There is not that much you can argue about when it comes to the fiscal budget of the following year. This is because we talk about estimates and no one has perfect foresight. One political party takes a view and it goes with it. The rest of the world – oppositions, analysts and business people – can either accept it or have their own view and take decisions based on that. Then, if it does not pan out market forces should punish the government by increasing the cost of borrowing for the government and the electorate should do it next election day.
Nevertheless, there are few things that are important to analyze. In the case of Romania I find particularly interesting to look at the connection, or the lack of, between the budget and the medium term objectives as expressed in the Convergence Report, National Reform Report and Fiscal strategy.
The best way to describe Romanian fiscal policy is: unpredictable. The latest 2012-2014 Fiscal Strategy although just published this August is already outdated. The medium term objective expressed there of fiscal consolidation has never been farther from realization.
But you would not know this by looking at the budget deficit evolution. Budget deficits increased until 2009 but then started to slide. In fact for 2012 the target is an ambitious 1.9% of GDP.
Source: Eurostat. *estimate, percent of GDP
Fiscal consolidation means more than a decreasing budget deficit. In fact the budget deficit is the easiest to manipulate, especially in the short run. A more detailed look at the public finance story in Romania shows that fiscal policy has been to only increase government expenditure and debt.
I will start with total expenditures. The next graph shows that both, state expenditures and consolidated budget expenditures, increased continuously. Very important to notice that consolidated expenditures have increase faster than the state ones which in no way shows a concern for public money.
Source: Ministry of Finance Romania, *estimate, millions RON
Looking further inside the expenditures we find out that the same pattern is found for expenditures for wages and to some extent for goods and services. To finance these increases the government had to borrow. And it did a lot as you can see from the rapid increase in the expenditures with interest.
Source: Ministry of Finance Romania, * estimate, millions RON
Further evidence of the increase in public debt is presented in the following picture. Any measure shows the Romanian government borrowing more. The graph below show, in ref, total public debt and in green the part which is borrowed from overseas. The last three years evolution is worrisome. But the troubling part is that given the official estimations of expenditures it is close to impossible to reduce the debt level in the next years. To do that Romania needs a combination of fast economic growth and aggressive expenditure cuts. Currently there are no signs that either one will happen in 2012.
Percent of GDP on the right axis.
Source: Eurostat, NBR, *estimate
M y main scenario is that public borrowing will continue to increase as percentage of GDP and as a nominal number 2012. This will be the case as long as expenditures will continue to increase. Presenting only the deficit story is misleading and dangerous on the government side, although understandable considering that 2012 is an election year.
Increasing public debt will weigh heavily on future economic growth. In the absence of credible plans to lower expenditures Romania will have to raise taxes again. As 2012 is an election year I do not see a high probability of taxes being increased in the next 12 months. However, there is a very high chance that in 2013 will see higher taxes to start paying back some of the public debt.
Finally, the worse possible outcome of higher public debt – concentrated on very short term maturities- in recessionary economic environment is that potential output will fall. For Romania it means that it will take a smaller negative shock from outside to get back into recession.