This report argues that Moldova’sgovernment could reduce fiscal risks to the economy byreducing the size of spending and improving its efficiency,making the tax system simpler, with fewer tax preferences,and strengthening the tax administration. After years ofrobust performance, in 2015–16 Moldova’s public financescame under pressure. Fraud in the banking sector andeconomic recession have pushed up public debt, reducingfiscal space and undermining investor confidence. Grantsfrom donors have fallen. Less revenue has forced thegovernment into an ad hoc spending adjustment, with anabrupt reversal of the recent welcome trend of highercapital spending. The government could address thesechallenges along three dimensions: fiscal stance andsustainability, spending, and revenues. First and foremost,nonetheless, it should concentrate on gradually reducingcurrent spending. As experience in other countries hasdemonstrated, fiscal consolidation based on spending cuts ina context and circumstances similar to these in Moldova, mayyield better results than one based on tax increases. Thefirst dimension to consider is safeguarding fiscalsustainability. The second dimension is reducing the sizeand improving the efficiency of spending. The thirddimension is making the tax system simpler. Moldova collectsmore revenues than peer countries but also depends onexternal grants. As in most other Eastern Europeancountries, the revenue structure is skewed toward taxes ongoods and services (indirect taxes). Moldova’s tax revenueshave been declining as tax exemptions proliferated. Whilethe tax administration has improved, continuing deficienciesin capacity and governance cannot deal with the problem ofhigh informality. Moldova could make the tax system simpler,more efficient, and revenue-enhancing by reducing taxpreferences, increasing the nontaxable amount of thepersonal income tax, improving property valuation,increasing excises, improving tax administration, reducingcompliance costs, and simplifying the tax structure. Mostimportantly, the government needs to deal with taxexpenditures, since tax initiatives over the last 15 yearsresulted in the adoption of a wide range of reduced taxrates and tax exemptions, with significant costs for thebudget. In the short term, additional revenues mightsupplement expenditure cuts to safeguard fiscalsustainability. In the longer term, though, Moldova wouldneed to find substitutes for external grants, so that theygradually become a relatively smaller source of revenues.
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