The deficit is pushing for tax increases

Our country is facing an acute crisis of credibility, reflected in the low country rating and the high costs of financing loans, the major problems being the excessive budget deficit and the lack of credible fiscal measures, according to the opinions expressed yesterday, during a conference organized by the Association of Financial and Banking Analysts of Romania (AAFBR).

To reduce the budget deficit, which last year reached 9.3% of GDP - the highest in the European Union - spending cuts alone are not enough. Thus, a short-term tax increase seems inevitable, which will be accompanied, over time, by a broader fiscal reform. Basically, for sustainable fiscal consolidation, it is necessary to address both components of the budget: increasing revenues and streamlining expenditures, according to the opinions expressed yesterday, during the event hosted by the National Bank of Romania.

• Daniel Dăianu: "Romania has a big credibility problem, illustrated by its very low sovereign rating and borrowing costs"

Our country has a big credibility problem, illustrated by its sovereign debt rating and the borrowing costs it incurs, said Daniel Dăianu, president of the Fiscal Council.

He stated: "You cannot go to the European Commission and in front of the rating agencies and say, as the media and even some analysts say, that first of all we need to collect better. It is a promise that has been made by Romanian governments for years. Better collection and state reform as ways to have a credible package of measures are, as the English say, a non-starter, in the sense that no one is looking at us if we come up with such a package of fiscal measures."

The President of the Fiscal Council added: "From the point of view of the big problem of the budget deficit, the situation is burning and we don't have time. This is the dramatic reality and everything is taking place in a Romania with a very complicated evolution, with a divided society. We have a great political risk, a tense social situation, we are faced with a cost of living crisis and large discrepancies between regions and citizens, as well as a very large imbalance in public finances. Romania has a big credibility problem, which is illustrated by the very low sovereign rating and the costs of the loans we want to contract. This is not understood, because one thing is said and another is done at home. We will have to pay a premium to regain and save financial creditworthiness through a robust package of measures."

• Dăianu: "The speech that we need to collect better, to reform the state, sounds good, but they are slogans; the financial markets are impatient with Romania"

As for the twin deficits, Romania's situation is unique because, in the European Union, there are countries with large budget deficits, but which do not have the problem of the current account deficit that our country has, whose refinancing was done last year in a proportion of two-thirds through loans.

"There is a very great fragility and every time this has been concealed in our country. Politicians did not understand, and those who are at the helm of public finances did not explain well enough", said Daniel Dăianu. The President of the Fiscal Council emphasized that most of our country's current account deficit comes from the budget deficit. "We need to cut this budget deficit and we don't have time. I repeat, the speech that we need to collect better, to reform the state, sounds good, but they are slogans. The financial markets are not patient with Romania. If we collect better, this will be seen in the budget execution for 2026, but until then you can't come up with such a package in front of investors, in front of rating agencies and in front of the Commission", said Daniel Dăianu.

The President of the Fiscal Council added: "We must reduce aggregate demand, that is, internal absorption. Whether we do it on the spending side, or we do it on the income increases side, aka tax increases. We don't even have time for "fine-tuning", as some people talk about impact studies. In my opinion, the lack of realism, of misunderstanding of the situation we are in is shocking. And I notice that there are analysts, supposed macroeconomists, who come up with the discourse that first we need to collect better (...). If we don't have a credible package and we don't try an adjustment, the markets will react with a lot of disorder. There will be greater pain than in the situation where we don't adopt the package of measures now. Painful measures, because there is no other way. Whether there are spending cuts, increases in tax revenues through tax increases, this is the situation. We are paying for the recklessness of those who governed."

• Ciprian Dascălu: "There is not much room to turn back when it comes to fiscal consolidation”

Reducing our country's budget deficit requires tax increases, at least in the short term, said Ciprian Dascălu, BCR's chief economist.

He stated: "We are between a rock and a hard place. The deficit must be financed and no one is talking about the financing costs, which are already at an unsustainable level. How did we get to this deficit - that 3% that was supposed to be the maximum slippage, became our target. Since the Covid pandemic, the 6% deficit has practically become the new 3% as the assumed budget deficit target. In only two years out of the last five, we have managed to have a deficit slightly below 6%. There is constant talk of spending cuts, but if we look at spending, we see that somewhere around 90% of tax revenues and tax contributions go to very rigid spending: salaries, pensions, interest expenses. This is the main problem of fiscal adjustment."

The economist added: "We have a very low revenue base, of only 27.2% of GDP. Only two countries in the European Union have lower revenues as a percentage of GDP, and the problem is that even when we had economic growth above potential, in the period 2015-2019, measures were taken to reduce revenues. There is talk of this VAT gap. Indeed, if collection were to improve towards the EU average, it would probably be "resolved" somewhere over two percentage points of GDP, but this happens over time. We needed the fiscal adjustment yesterday, which means that, most likely, we will not get away without tax increases."

Ciprian Dascălu pointed out that, in recent years, our country has had fiscal slippages, so much credibility has been lost and financing costs have increased. "Even in the scenario of the seven-year plan agreed with the European Commission, public debt reaches almost 63% of GDP in 2029, which, from the perspective of the rating and the cost of financing, can be a problem," said the economist.

From his point of view, there is little room for turning back in terms of fiscal consolidation. "Only from financing costs do we accumulate public debt and the ratio of public debt to Gross Domestic Product increases. Assuming that we will have a fiscal consolidation plan as soon as possible, we will probably buy ourselves some more time, but we should rebuild our credibility which, unfortunately, once lost, is difficult to regain!".

In the economist's opinion, for a balance of fiscal consolidation, in the short term there is no other solution than increasing taxes. "We need to acknowledge this as openly as possible. Even in the fiscal adjustment plan agreed with the European Commission, there is an implicit mathematical start of tax increases, followed by structural reforms that will yield results over time."

• Valentin Lazea: "40 billion lei cannot be reduced only by cutting expenses”

There are several strange or erroneous ideas circulating in the public space related to reducing the budget deficit, which influence the public and political agenda in an inappropriate way, said Valentin Lazea, the chief economist of the National Bank of Romania, who mentioned that he was speaking on his own behalf.

"A first idea that was very popular and is now losing ground is that the budget adjustment could be made only on the expenditure side, without going into the revenues. It seems that the political leaders understood that this is not possible. An open discussion with specialists from the Ministry of Public Finance was enough to see, from the first day, that this idea does not work, because we have a very large adjustment size - 40 billion lei or eight billion euros cannot be reduced only on the expenditure side,” said Lazea.

According to another idea that is still circulating and shaping expectations, tax and duty increases should wait, the economist added. "They say - let's first cut spending, then wait for better tax collection and not only as a last resort, if these two don't work, let's increase taxes. However, those who say this neglect the urgency of the adjustment, which is given by the Commission's expectations that we will come up with a credible program in June. External financiers are also waiting for this and, last but not least, the rating agencies, which will re-evaluate Romania in August and September respectively. We don't have time to wait until we see the improvement in collection," Valentin Lazea pointed out.

In his opinion, another erroneous idea circulating in the public space is that our country can present itself (ed. to the European Commission) with measures to reduce the budget deficit that are difficult to quantify or unquantifiable, which can be challenged in court. "Measures like - let's improve collection, let's collect VAT better, let's reduce special pensions. Romania has a credibility handicap coming from previous rounds of negotiations, when it kept promising such measures that it did not implement. Such measures will have no success either with the Commission or with the rating agencies," the economist said.

• Ionuţ Dumitru: "A reform that will bring us the fiscal-budgetary consolidation we need must address both sides of the budget”

The perception that the citizens of our country pay high taxes is subjective, being based on a poor quality of public services, said Ionuţ Dumitru, chief economist of Raiffeisen Bank.

"People do not want to pay and have the impression that they pay too much, compared to what they receive in return. But if we look at the numbers, based on no data, we cannot conclude that high taxes are paid in Romania. Rather, we perceive that we pay a lot compared to the poor quality of the services we receive,” said Dumitru. The economist emphasized that, according to the specialized literature, all fiscal consolidation measures, regardless of whether they are spending cuts or tax increases, are recessionary in the short term.

"A reform that will bring us the fiscal-budgetary consolidation we need must address both sides of the budget, mainly from my point of view on the revenue side, given the great pressure we have in the coming years: defense, interest, education, health and so on. But, without addressing the expenditure side, I believe the effort is in vain. People will not continue to pay taxes, companies will always look for optimization loopholes and we will get nowhere. If we do not improve voluntary compliance, we cannot increase the level of taxes collected and this can only be done if you show people that the money is being spent correctly. That is, to improve the efficiency of spending public money", said Ionuţ Dumitru.

The European Commission decided yesterday that our country has not taken effective measures to correct the excessive deficit. The increase in Romania's net spending far exceeds the ceiling set for its correction path, which poses clear risks in terms of reducing the deficit by 2030. Finance Minister Tanczos Barna said that Romania has received a final signal that urgent measures must be taken to reduce the budget deficit to the assumed level, writes News.ro.

The Commission agreed on a medium-term budgetary-structural plan for our country, which has as its main goal the correction of the excessive deficit by 2030-2031 to below 3% of GDP, a program that implies a deficit of 7% this year.