The public debate on the correction of the deficit has shown a lot of ideologies, a disconnection from reality, a lack of understanding of the inevitable trade-offs in economic policy, writes Daniel Dayanu in a report accompanying the Fiscal Council’s opinion on the budget. “Deficit reduction cannot be achieved painlessly without an equitable distribution of corrective efforts. If everyone wants to be exempt from participating in this effort, who should bear the burden? And it is not normal for the most helpless to bear the greatest cost,” says the academician.

What else does Diane say:

• It is not possible to cut public spending with a cleaver in a country where it is at the lowest level in the Union, where citizens are deprived of public goods and services in the required quantity. And EU funds cannot replace what the state budget should do. Cutting public spending indiscriminately, beyond a critical threshold, can cause very great damage, a significant jump in inefficiency.

• The horizon of correcting the budget deficit for 2024-2027 is complicated by the new pension law. This pension law is necessary to eliminate the glaring injustice in the social assistance system, to take into account the aging of the population and to promote the stability of the pension system. But the impact in the near to medium term is serious, it increases the deficit significantly, being a fixed cost. Although the pension law is necessary, it creates a fiscal risk for budget consolidation.

• It would be good if the application of this law was extended for several years. But delay is no longer possible, given the government’s decision to fully apply from September 1, 2024. This provides for a clear allocation of resources in the state budget for 2024.

• It is an illusion to believe that correction of the budget deficit can be achieved through an inflation tax; this tax may help slightly, but not decisively. This could only happen if there was another big shock on the supply side, which would create a new inflation basket and which would not be accompanied by indexation of salaries and compensatory pensions.

• There is a need for continued tax reform that corrects the deeply unfair tax regime (through concessions and loopholes) that also results from the capture of tax policy by interest groups.

We in Romania have escaped from reality, academician Dayanu said at a recent conference. We did not understand that for years we lived beyond our means, which is evident from the external deficit, not only from the internal one. This denial of reality is also accompanied by widespread myths: that there is no need for high revenues, that we can organize consolidation only by cutting costs, Dayanu also said.

Other statements by Daniel Dayanu

• When I hear something like this from economists (that we can only consolidate by cutting costs), I would ask them: what planet do you live on, people? Have you picked up a pencil to do some serious analysis?

• Giving up the elevator… maybe it’s good for the political image. But this does not solve budget problems!

• A country that chronically underfunds health care or education…we lack the manpower and equipment to fight drugs. We need to spend more on defense. From where to introduce so many additional costs, when tax revenues are 27% of GDP?

• In Romania, we have an informal economy and non-banking systems where money circulates in millions of lei. No taxes are paid – those working in the informal sector do not pay taxes. Going back to this denial of reality, it’s amazing to me. And it will be very difficult, although some do not want to put up with the fact that tax revenues need to be increased. And a simple idea occurs to him: let’s increase the collection!

• Also a lot of hypocrisy. Those who enjoy the tax breaks would like them forever if possible.

• Romania has an attractive economy, but look at the bad times we live in. Financial markets are very nervous. Even energy prices may jump again if the situation does not calm down.

• This correction is not without pain. Everyone wants to stay out of this patching attempt. you can’t Businesses want things to stay the same, people also don’t want to pay higher or higher taxes. But who to carry then?

• You cannot withdraw cash. How to withdraw cash at the market, for example, when you go to buy apples? I go to the market, talk to people. The problem is not the liquidation of cash, but the struggle to ensure that large transactions go through banks. When you see millions of lei in your bag… these are thieves, not transactions.

Consolidation is a difficult process because we have a large structural deficit, but there is no other way. The government formed after the election will have to take measures to correct the deficit, which will mean several percent of GDP, even if the results are not immediately visible.

Measures to offset the impact of the new pension law and budget consolidation are generally expected to be passed in 2025, especially as the 2024 political election rounds are underway. recommendations provided by the EC, BM and IMF indicating the steps to be taken. 2025 may be a turning point in budget consolidation.

Consolidation is imperative because, while the national debt is not (yet) huge, it could become more burdensome to service, and there is also currency risk. Budget consolidation will significantly reduce the current account deficit.

If the corrective measures are credible, if they have effects that manifest themselves over time, and if the absorption of European funds is intense, there is no risk of worsening sovereign risk.

It should be noted that a significant part of the current account deficit is covered by flows that do not create debt; this fact contributes to Romania’s sovereign rating. And membership in the EU helps, including through mechanisms for monitoring imbalances. Romania’s foreign exchange reserves have grown significantly thanks to European resources.

The business environment has reason to fear measures that may affect the economy. But if these measures make it possible to correct significant injustices in the tax regime, reduce tax evasion and optimize taxes, the impact on the economy is unlikely to be devastating