Rules-based fiscal policy in Romania, could save generations

I have been engulfed in a project assessing Romanian Fiscal Policy framework for the last couple of weeks. Very interesting stuff. Some things I knew or derived from policy actions and data but there were plenty of new issues that showed up.This said, I have not looked yet at the proposed budget for 2012 (I know several people were expecting comments). I had two reasons for this: it will be changed soon enough, and I had better things to do.

Coming back to the fiscal policy framework, I see the current economic environment as a fertile ground to plant the seeds of a new way of approaching fiscal policy in Romania: rules based.  Of course the idea of rules based policy is not new but it has to be adapted to the Romanian economy. Hopefully this time better than our own brand of “Inflation Targeting regime which targets the exchange rate instead and hopes for good agriculture years and recession to hit the very ambitious inflation target”.

My main expectation and reasoning for proposing this is that such a fiscal regime will o define a permanent constraint on fiscal policy, will limit discretionary intervention, and confer credibility on the conduct of policy.

Yes, rules based policies mean different things to different people.  This is what I expect the targets for such a regime to be in Romania.

  • medium term structural budget deficit to be zero
  • medium term target of lower public debt
  • medium term target of lower government expenditure
  • in periods of economic boom only revenues form permanent sources can be spent, others saved

I know that all of them do exist somewhere in the documents of the Ministry of Finance. Much like the Maastricht treaty had targets included that no one seemed to care about. To make rules based fiscal policy work those “constraints” on governments waste of public money have to be binding. They have to stick. There are many examples of how this can be done. Rules may be imposed as a constitutional amendment or a legal provision. However, There has to be judicial or financial sanctions for noncompliance.

In the end,to me, the most important characteristic of rules based policies is that with transparency and  predictability comes credibility. Fiscal policy rules succeed, much like monetary policy rules, when they serve as an instrument for garnering public support for a responsible fiscal policy.

All I need now is to find a political party to support it. What are the odds of that happening?

6 thoughts on “Rules-based fiscal policy in Romania, could save generations

  1. Opposition parties will always support such a proposal.
    Once they get elected they will forget about it and keep spending lots of our money.

  2. Agree, these things have been proposed on several ocasions to the guys at the Ministry of Finance, Government etc. It is hard however to impose binding rules on politicly run institutions. The person in charge at a public institution will not be held responsable if he breaks one of these rules. In a worst case scenario the institution he runs will pay a fine, which is pretty much moving money from one pocket to another.

    If we are to talk of expenditure at a macro level, I find the expenditure rules imposed by the Gov. of Chile very interesting. They are very unpopular, but seam to have worked efficiently so far.

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