2023-12-19 15:58:00
The public debate regarding the correction of the deficit showed a lot of ideologies, detachment from reality, misunderstanding of inevitable compromises in economic policy, writes Daniel Daianu in the Report accompanying the Fiscal Council’s opinion on the Budget. “Deficit reduction cannot be achieved painlessly without distributing the corrective effort equitably. If everyone wants to be exempt from participating in this effort, who should bear the burden? And it’s not normal for the most helpless to bear the biggest cost”, says the academician.
Daniel DaianuPhoto: Hotnews
What else Dăianu says:
- You cannot cut public spending with a cleaver in a country where it is at the lowest level in the Union, where citizens are deprived of public goods and services in the necessary quantity. And EU funds cannot replace what the public budget has to do. Indiscriminately cutting public spending, beyond a critical threshold, can cause very great damage, a great leap in inefficiency.
- The correction horizon of the 2024-2027 budget deficit is more complicated by the new pension law. This pension law is necessary to eliminate glaring inequities in the social assistance system, to take account of the aging population, to help the sustainability of the pension system. But the impact in the immediate and medium term is severe, it increases the deficit a lot, being permanent expenses. Although necessary, the pension law brings a fiscal risk for budgetary consolidation.
- It would have been good if the application of this law was staggered over several years. But the stagger is no longer possible, given the government’s decision to apply in full from 1 September 2024. This implies the clear allocation of resources in the 2024 public budget.
- To think that the correction of the budget deficit can be achieved through the inflation tax is an illusion; this tax may help marginally, but not decisively. It might, only if there were another big shock on the supply side, which would create a new inflationary basket and which would not be followed by indexation of wages and compensatory pensions.
- There is a need for the continuation of the tax reform, which corrects a profoundly unfair tax regime (through exemptions and loopholes), which is also the result of the capture of tax policy by interest groups.
We in Romania ran away from reality, the academician Daianu said at a recent conference. We did not understand that we lived beyond our means for years, which is also visible in the external deficits, not only in the internal ones. This denial of reality is also accompanied by propagated myths: that there is no need for high incomes, that we can arrange consolidation only from spending cuts, Dăianu also said.
Other statements made by Daniel Daianu
- When I hear economists say something like that (that we can arrange consolidation only from spending cuts), I would ask them: what planet do you live on, people? Have you picked up a pencil to do some serious analysis?
- Giving up an elevator…maybe for the political image is good. But that doesn’t solve the budget problems!
- A country that chronically underfunds Health or Education…we don’t have enough staff and equipment in the fight once morest drugs. Need to spend more on Defense. Where to introduce so much additional spending when tax revenues are 27% of GDP?
- In Romania we have an informal economy and non-banking circuits with money circulating in millions of lei. No taxes are paid – those in the informal sector do not pay taxes. Coming back to this denial of reality, it is amazing to me. And it will be very difficult, although some do not want to accept that we need to increase tax revenues. And he comes up with a simplistic idea: let’s increase the collection!
- There is also a lot of hypocrisy. Those who benefit from tax privileges would want them forever, if possible.
- Romania has an attractive economy, but look at the bad times we live in. Financial markets are very nervous. Even energy prices might jump once more if things don’t calm down.
- This correction cannot be done without pain. Everyone wants to stay out of this patching effort. You can not. Business wants things to stay the same, people don’t want to pay higher or more taxes either. But who to bear then?
- You have no way to remove the cash. How to remove cash money at the market, for example, when you go to buy apples? I go to the market and talk to people. The problem is not to eliminate cash, but to fight for large transactions to go through the banks. When you see millions of lei in your bag…those are thieves, not transactions.
Consolidation is a difficult process, because we have a large structural deficit, but there is no other way. The government resulting from the elections will have to adopt measures to adjust the deficit, which will mean a few percent of GDP, even if the results will not be seen immediately.
It is expected that measures to offset the impact of the new pension law and to consolidate the budget, in general, will be adopted in 2025, especially since the rounds of political elections in 2024 are being passed. There are measures in the PNRR, in the recommendations made by the EC , BM and IMF, indicating steps to follow. The year 2025 can be a turning point in budgetary consolidation.
Consolidation is mandatory because, although the public debt is not overwhelming (yet), its service may become more burdensome, and there is also a currency risk. Budgetary consolidation would considerably reduce the current account deficit.
If the corrective measures will be credible, be they with effects manifested over time, and the absorption of European funds will be intense, there is no risk of worsening the sovereign risk.
It should be noted that a large part of the current account deficit is covered by flows that do not create debt; this fact helps Romania’s sovereign rating. And EU membership helps, including through mechanisms for monitoring imbalances. Romania’s foreign exchange reserves have grown considerably, fueled by European resources.
The business environment has reasons to fear measures that can affect the economy. But if the measures will correct large inequities in the tax regime, reduce tax evasion and tax optimizations, the impact on the economy is unlikely to be crippling
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