​2023 was a very difficult economic year for Romania. Inflation has fallen in line with developments in Europe, albeit at a slower pace. But the economy slowed in the second half of the year, and real GDP growth is likely to be around 2%, below the forecast, writes academic Daniel Dayanu in the 14th issue of Euromonitor, published by BNR.

Romania’s most pressing problem (along with external deficits and institutional weaknesses) is the budget deficit, which in 2023 is likely to remain at around 6% of GDP – the same as in 2022 (when the ESA deficit, the European methodology, was 6.23 per cent ).

Romania is subject to an excessive deficit procedure and probably has the largest structural deficit in the EU. The government’s 2023 target of 4.4 percent of GDP was unrealistic, and the Fiscal Council assessed it as such in its opinion on the public budget, which was built with hibe (higher revenues and lower costs).

Fiscal-budgetary measures must be taken so that in a few years the budget deficit is aimed at 3 percent of GDP.

The public discussion on correcting the deficit – the revenue or expenditure part revealed a lot of demagoguery, detachment from reality, misunderstanding of inevitable compromises in economic policy.

Painless reduction of defects cannot be achieved without a fair 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 that those who bear the greatest cost should be the most helpless. For any serious analysis, it is clear that the adjustment must be made mainly on the income side.

In an EU state with ultra-low tax revenues, including contributions (about 27% of GDP, when the EU average is over 40% of GDP), with massive and chronic underfunding of education and health care, with tax evasion and almost institutionalized levies and taxes, with a gap in VAT collection of more than 36% compared to the EU average of about 5%, this is a common sense, logical alternative.

Romania needs to spend more efficiently, and therefore spending reviews are needed (as is done in the OECD, an organization Romania wants to join) – by 2023, such documents should be developed for health care and education. But it is not possible to cut public expenditures with a cleaver in a country where they are 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.

Starting at a critical threshold, a sharp cut in government spending can cause overall damage to the economy

Starting at a critical threshold, a sharp cut in public spending can cause a large jump in inefficiency and overall damage to the economy. The budget deficit predicted by the Fiscal Council for 2024, taking into account the fact that it cannot take into account hypothetical revenues in the estimate (which will result from the digitization and improvement of the collection) and the impact of the new pension law, will significantly exceed 6% of GDP.

From 2025, additional measures will be needed to bring the budget deficit to 3 percent of GDP in the coming years.

The new pension law is necessary to eliminate the blatant injustice in the social assistance system, to take into account the aging of the population, and to promote its stability. But the impact in the near to medium term is serious, it increases the deficit significantly because it is a fixed expenditure.

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.

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

In any case, 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.

It also needs to be collected much better; ANAF needs a revolution in this regard

It also needs to be collected much better; ANAF needs a revolution in this sense, which involves more than just digitalization. For this, it is also necessary to resolutely fight tax evasion and optimize taxation.

The tax reform also involves reforms of the labor market, which is very deformed. Among the working population, only 5.5 million have employment contracts.

Many people work in the informal sector of the economy, more than 1.5 million receive the minimum wage, many citizens do not pay contributions to the insurance system.

Romania has the lowest labor market participation rate in the EU at 68 percent compared to over 78 percent in the EU. There is a lot to fix in the labor market, as the reports of the World Bank and the IMF and the EC show. And the PNRR has provisions for this, as it does for tax reform. The above context regarding Romania’s economy emphasizes, even implicitly, the enormous importance of European funds (PNRR and CFM) – for the necessary reforms and financing of important projects, digitization, energy transition, infrastructure development, competitiveness.

European money can soften the inevitable contractionary effect of the correction of the budget deficit. This adjustment is also necessary to reduce the current account deficit, which is likely to be around 7 percent of GDP in 2023 (down from nearly 9 percent in 2022). It should be noted that Romania’s banking system has withstood the shock well and that the Development Bank will finally be put into operation.