The concept of fiscal consolidation is on everyone’s mind these days. Romanian policy makers pride themselves in saying that since 2009 they took the right measures to stabilize this economy. One argument put forward to support their claim is fiscal consolidation. But what is fiscal consolidation?
As a measure of fiscal consolidation Romanian policy makers chose to present a declining budget deficit over the period 2009-2011.
I have a different view. In my world fiscal consolidation should show smaller nominal expenditures over time. This way we show a more efficient and smaller government allowing for a bigger private sector. Unfortunately if we look at fiscal consolidation from this perspective the story is quite bleak.
Let’s now look a bit more into detail. The next graph compares 2011 versus 2009 expenditures with wages, good and services, subsidies and social transfers. The good sign is that wages expenditures have decreased relative to 2009 but all the other three have increased. The not so good part of the story is that still wages and social transfers (e.g. pensions, unemployment ) make up the overwhelming majority of government expenditures. One small but important note on the wages expenditures, we see that the decrease comes from the state owned companies that finance themselves because if we look at the state budget we see an actual increase in wage expenditures.
This is the budget story. Of course the other argument going against fiscal consolidation in Romania is the doubling of the public debt since 2009 which now is at 40% of GDP or about 47 billion EUROS.
There is no added value in my into lying ourselves about a very serious issue as fiscal consolidation. We are all familiar with the stories of Argentina, Greece, Spain, Portugal, Italy, Ireland, Hungary etc. There will never be a good time to cut expenditures so we have to start today. Playing with arrears, deficits, definitions or biased stories will only give the impression in the short term that things are all right. EU has shown that delaying a solution to a debt problem will only make things worse. Thus, Romania has to first admit it has a big public expenditures/debt problem and then start solving.