​This year will be difficult from an economic point of view, and the next year will be electoral, with local, parliamentary and presidential elections. The economy will slow sharply in 2023, and the Treasury Department is sitting with the elephant in the room looking for new ways to get around it.

From the point of view of financial stability, the fiscal policy in Romania, unfortunately, instead of stabilizing the economic cycle, as is its role, rather increased its fluctuations, explained Ionuc Dumitru, former head of the Fiscal Council, now chief economist of a commercial bank, at the debate held in the central office of the National Bank.

“Risks come more from the sphere of public finances and imbalances created by a large budget deficit. We all know that in times of crisis, everyone looks at the state budget. When we have problems, everyone looks at the budget and asks for money. But the room for maneuver can be very limited, and sometimes we don’t even know how to use it,” said Dumitru.

Iserescu points to the “elephant” of last summer. Until July, he was just a “baby elephant”

By the way, starting from July 2022, there is not a single protocol of the discussions of the board of the BNR under the chairmanship of Iserescu, where there is no phrase about “big risks” caused by fiscal policy. “However, major uncertainties and risks remain related to the conduct of fiscal policy,” Council members agreed, citing, on the one hand, the budget deficit target set for 2023 to continue fiscal consolidation in the context of an excessive deficit procedure and a significant increase cost of financing, and on the other hand, to a number of support measures that are expected to be applied or extended this year, in an economic and social situation that remains difficult domestically and globally, with potential adverse consequences for budgetary parameters” — this is the phrase in question, obsessively repeated in the last 6 minutes of discussions.

By July, NBR reports speak of “growing” fiscal policy risks.

We have a very large budget deficit, whether we like it or not. The EC estimates the deficit at 6.5%, the second highest figure at the European level

“It should be noted that compared to 2020, when the deficit was very high everywhere, everyone is blaming the pandemic for the large deficit. Now the pandemic has passed, and large deficits remain. This means that the nature of our deficits is not necessarily opportunistic, but structural,” says Ionuts Dumitru.

You remember, he adds, that there were also big discussions in Romania about the size of the state aid package during the pandemic. It was smaller, less generous or, in any case, required less budgetary resources than anywhere else. And because we have nowhere to allocate more money!”, the economist believes.

Romania is like a family that has an income of 100 lei but borrows another 22-23 lei to be able to spend 123 lei every month

“Romania entered the pandemic with a large deficit, and our fiscal space did not actually exist! We can see that all European countries have reduced their deficits after that, we are left with a deficit of over 6%, which is a lot. With 27% of GDP revenues from fees and taxes, we have a deficit of more than 6%. It is as if a citizen, a family has 100 lei of income and spends 122-123 lei every month. To put it very simply, the difference in 22-23 comes from borrowings. So the national debt has grown quite a lot. It jumped up a lot in 2020, when we also had a big reduction in GDP,” says Ionuc Dumitru.

Our state debt level is no longer low and not at the end of the European rating. Our public debt is still lower than the EU average, but it is no longer among the lowest, the economist points out.

This is not the first time that we differ with what is happening in Europe

This is not the first time that we differ with what is happening in Europe. If we look back in history, we will see that we had another similar period in the period of 2003-2006, when the deficit was decreasing in Europe, and it was increasing in ours.

We had a period of adaptation after 2010, when our deficit decreased very quickly, much faster than at the European level, – explains Dumitru

An increase in the budget deficit in 2007-2008 added fuel to the fire. “Basically, we had a party in both the private sector and the public sector, if you can call it that, in non-academic terms. At that time, the nature of the external imbalance was mainly the income of the private sector. Starting from 2010 and until today, we see that the external imbalance goes almost hand in hand with the budget deficit,” says Ionuts Dumitru.

We have an almost entirely external fiscal imbalance

So, we have an external deficit, an external imbalance that is almost entirely of a fiscal nature. The solution to the current problem lies in solving the budget problem, which is very serious, the economist also states.

From the point of view of financial stability, the fiscal policy in Romania, unfortunately, instead of stabilizing the economic cycle, as its role, to stabilize the economic cycle, rather strengthened them.

The most pro-cyclical years are 2008 and 2010. 2008 is in the growth phase of the economic cycle, and 2010 is in the recession phase. why Because in 2008, when the economy was growing at almost 10% in real terms, huge growth, we had a budget deficit of 5.4% of GDP. This is an example of “not so!”

The excessive deficit must be eliminated by 2024. Only 2024 is an election year…

Any economics text we pick up will tell us that this can never be done. However, in 2010, when we entered the recession, and because in 2009 we postponed the decision because it was an election year, in 2010 we resorted to a pay cut, accordingly, a tax increase, because we just didn’t have the money!

The fact that we were pro-cyclical before the recession, before the crisis, forced us to be pro-cyclical also in the phase of decline, because the markets no longer finance you, according to the former head of the Fiscal Council.

Also, adds Dumitru, we have a large share of public debt in foreign currency. If we look at the numbers, we will see that most European countries have almost full financing in national currency. There are some exceptions: Romania, Bulgaria and Croatia. But let’s not forget that Bulgaria has a currency board and therefore has no currency risk, and Croatia has just entered the Eurozone so there is no currency risk either. In our country, the prospect of joining the Eurozone is in the dark, Dumitru said.

When you have large imbalances, you cannot have exchange rate stability indefinitely.

One conclusion: reducing the budget deficit is a MUST! There is no alternative to this. We must reduce the budget deficit despite the election cycle.

In 2024, it will be a big test to see whether we can meet the deficit target again or not. And this largely depends on the perception of the markets and the costs that each of us ultimately bears.