The percentage of GDP allocated in the budget for interest payments has increased from approximately 1% of GDP in the period of 2018-2019 to more than 2% of GDP in the period of 2023-2024, Jonuts Dumitru, chief economist of Raiffeisen Bank, showed during a seminar at the headquarters of the BNR.

Interest on government debt eats up almost 9% of what we get from fees and taxes, compared to a much lower average in Europe. And from this we clearly conclude: we have a very small collection base to refer to. These low incomes are a big structural problem that we will not be able to avoid in the coming years, pointed out Ionuc Dumitru.

Fiscal consolidation is also necessary for a very pragmatic reason, namely the concrete possibility of financing the ever-increasing public debt, most of which is held by non-residents.

In Poland or Hungary, most of it belongs to residents, and the public debt owned by residents is financed by local banks

Romanian banks have the highest risk, about 23-24% of total assets, compared to other European countries. In addition, around 55% of Romania’s public debt is denominated in foreign currency, with only two European countries having a higher proportion of foreign currency debt, namely Bulgaria and Croatia. But they have no currency risk, as Bulgaria, as we know, has a Currency Board, and Croatia adopted the euro on January 1, Raiffeisen Bank’s chief economist also said.

The interest rate that the Romanian government pays on the debt is relatively high. We have a rather weak rating, the 2nd lowest in Europe. Only Greece has a lower rating than us. Meanwhile, Hungary has fallen to the level of our rating, the first step of the investment level. I would say that upgrading the country’s rating is absolutely necessary to reduce this pressure of an increasingly high interest rate, explained Dumitru.

Romania entered the pandemic with the largest budget deficit in Europe, and we emerged from the pandemic with the largest budget deficit in Europe. In practice, the growth of the budget deficit during the pandemic was not a conjunctural one, but rather stems from its structural nature.

Even though we had very high economic growth, public debt did not decrease as a percentage of GDP, as would be normal and as actually happened in many European countries where public debt decreased as a percentage of GDP (they actually registered budget consolidation ), – concluded the former head of the Fiscal Council.

When does public debt become dangerous?

For years, economists have debated whether high national debt is a curse or a blessing. In itself, national debt is neither a curse nor a blessing. It is an indicator that tells you whether good or bad things may follow. Government and business (since debt has both public and private components) can choose whether to use this tool well or not; it depends on how economically “savvy” they are.

Myths that could help clarify the understanding of public debt

The term “public debt” is an ambiguous expression that sometimes leads to a wrong approach. Since every debtor has a creditor, we can talk about the country’s debt as a national credit that it receives. So instead of saying that Romania’s public debt is 142.9 billion euros (it was at the end of last year), we can say that Romania has a national debt of 142.9 billion euros to repay.

The most important is the level of public debt. Debt is always bad

no It’s not the level of debt that matters, but how you use credit.

Public debt can be a burden not because of its size, but because of the costs that the population bears through public policy. When you take out a loan and spend money on a bigger TV or a more expensive phone, your debt becomes a burden. If you take out a loan to buy a car or a device that you can use to make money, the debt can pay itself off.

The country’s debt is not related to national income

In the case of a family, the NBR has established a debt level above which the bank will no longer lend to you. In the case of the state, the Maastricht Agreement tells us that public debt should not exceed 60% of GDP.

The burden of public debt depends on national income; the higher the national income, the smaller the burden of this debt. Obviously, a debt of 10,000 lei per year is much more difficult for someone who earns 50,000 lei per year than someone who earns 300,000 lei per year. Likewise, it is much easier for a state to carry an annual debt of 6 billion euros when its revenues are 150 billion than when they are 75 or 100 billion.

Therefore, the burden of the national debt is best expressed as a percentage of the annual interest on the debt to the annual national income.

Inflation helps pay off debt, so let’s make it inflationary!

Although inflation increases nominal income without increasing real income, it helps governments because it eases the burden of public debt. However, since the economic and social harms of inflation far outweigh its benefits, it would be better to focus on increasing real national income than to settle for the illusory satisfaction of reducing the debt burden at the expense of monetary income inflation.

The debt is harmless if it is issued in one’s own currency.

Yes, if your currency is a reserve currency, then in Romania it is not. In our country (although the share of debt in foreign currency is higher than in lei), demographic problems can exacerbate the debt problem. as? Thus, an aging and shrinking population will lead to lower incomes and increased social and health care costs.