cuts in
a context and circumstances similar to these in Moldova, may
yield better results than one based on tax increases. The
first dimension to consider is safeguarding fiscal
sustainability. The second dimension is reducing the size
and improving the efficiency of spending. The third
dimension is making the tax system simpler. Moldova collects
more revenues than peer countries but also depends on
external grants. As in most other Eastern European
countries, the revenue structure is skewed toward taxes on
goods and services (indirect taxes). Moldova’s tax revenues
have been declining as tax exemptions proliferated. While
the tax administration has improved, continuing deficiencies
in capacity and governance cannot deal with the problem of
high informality. Moldova could make the tax system simpler,
more efficient, and revenue-enhancing by reducing tax
preferences, increasing the nontaxable amount of the
personal income tax, improving property valuation,
increasing excises, improving tax administration, reducing
compliance costs, and simplifying the tax structure. Most
importantly, the government needs to deal with tax
expenditures, since tax initiatives over the last 15 years
resulted in the adoption of a wide range of reduced tax
rates and tax exemptions, with significant costs for the
budget. In the short term, additional revenues might
supplement expenditure cuts to safeguard fiscal
sustainability. In the longer term, though, Moldova would
need to find substitutes for external grants, so that they
gradually become a relatively smaller source of revenues. |
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