RSS
Report: 40% higher pensions would lead to increase of budget deficit to 11% of GDP in 2021
Pension increases by 40% may lead to the increase of budget deficit to over 11% of GDP in 2021. A high systemic risk is possible through the aggravation of the state of public budget, according to the analysis report “Romania – Euro Zone, Monitor”, published on the website of the National Bank of Romania.
“A high systemic risk is possible through the aggravation of the public budget situation, of public finances, economy destabilization if pensions rise by 40%, which would lead to the increase of budget deficit to 11% of GDP in 2021. We would have a financial market reaction which may seriously affect economy, slowing down recovery in 2021. Instead of an orderly macroeconomic correction for many year, we would have a disorderly correction, very costly from the economic and social points of view,' the report shows.
The document also refers to the latest opinion of the Fiscal Council, which mentions that it is essential to avoid pension increases by 40%, as it would destabilize economy even more, “during complicated times” when we have to fight against Covid 19, to reduce effects of the economic crisis.
According to the document, the ambitious target of joining the euro zone (after entering the Exchange Rate Mechanism 2) is not compatible with infringing the community acquis about the Economic and Monetary Union which excludes big structural budget deficits and with considerable foreign deficits, as was Romania's situation at the beginning of 2020.
According to the source, the big macroeconomic challenge as of 2021 is the correction of budget deficit and macroeconomic imbalance.
“It is not likely that markets will accept big budget deficits for years on end. A difference should be made between permanent and one-off expenses caused by the need to reduce epidemic effects. If economic recovery is more difficult in 2021 than the one anticipated and economic activity will have to be temporarily backed, a correction of of the structural component of overall non permanent expenses may dissociate. Correction of budget deficit and structural deficit is necessary in the years to come if we want to keep things under control. This correction supposes a program of a few years, according to the EC request which should bring deficit close to 3% of GDP. Anyway, the impact will be significant, at the same time for demand and offer,” the report shows.
According to the report, European funds have a key role in making correction easier. European money could help financing the balance of payments. Important European funds would back the activity of private firms, directly or indirectly.
“Romania – Euro Zone, Monitor”with the topic “Romania and EU in pandemic times”, was coordinated by academician Daniel Daianu. The work group was made of: Amalia Fugaru, Gabriela Mihailovici, Bogdan Moinescu, Ioana Muntean, Iuliu Panait, Mirela Roman, Bogdan Stoian and guests Csaba Balint and Clara Volintiru.