The stock of public debt has reached an impressive level, exceeding 120 billion euros today. The speed at which the government is borrowing is dizzying. Moreover, it does so at an increasingly dire cost.

Today, we are on the border between green and red in terms of public debt, which is about 50% of GDP. If in 1995 the state debt per inhabitant amounted to only 85 euros, then in 2021 it reached at least 6,077 euros per inhabitant (an average family with two adults and two children today owes the state more than 24,000 euros, in addition to other personal debts ).

A similar calculation shows that if in 1999 the share of debt in the average net income was about 25%, then in 2022 it exceeded 60% (the degree of indebtedness compared to the individual ability to pay this public debt from net income is high).

To be able to reduce the rate at which the government borrows, we must understand the causes of these debts.

We cannot find solutions if these causes systematically elude us

The main reasons, from my point of view, are two:

1. Romanian governments have not been able to cope with the country’s problems by limiting themselves to the revenues they collect from fees and taxes. They always stretched more than a blanket. They incorrectly predicted the drop in income during the crisis. They do not have an economic approach to the problem of the deficit, trying to adjust expenses to the level of income through the construction of the budget, and not the other way around. Thus, between 1995 and 2021, Romania has accumulated a deficit exceeding €127 billion, which is equivalent to approximately 12,700 kilometers of motorway, approximately 1/3 of the circumference of the Earth at the equator. Impressive and not sustainable at all, especially in the long run;

2. The resulting deficit and, implicitly, the debt of more than 120 billion euros (the figures clearly show that the deficit of these transitional years is fully manifested in the public debt) were not directed to investments with an obvious, consistent and rapid driving effect. That is, we produced and are producing deficits that absorb resources, rather than forming and forming resources for the state budget. If we could build more than 12,700 km of highways from the deficit created in the last 27 years, we barely built 824 new km, the average rate at which we created this deficit is about 490 km of highway per year.

It is clear that the public debt (its volume, rate of accumulation, cost) is the cause of the budget deficit and that its moderation largely depends on the moderation of the budget deficit. As I said, the accumulation of deficits has two main reasons: the disproportion of expenditures with the revenues of the state budget and the orientation of these expenditures on priorities with no or very low added value. Do we have a solution for this? Obviously yes, the scope can be divided into three broad areas: revenues, costs and cost drivers. All three areas are united by one key word: reforms. Without reforms, without modernization, without large-scale corrections and adjustments, it is impossible to reduce the pressure on the deficit, make it less excessive, and limit the connection of the government with the financial markets.

Let’s take it one at a time. First of all, in the revenue part, we have the following main directions of action: reforming the tax system from scratch, paying special attention to the VAT area (where we have many deductions, many compensations, many exemptions from VAT).

It is clear that without a large-scale tax reform, which requires the involvement of tax officials and the private sector in the first place, we cannot get more from the state budget. The end result of this tax reform should lead to simplification, predictability, transparency, equal opportunities before the tax law (elimination of all exemptions) and, why not, to the reduction (elimination) of these unnecessary taxes, especially on the business environment.

Equality before the tax law (similar to the removal of exemptions) also means a more effective fight against tax evasion (especially in high-tax sectors such as the fuel or tobacco sector), a more effective fight against smuggling (cigarettes, luxury goods, fuel) and action with more tangible results for counterfeit goods.

According to the latest report of the FISC Committee of the European Parliament for 2022, Romania remains in third place among the leading EU countries for the shadow economy with approximately 29% of GDP, ahead of Bulgaria with 33.1% of GDP and Croatia with 29.7%. % and immediately behind us are Hungary with 25.4% and Cyprus with 23.9%. The EU average is about half of our value at 17.3%, which means a difference of more than 10% of GDP between our level and this average.

In addition, Romania for many years failed to take very important steps in this direction, in 2003 the shadow economy was 33% of GDP, the long-term average from 2003 to 2022 was 29.3% of GDP (in the conditions in which we are talking about a much higher GDP in recent years). Moreover, while this shadow economy decreased slightly before the pandemic to values ​​of around 26-27% of GDP, during the pandemic the percentage suddenly increased to around 29% and remained there, even increasing slightly in 2022. These actions can improve the level of collection and, implicitly, the level of revenues to the state budget of at least 4-5 percent of GDP.

Even so, fiscal adjustment is incomplete if there is no proper focus on budget expenditures, because you are collecting more in the budget for nothing if the government is unable to return more to its citizens. The second important course of action involves fundamental reform of the state. The modern resource-hungry state offers its citizens far too little compared to what these public services cost today. Obviously we can’t afford them because of their size and calibration.

The administrative apparatus must be quickly adjusted and modernized

The main urgent directions will be the following:

1. Administrative-territorial reform, which should: eliminate the district form of organization and make the transition to a regional organization (historical, development); unification of communes in depopulated areas of Romania (the commune must have a minimum of 10,000 inhabitants from the localities of the district) and the development of metropolitan areas that allow absorbing all the localities in their radius (less than 10-15 km).

2. Reforming the central administration by: reducing the number of ministries through mergers and ensuring that this number is kept to a minimum for a long period of time; reduction to a minimum of departments, bodies and bodies separated from these ministries (today we have agencies and authorities almost everywhere, they are uncontrolled, there is no result behind them);

3. Full privatization of all production capacities of goods and services: the state should be completely excluded from all state-owned companies, state-owned banks through their full placement on the capital market and the provision of tax benefits to those who invest in these industries. time period (pension funds, investment funds, individual investors) and

4. Changing the scope of public services in parallel with their professionalization (national security, army, justice, health care, education, etc.). There are many areas where the system is over-sized today and areas where the system is under-sized. Professionalization means recruitment and promotion procedures that emphasize performance indicators, depoliticize these public services, and position them in real and direct competition with private services (where appropriate, for example in education and health).

For revenue and expenditure reforms to be possible, the state must also act in a coordinated manner in a third area: how resources are allocated and spent to ensure maximum impact.

Transport and energy infrastructure should become priority zero, and we should see an unprecedented acceleration of allocations to these two strategic areas.

It is impossible to talk about the merger of municipalities into a metropolis or the unification of counties into regions without large-scale investments in the infrastructure that connects communities within them. In addition, it is impossible to talk about an effective fight against tax evasion, cigarette smuggling or illegal trade in counterfeit products without consistent investments in structures that can more effectively keep these phenomena under control.

Without a country plan where these things can be found consistently and in detail, we cannot talk about balancing the budget or slowing the rate at which we are in debt. On the contrary, with every moment of delay it will get worse. The budget deficit and national debt are a direct indicator of the quality of governance and the effectiveness of the political class behind it. The longer we delay these reforms, the more significantly the ability to make the necessary adjustments decreases, the resilience and resilience to crises decreases, and the cost of rescuing from these extreme situations increases.

Editor’s Note: Christian Paun is a Doctor of Economics, a lecturer at the Faculty of International Economic Relations at the Academy of Economic Studies in Bucharest, and the Executive Director of the Romanian Economic Society (SOREC).