Isarescu: A tax hike contributes to higher inflation

Using tax hike as a weapon to fight recession and narrow the economic imbalances, comes at high inflationary costs, said the governor of NBR, Mugur Isarescu, adding that an increase in VAT could trigger an “inflationary shock”.
Addressing the correction of external imbalances, NBR governors said this could be achieved only by currency exchange rates, credit or by tax hike. All three of them exert additional pressure on inflation rates.

“Narrowing economic imbalances comes at inflationary costs, if the correction is made via currency exchange rates. Another solution would be the reduction in lending or tax hike, which both nourish an increase in inflation,” said Isarescu.

He warned on the likelihood of an “inflationary shock” in the event of a VAT hike. Raising other taxes could have “milder effects, but the measures will reflect in economic growth and inflation”.

Isarescu added correction of economic imbalances could not be carried in default of a slowdown of economic growth.

“Under no circumstances could one attempt to narrow the external imbalances and keep economic growth. I can see that Romanians don’t seem to grasp these facts”, the governor of central bank continued.

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