Daniel Daianu: Budget consolidation is urgent; it must start in 2020

Budget consolidation is urgent, and this should start in 2020 by bringing the budget deficit as close to 3 percent of GDP as possible, according to Daniel Daianu, advisor to the BNR Governor and chairman of the Fiscal Council, in an article published on the BNR Opinion blog.

“The Romanian economy depends on what is happening in the European economic area, on the ECB’s monetary policy; the monetary policy rates from us, the internal monetary market rates are influenced by the external monetary conditions. Excessive differentials of monetary policy rates can induce destabilizing capital movements and therefore an adequate calibration is required of monetary policy, which needs the support of an optimal budgetary policy. The budgetary policy should not have large deficits, especially since the RON is not a reserve currency,” says the economist.

Growing deficits (public budget and current account) are the result of excessive domestic demand and calls for macroeconomic corrections on the public budget chain. Daianu says that here is a fiscal dominance over the internal monetary policy that can easily be overweight.

”Romania’s economy is unique in the region by the size of the budget deficit and the current account deficit; the budget execution shows a major slippage in 2019 with the cash deficit announced by the Ministry of Finance at 4.4 percent of GDP (ESA deficit probably 3.8 – 3.9 percent) while the current account deficit probably exceeded 5 percent of GDP last year, together with a worsening of its financing structure. Poland and Hungary, with which we often compare, have much stronger external balances. Romania, which is targeting the accession to the euro area, shows a fracture between word and deed”, stresses Daianu.

Monetary policy cannot effectively counteract large deficits of the public budget. The NBR can only offset the pro-cyclicality of the budgetary policy only to a limited extent. This, because it could accentuate external imbalances, would even affect financial stability. Increasing budget and current account deficits put pressure on the currency market, on the RON, affecting the stability of the national currency.

“Budget consolidation is urgent; it must start in 2020 by bringing the budget deficit as close to 3 percent of GDP as possible. The 2020 budget is compelling, as construction sets milestones for the 2021 and 2022 budgets; without credible measures to adjust, the deficit budget in 2020 would reach 5 percent of GDP and 6 percent in 2021. These figures invite all kinds of bad scenarios for our economy, therefore, it is necessary, among others, to rethink the steps / growth schedule of personal incomes (including pensions) from the public budget. Increasing tax revenues is absolutely necessary, as the thesis that such a thing cannot happen is unfounded (reforms in Bulgaria and Poland show that it is possible), but it is unwise to base it. the construction of the public budget; the execution and the effective budgetary consolidation, however, can benefit from higher tax revenues”, shows Daniel Daianu.

In his opinion, new tax and tax reductions, given the “terrible strain on the public budget” and the urgency of budget consolidation, are irrational.

“Macro-prudential measures (MPP) are needed to guide the dynamics of credit. This assertion seems curious, considering the share of domestic private credit of about 27 percent of GDP (up from 37 percent in 2008) and the economic dynamics of recent years. we do not omit that the evolution of the economic growth has had the main motor of the income policy. We also have an externalization of the financing, given that the domestic economy has a dual structure – large groups that are financed abroad and SMEs that have difficult access to finance and massive recourse to commercial credit”, mentions Daianu.

According to the economist, the conditions in the world economy are extremely unusual, which produces great uncertainties and seemingly insurmountable dilemmas. The decision-makers in an emerging economy, such as Romania, should be cautious in macroeconomic policy, not tolerate large deficits, have permanent care for non-problematic financing of balance of payments and productivity gains (competitiveness) and benefit. of reserves (buffers).