Policy Memo CRPE no. 65, August 2015, Author: Victor Giosan. The Romanian Centre for European Policies (CRPE) is launching the report titled “How can we avoid the Greek trap in the next 10 years? Reflections on Romania’s fiscal policies in a European context“.
In the context of the lowering of the VAT and other fiscal loosening policies, CRPE considering whether these options, in the light of the objective of substantial and sustainable economic growth in Romania, are desirable and concludes that the recent changes are rather detrimental than beneficial to this goal.
As part of the fiscal stability pact, the European Union aims for Member States to take action in the other direction to that of the existing economic cycle: in good times or boom to tighten the purse and decrease the budget deficit and during recessions to lay wood to the fire and boost the economy.
To this end, it has built a system for the analysis of macroeconomic indicators (named Cyclically-Adjusted Budget Balance – CAB), which allows for the adjustment of the budgetary policy according to the cycle in which the economy of a Member State is. The system is built in order to prevent a succession of growth-recession cycles (pro-cyclical) affecting the solid, long-term development of national economies.
In other words, the EU seeks to avoid past mistakes – “to put fuel on a fire that roars, and then to put water on a fire that is barely flickering” and to move on to a preventive logic: “put little water on a fire that roars and then put straw on a fire that is flickering.”
CAB is based on the Keynes’ macroeconomic philosophy, which essentially argued that boosting the economy by means of budget deficits can be used with the desired effects only in the short term and only in case of recession, over-stimulation through excessive deficits over the decades having generated the global economic crisis in the late 2000s.
The CRPE presents in detail this system of analysis, it applies it to Romania in the context of the debate on fiscal loosening and brings a series of policy proposals in the light of the lessons learnt – both from our experience with the economic crisis and from Greece’s recent crisis.
Victor Giosan, the author of this report, an international consultant in public management and strategic planning, with an experience of over 22 years in politics and central government is applying the EU model for analyzing the aggregate indicators of the macroeconomic policies in Romania in the last ten years and is proving that if the fiscal stability pact principles would have been applied in Romania during 2006-2008 (if the significant budget deficits wouldn’t have existed), we would have been much better prepared for the recession of 2009 and the draconian measures of 2010 would have been much milder.
Considering Romania’s situation today and the recent history, the author believes that further fiscal stimulus policies in a new period of growth are risky. The commitments that Romania has undertaken to the European Union (the famous MTO’s) are designed precisely to prevent previous mistakes and the abandonment of these commitments could harm economic growth.
What we would gain in the short term due to fiscal easing, we would surely lose in the medium term. With a sharp decrease in government revenue, entering the excessive deficit area will almost certainly will occur in 2016. Given that there will be no agreement with international lenders, refinancing expenses of Romania will become unsustainable and any government will have to increase tax or suddenly cut spending.
The report analyzes in terms of the macroeconomic determinants, the links between the various tax cuts introduced in the new Fiscal Code and their supposed benefits (e.g. increasing the collection to the state budget) and demonstrates that in fact they are often populist speculation in the year prior to elections, without scientific basis.
In the author’s view “Romania should have reserves, both regarding tax levels and regarding budget deficits and public debt so that in the next period of recession we are able to adopt truly anti-cyclical measures: tax cuts and/or increased expenditure. The tendency to give fiscal and budgetary policies a “Start and Stop” movement by means of pro-cyclical policies is only adversely affecting solid and sustainable economic growth (3% -4% per year), which needs a predictable, stable and sustainable budgetary and fiscal framework and quality public services.”
Romania needs an additional fiscal space of 4% -5% in order to achieve the structural reforms in education, health, public administration and management, which will require additional costs. It is not necessarily the level of tax which the investors are complaining about but bad governance, waste and the lack of structural reforms in the economy. Romania must cross a certain productivity border and for this it needs spending on education, health and infrastructure. The CRPE report responds to hard liberal (libertarian) arguments supporting massive sudden tax cuts as an end in itself as follows – to “starve” the budget because money is anyways spent badly by the state is a sure recipe for remaining underdeveloped.
The report concludes that cyclically-discretionary policies, which bring benefits in the very short term and especially benefits to elections, must give primacy to structural change policies (to do things differently, to change institutions, the way they function, to change the organizational culture, to professionalize and stabilize in the medium and long term the grounding and implementation of public policies) and clearly to clearly be subordinated to the latter.
The full report in Romanian can be accessed here, at Facebook.com/Romanian Center for European Policies (CRPE) or at Facebook.com/Victor.Giosan.
This Policy Memo is published in the framework of the project “Influent, alert and informed in EU negotiations – Expertise and consultation on European policies” financed by the EEA Grants 2009 – 2014, the NGO Fund in Romania.
The contents of this report do not necessarily represent the official position of the EEA Grants 2009-2014. The entire responsibility for the accuracy and coherence of the information is held by the project promoter, Romanian Center for European Policies and by the author of the report.
For official information about the EEA and Norway Grants visit www.eeagrants.org.