A budget deficit causes inflation because it creates demand in the economy. The request concerns borrowed money, said Adrian Codirlashu, vice president of CFA Romania.

“What else causes the budget deficit? Higher fees. Higher taxes lead to inflation. If the tax is imposed on the company, it is reflected in the price. If it is imposed directly on the product, on the product, such as VAT or excise duty, it is also included in the price,” he said during a conference organized by Oxygen Events.

According to him, a tax that would have less impact on inflation and could reduce it: an increase in the salary tax, that is, labor taxation.

“By keeping less money, we will automatically consume less, reduce demand, and this will have a disinflationary effect,” Codirlasu explained.

95% of government spending is on consumption

Christian Paun, ASE teacher, mentions that many say: Romania is not a developing country and needs a deficit.

“Romania has accumulated a budget deficit, starting from 1995 until now, up to 200 billion euros (in total). This would mean 20,000 kilometers of highway. How many kilometers have we covered over the years? About 1,000,” says Paun.

If we look at the structure of government spending, he says, we see that 95% is consumption spending, and 5% is investment.

“This weight is also kept in deficit. You can’t say you have a deficit just for the sake of investment. You pay all your expenses,” said the teacher.

In his opinion, inflation in Romania is fueled quite strongly by the lack of correlation between fiscal and monetary policies.

“Monetary policy responded correctly to inflation and tight liquidity by making Central Bank liquidity more expensive, which forced banks to seek capital in the deposit sector. On the other hand, the Government should have come and said: I am limiting the deficit. Limiting the deficit would normally occur naturally and through a monetary policy of limiting credit expansion,” Christian Peun explained.

The rise in credit, he says, should have prompted the government to say: I can’t run an excessive deficit with these elevated interest rates.

“The government ignored the signal that came from monetary policy and continued these excessive deficits that we see ahead. When there is a deficit, the tax is no longer enough. Then the Government on the bedside table offers people purchasing power, which it does not have, it receives it not from taxation, but from the future from credit,” – Professor ASE also noted.

According to him, as long as the deficit is excessive, amounting to tens of billions of euros, the problem of inflation will remain.

“If we rely only on the monetary leg and not the fiscal leg, we may end up with dangerous monetary adjustments that will eventually push us into even greater instability and monetary policy will become pro-cyclical,” the economist warns.