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Daianu: Budget consolidation urgent- it should start in 2020

Budget consolidation is urgent, it should begin in 2020 by bringing budget deficit closer to 3% of GDP, says Daniel Daianu, councilor of BNR Governor and president of the Fiscal Council, in the article “Real negative rates persist: where are we going?”, published on the blog BNR Opinions.

He mentions that rising deficits (of public and current account deficits) are the result of an excess domestic demand and asks for macroeconomic corrections on the public budget. Daianu says there is a fiscal dominant on domestic monetary policy which can be easily over burdened.

“Romania's economy is singular in the area by the dimensions of budget and current account deficits. Budget execution shows a cash deficit announced by the Public Finance Ministry at 4.4% of GDP  in 2019 (possible ESA deficit 3.8-3.9%), while the current account deficit exceeded 5% of GDP, at the same time with the worsening of the structure of its financing. Poland and Hungary with which we often compare, have more solid foreign balances, while Poland has budget surplus! Romania which intends to join the euro zone shows a fracture between say and act,” Daianu points out.

According to him, monetary policy cannot counteract with efficiency bug deficits of the public budget. BNR can compensate the procyclicity  of budget policy only to a limited extent, because it might increase foreign imbalances and even affect financial stability. Rising budget and current account deficits lay pressure on the currency market , on the leu, affecting the stability of national currency.

“Budget consolidation is urgent; it should begin in 2020 by bringing budget deficit closer to 3% of GDP. 2020 budget is a bridge as construction lays landmarks for budgets of 2021 and 2022; without credible adjustment measures budget deficit in 2020 could climb to 5% of GDP, while in 2021 could exceed 6%. These figures invite to all kinds of bad scenarios for our economy. That is why it is necessary to reconsider steps/calendar for personal income increases from public budget (pensions included). The increase of fiscal incomes is absolutely necessary, as the theory that it cannot take place is not grounded (reforms in Bulgaria and Poland show it can). But it is not prudent place this wish at the base of building public budget. The effective budget execution and consolidation can take advantage of superior fiscal incomes,” Daianu showed.

In his opinion, new tax cuts, taking into account “the terrible stress on public budget”and the emergency of budget consolidation are irrational. 

 According to the economist, conditions of world economy are extremely unusual, which leads to big and apparently insurmountable uncertainties and dilemmas. Decision making factors in an emerging economy, such as the Romanian one, should  be prudent in macroeconomic policy, should not tolerate big deficits, should take permanent care of financing a payment balance and competitive gains without problems and benefit from buffers.