The acceptability of public debt is a concern in many countries. In the US, the economic backbone of the developed world, the national debt has exceeded 130% of GDP and is causing heated debate, including in Congress. In the EU, the financial crisis, the pandemic and the energy transition (with consequences exacerbated by the war in Ukraine) have caused a significant increase in public debt in many countries; these are eurozone countries (Greece, Italy, France, Belgium, Cyprus, Spain, Portugal), whose debts exceed 100% of GDP.

Many years ago, the ECB was forced to intervene with special operations to save the Eurozone.

Public debt is much lower in Central and Eastern Europe, but some countries in this region are not part of the euro zone (currency risk arises) and have large budget deficits; this also applies to Romania, where the structural budget deficit is more than 5% of GDP, possibly the highest in the Union (structural deficit is defined in simple terms as the difference between permanent revenues and expenditures of the public budget, although no component of the budget can be considered permanent forever).

Fiscal governance reform in the EU addresses public debt sustainability, and to this end, net government spending (which excludes debt service and temporary spending) is being more tightly controlled to ensure that it does not grow faster than GDP growth.

It is involved in assessing sustainability and the ratio that states that the real interest rate applied to finance the public debt should not be higher than the real growth rate of the economy.

The current general picture is determined by an increase in public debt or a very high level in many countries, as well as a strong, even aggressive tightening of monetary policy by major central banks (the Fed, the ECB, the Bank of England, the Bank of Japan), which affects monetary conditions in international markets and the cost of financing.

In many countries, there is a difficult situation with state pension systems, which represent “hidden liabilities” for state budgets. With the growth of defense costs in the conditions of the war in Ukraine and the exacerbation of geopolitical confrontation, the pressure on state budgets is increasing; in Romania, an increase of 7.5 billion lei (0.5% of GDP) was allocated to defense spending in 2023 compared to 2022.

but take into account the adverse effects of climate change, forcing governments to allocate additional resources to deal with repeated emergencies. What is happening this summer in Europe (with the highest temperatures recorded in hundreds of years) speaks volumes.

A natural question arises: why markets do not react sharply to an increase in public debt in many economies

In this regard, several assumptions can be made:

• The US, despite a national debt even higher than the level immediately after the Second World War, has the strongest economy in the world and seems to be pulling the global “train” of indebtedness;

• public debts of highly developed countries are a benchmark for debt dynamics in the world; here we can talk about the effect of hiding cases with serious vulnerabilities (for example, Romania has, for example, a large structural budget deficit, one of the highest in the EU);

• there is a global rush for safe assets (safe assets), and bonds from major advanced economies offer such assets. Gold enters the discussion, but this does not reduce the status of securities issued mainly by the US Treasury, ordinary EU bonds (although the latter are limited);

• in conditions of war and geopolitical confrontations, the attractiveness of investments in “safe havens” is increasing, and the American economy and some European economies are the preferred destinations;

• developed/wealthy economies have national assets that give them a great advantage; they also have foreign assets (investments in other countries) that represent assets.

• international financial institutions work in such a way as to protect the global financial system; in this system, the US and the G-7 (a group of 7 highly industrialized countries) play an important role, which was also seen during the financial crisis that erupted in 2008. Then the G-7 major central banks and governments cooperated to prevent the collapse of the global financial system. Even if China and other countries (from the BRICS) try to build an alternative to the international financial regime established after the Second World War, the superiority of the G-7 cannot be denied;

• the bankruptcies of some US banks this spring, as well as the forced takeover of Credit Suisse by UBS (at the behest of the federal government in Bern), show that the central government is ready to step in whenever the situation seriously deteriorates, with visible contagion effects; these interventions provide a kind of guarantee to the markets against a possible collapse in the chain.

• the financing of some industrial and environmental projects by various states (and which increase public debts) can have a significant positive impact on the progress of some economies, on the sustainability of public debts. But this consideration is unimportant, since such investments mean an increase in public debt, if they are not compensated by a decrease in other budget expenditures and an impetus to economic growth (which will slow down the dynamics of public debt as a share of GDP). EU countries that benefit from National Recovery and Resilience Plans (PNRRs) should also make the most of them from this perspective.

• it can manage the short-sightedness often inherent in markets.

It is necessary to check whether the assumptions proposed above are appropriate. However, the acceptability of public debt cannot be removed from the agenda of governments. Financial repression (when interest rates are lower than inflation) may make debt more acceptable, but is this a compelling argument?

And cancellation of public debt cannot be applied in the case of developed countries; there is no one to do it, especially since the same countries are obliged to intervene when financial systems are in trouble – there is an obvious vicious circle (who finances/rescues whom?).

Considering these data, for the stability of the public debt, it is necessary to control (reduce) some of the more significant expenses and revenues of the budget. For the most helpless countries, debt relief makes sense.

In the context outlined above, there is a well-known corollary: economies that issue reserve currencies are much more secure than developing economies that are obsessed with adequate foreign reserves. Hence the need for smaller deficits that are easier to finance.

As for Romania, its public debt has tripled since the global financial crisis, reaching just under 50% of GDP in 2002 (from around 14% in 2008), a level comparable to that of Poland and the Czech Republic (in Hungary and Croatia, public debt is more than 75% of GDP) and below the 60% of GDP benchmark agreed by the EU’s fiscal governance system.

But be careful:

• the debt may increase significantly if the structural deficit of the budget, which is likely to remain above 5% of GDP, does not decrease;

• public debt service becomes more burdensome if the deficit is not reduced and monetary policy remains tight;

• the budget deficit largely forms the deficit of the current account of the balance of payments, which will amount to about 8% of GDP this year (a decrease from 9.2% of GDP in 2022 and as a result of the recovery of the exchange rate); if the budget deficit is reduced to 3% in a few years, it is likely that the current account deficit will fall to 4-5% of GDP.

• most of the public debt is held by non-residents, which is a vulnerability, and local banks are subject to the Romanian sovereign bond limit.

• The year 2022 was special, with “sudden inflation” (much higher than predicted) and with additional revenues to the state budget, including from inflated tariffs of energy suppliers; this situation was underestimated when building the budget for 2023.

• Romania’s sovereign rating (BBB-) is just above “junk” (risky for investment), one of the lowest in the EU.

• Romania has some of the lowest tax revenues in the EU (26-27% of GDP, including social and health contributions – compared to an average of about 41% in the Union); Here is an explanation of the structural tension of our state budget and very limited fiscal space.

Apart from the mentioned global context, it can be assumed that the markets are not yet reacting nervously to the state of the public budget in Romania, and because:

• public debt is not (yet) overwhelming;

• NBR has significant foreign exchange reserves;

• PNRR has brought “hard money” to the country, although many of these resources are not used in projects.

• Romania is a member of the EU and is obliged to comply with fiscal rules (there is also an excessive deficit procedure).

• EU membership provides financial protection; this was also seen through bailouts after 2008.

• after the outbreak of the pandemic, the budget deficit in the Union increased significantly, and Romania was no longer singled out for a budget deficit (in 2020 it was the only country applying the excessive deficit procedure). In 2022, according to EC data, the countries with a budget deficit of more than 4% of GDP were Belgium, France, Hungary, Spain, Romania, Italy, and Latvia (from 2024, the excess deficit procedure will be resumed and probably other countries will be targeted); it remains to be seen how structural these deficits are.

The budget deficit is a major vulnerability that cannot be sustained indefinitely. In the following years, Romania will go out again due to the budget deficit, if it is not adjusted. Markets will react, perhaps nervously, financial credit will suffer.

Therefore, the government should take measures to reverse the dynamics of the budget deficit, which this year reaches 7% of GDP. If a much lower deficit is obtained in 2023 than in 2022 (when it was 6.2% of GDP according to the European methodology, ESA), even if it is well above 4.4% of GDP (a target that has now become unrealistic), it can be assumed that the markets will not react nervously. This is especially true if we assume that the deficit trend is reversed due to corrective measures, that the deficit will continue to decline in 2024.

To correct the deficit, it is necessary to eliminate as much as possible what makes the fiscal regime in Romania regressive, unfair (those who earn more pay proportionally less), abandon the benefits created by fiscal optimization (the case of PFA, the micro-enterprise regime, etc.) and ANAF to seek to collect better.

Expenses must be regulated, and social assistance must be targeted as much as possible (it is not provided regardless of family income)

Recommendations of the European Commission (some provided in the PNRR), the World Bank, the IMF, the Fiscal Council, and local economists offer ways of implementation. It is not easy, because changes in the fiscal regime inherently affect the incomes of certain categories of the population and there is loud opposition. But we must see the Forest of trees, the interests of society as a whole. There is no magic! To reduce burdensome external financing, we must reduce excessive domestic subsidies, preferential tax regimes.

It is important not to find yourself in the extreme situation where receiving external financing is conditioned by taking extremely painful measures. The problem of the structural deficit of the budget, the lack of fiscal space was ignored for many years, the necessary measures were constantly postponed.

PS Communication with the public needs to be improved, especially when it comes to the budget deficit adjustment package that affects the incomes of individuals and some companies. It is good to explain the need for an adjustment program without referring primarily to the loss of money from the PNRR. The main premise is that a budget deficit of 6-7% of GDP cannot be sustained, as an acceptable correction of the deficit implies a fairer fiscal regime. This should be clearly stated.