In the year of its accession to the European Union, Romania’s public debt was about 17 percent of GDP, one of the lowest in the Union and one of the country’s few macroeconomic assets. Public debt has now reached about 50 percent of GDP – still a manageable level that is likely to lull policymakers into the illusion that the problem is not really serious, that it can only be solved with minimal efforts that can wait another year or two. Nothing could be less true than this: Romania’s public finances are right on the brink, with a serious risk of throwing the national economy into chaos. In the current geopolitical context, the problem is much more serious, and the main risk is directly related to national security.

It’s time to think

Ten years ago, there was a lot of discussion about a new concept: MTO (medium-term objective = medium-term objective). It was about what the state deficit should be so that the state debt does not increase. 1 percent of GDP is considered acceptable for our country. It was almost reached in 2014, so that in 2015 the state budget deficit fell to only 0.5 percent of GDP. A very good state of affairs, which naturally attracted the reduction of the external deficit to the lowest level since the fall of communism. However, since 2016, fiscal slippage has been increasingly evident; first, with values ​​well above the average annual target but still below the magic threshold of 3 percent of GDP. Since 2019, the government deficit has gone crazy, crossing almost every red line that could be drawn: first the introduction of the excessive deficit procedure, and then under the “cover” of exceptional measures due to the pandemic more than 9 percent in 2020. and more than 6 percent in 2021, 2022 and possibly 2023 as well.

Such a high level of public deficit could have led to a much faster decline in public debt. But several factors were at work to slow this growth: a modest initial amount of debt, rapid GDP growth, a relatively stable exchange rate (which reduced, in relative terms, external debt), very low interest rates for part of this period, and, not least, huge net resource inflows from the European Union, amounting to more than €61 billion in the 17 years since accession.

But such a favorable situation cannot last forever. When public debt rises from 17 to 50 percent of GDP, the pressure to pay interest becomes overwhelming. And this applies all the more to the country, which barely clings to the rating of the country in the “recommended for investment” category – on the lowest rung, below other countries in the region. As a result, the interest we pay on loans is higher than in these countries and incomparable to the interest rates in the developed countries of the European Union. That is why a public debt of 50 percent, lower than in France and Germany, for example, is actually a much greater strain on public resources. In addition, interest on public debt increased sharply from 3.1 billion lei (i.e. 0.7 percent of GDP) in 2007 to 9.2 billion lei (i.e. 1 percent of GDP) in 2018 and an estimated 31 billion lei ( i.e. 2 percent of GDP) in 2023. .

As for interest on the national debt, the situation will worsen significantly. First, because we are talking about the growth of public debt. Then, because interest rates on the international market, as well as on the domestic market, are far from the minimum values ​​during the pandemic and we have no reason to expect their decrease. Finally, as the vulnerability of the Romanian economy increases, dependence on the financial market is increasing rapidly, and this by no means leads to more generosity on the part of creditors. Thus, if we are to continue with current fiscal behavior, we should expect not only rising costs of covering the deficit, but also, quite likely, a growing reluctance of potential creditors to finance it, leading to increasingly burdensome risk margins.

An additional problem of Romania’s fiscal behavior, which is almost never discussed, is the low share of budget revenues in GDP. After reaching, if we were lucky, around 30 percent of GDP in the early 2000s, incomes have fallen to 27 percent of GDP, while the European Union average is almost 41 percent of GDP. Thus, any budget expenditures constitute a greater relative pressure, even at the same percentage level of GDP. Thus, interest payments from 2023 are already 7.5 percent of budget revenues. Is it not enough?

We have reached a point where the continued accumulation of large government deficits becomes very expensive, and the risk of not being able to finance this debt is far from hypothetical. Even reducing the deficit from about 6 percent of GDP today to 3 percent in, say, 2025 would still mean more debt, as well as pressure on the interest rate. And here we have in no way taken into account the decrease in the exchange rate, which is currently protected by both the high level of reserves of the National Bank and the dynamics of GDP. The fact is that the outbreak of a crisis, internal or external, can instantly change the data about the problem, which can have dramatic consequences for us. We have an election year, the risk of new mistakes is not hypothetical. It’s just that we’ve reached a point where only one direction is acceptable: to consider!

What does structural deficit mean?

Alleviating the current deficit is extremely difficult, as budget expenditures have a high degree of rigidity. Pension costs, public sector wages or welfare costs such as state child benefit cannot be deducted. As we have seen, interest costs on the public debt will not decrease in any way even under the most favorable scenario. We will also have an inevitable increase in defense spending due to a very turbulent international context.

The fundamentally positive news, namely the expected decline in inflation, has a less favorable impact on the budget, as nominal revenue growth slows and spending continues to rise, even if simply indexed to inflation. And some categories of budget spending, such as pensions and salaries in education, should grow much faster than nominal GDP. Undoubtedly, a reparative measure from a social point of view, but which inevitably leads to a deepening of the structural deficit of the budget.

A terrible Pandora’s box has opened with the advent and rapid growth of special pensions, both in terms of the number of those entitled and the size of the pension. Of all the deviations generated by this state of affairs, there are no analogues in the civilized world, retirement before the age of 50, that is, in full maturity and long before the normal retirement age. Sending adults home full time with pensions amounting to thousands of euros every month is an unacceptable deviation with serious consequences for the labor market and the long-term prospects for economic growth of the country. One of the main risks of perpetuating this state of affairs is serious damage to social unity. It may manifest itself to a lesser extent as long as the economy works and incomes of all occupational categories continue to rise. But in a crisis? Is anyone doing a responsible analysis of what will happen if the 2010 scenario repeats itself due to internal or external causes?

Issues of national security

Economic theory strongly recommends that public policy be countercyclical. In other words, during periods of steady growth, there should be no budget deficit for two reasons: to avoid overheating of the national economy and to create a buffer capable of mitigating the negative consequences of a future crisis. This is what economic theory says. What did we do? The government’s policy was without exception pro-cyclical: periods of economic growth were accompanied by an increase, not a decrease, in the state deficit; therefore, there was never a reserve to cover crisis situations, so when they arose, the policy remained pro-cyclical by force of circumstances, that is, it deepened the consequences of the crisis.

In my opinion, this state of affairs was most clearly manifested in 2008-2010. Economic growth was very high in 2007-2008. But the state budget deficit also rose sharply to an incredible 5.4 percent of GDP in 2008. The onset of the global crisis, which was not accompanied by countermeasures in 2009 (well, the presidential election was approaching!), pushed the deficit to 9 . 5 percent of GDP. Fiscal correction began only in the summer of 2010 with a sharp increase in VAT and a marked decrease in public sector wages, which caused a recession and a marked decrease in living standards. Only in 2013 did the budget deficit fall below 3 percent of GDP after years of deprivation, which could have been avoided if public policy had been more thoughtful. _ Continue reading the article on Contributors.ro