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Lazea (BNR): Budget deficit risks to exceed 6% of GDP unless measures are urgently adopted
Budget deficit at the end of 2023 risks to exceed 6% of GDP unless urgent measured are adopted. It would be a setbsck from the level of 5.7% of GDP recorded in 2022, says Valentin Lazea, chief economist of the Central Bank (BNR) in an article published in the blog “BNR Opinions”.
In his opinion, by not adopting any measures in 2023 and 2024 will make Romania “the next candidate to IMF assistance and to a possible suspension of European Commission funds.”
“After the first five months of 2023, budget deficit was 2.32% od GDP, that is by 0.8% of GDP higher than in the same period of 2022. In these conditions, unless urgent measures are adopted, budget deficit at the end of 2023 risks to exceed 6% of GDP, being a drawback from 5.7% of GDP recorded in 2022. It is easy to imagine the shock created in Brussels and financial markets by such a couter performance: a country that engaged in reducing budget deficit to 4.4% of GDP this year and cannot do it, deficit compared to the previous year would be a first at EU level,” Lazea mentioned.
The chief economist of BNR pointed out that Romania should implement, as of September 1, a fiscal package equivalent to at least 2% of GDP to avoid “the shame of not having any fiscal consolidation this year.”
Acording to him, the solution would be, a short term, the return to the real flat tax , claimed by all but observed by few.
The cause? “The greed of the business environment which benefitc from exemptions and exceptions; the ideology of a large part of analysist and economists; the fear of reform consequences from the political class,” Lazea added.
Referring to the argument “any fiscal correction means tax increases,” it is a hypocrisy to see that those who defended the introduction of the flat tax in 2004-2005 now defend its de facto disappearance, in a regressive tax system, the BNR official said.
The same thing happens to over employment in public administration, considering that all budget employee salaries represent about 8.5% of GDP, he added.
In his opinion, with fiscal incomes of only 27% of GDP (against 30% in Bulgaria, 35-36% in Czechia, Ponad and Hungary) Romania cannot offer public expenses lower than 36-37% of GDP, while the level of those expenses will inevitably grow in the future, hence the need to massively increase budget incomes.
The BNR chief economist also referred to the politicians' fear about fiscal reform consequences.
“This fear is somehow legitimate, but we will try to demote it with economic arguments. The truth is that politicians are now paying the fruit of many years of populist policies, when they gave with both hands and took with none, teaching voters the saying “we will vote people who gave us something” worthy of an underdeveloped country,” he noted.
Referring to the argument: “If we eliminate tax exemptions we will lead economy to recession,” Lazea pointed out that at present, Romania's economy grows by 2.4% per year, slightly below potential.
Anyway, we are far from recession (negative GDP increase) and even from a technical recession (negative increase for two quarters in a row), Lazea says.
Lazea answers the argument “If we eliminate tax exemptions, future elections will be won by extremist parties,” with “We can say that is necessary measures are adopted we will have both economic gains (deficit lower than last year and a 4% of GDP deficit in 2024 without any other additional measures), and political gains (there is still time until 2024 parliamentary and presidential elections), so that the negative effect of the measures could dissipate. On the contrary, if those measures are not adopted now, the risk of adipting them in 2024 grows, with electoral consequences. But not adopting any measures in 2023 and 2024 will turn Romania into the next candidate to IMF assistance and a possible suspension of European Commission funds.”