The Fiscal Council published a report on Romania’s budget rectification, highlighting an alarming economic situation and some controversial government decisions. With a budget deficit that is among the highest in the European Union, it is imperative that we scrutinize the authorities’ plans and discuss their implications for the national economy.
Twin deficits and external risks
Romania is facing “twin deficits”, a concept that describes the simultaneity of the budget deficit and the current account deficit. These external imbalances are amplified by a considerable dependence on external loans, a situation that raises questions regarding the long-term sustainability of the Romanian economy. The Fiscal Council emphasizes that the country has the largest current account deficit as a share of GDP among the states in Central and Eastern Europe, an alarming reality considering that Romania is not part of the euro zone. This exposes the economy to significant currency risks, and the authorities should urgently review their economic strategy.
Justifying deficits through investment: a dangerous illusion
One of the government’s frequent claims is that the current deficits are justified by public investment, considered sustainable. However, the Fiscal Council warns that the effects of these investments largely depend on their composition. If there is no focus on developing the production of exportable goods, these expenditures may not bring long-term benefits. In fact, most of the European resources reflected in the budget are accompanied by additional pressures on public spending, without generating significant increases in budget revenues.
The superficial approach to tax reforms
Another critical point of the budget rectification is the superficial approach to fiscal reforms. The Fiscal Council suggests that an effective correction of the deficit cannot be achieved solely by cutting spending; a significant increase in tax revenues is essential. However, the government appears to be reluctant to address the structural problems of the tax system. Romania has some of the lowest tax revenues in the EU, standing at around 26-27% of GDP, a level that cannot support the growing demands of the public budget, especially in the fields of education, health and infrastructure.
The long-term effects of an inconsistent fiscal policy
Inconsistent fiscal policies and a lack of long-term vision have negative effects on economic growth. Romania’s economic growth is not robust, relying on internal and external imbalances. The budget rectification project envisages an increase in budget revenues and expenses, estimating a budget deficit of 6.94%, 1.94 percentage points higher than the initial target. These estimates are worrying, given that a cash budget deficit of around 8% of GDP in 2024 could lead to further economic instability, risking repeating the mistakes of the past.
Dependence on European funds: a systemic risk
An alarming aspect is Romania’s dependence on European funds, which can become a dangerous trap. The absorption of these funds is critical, but recent data shows a low absorption rate, with only €2.5 billion repaid from the 2014-2020 MFF and zero funds absorbed from the 2021-2027 MFF by August 2024. This indicates deep institutional weaknesses in Romania’s ability to attract European funds, and an excessive dependence on them risks destabilizing the economy in the long term.
The need for a fundamental change
In conclusion, Romania’s budget rectification is proof of the lack of a coherent and sustainable economic vision. The authorities must recognize the gravity of the situation and implement deep fiscal reforms aimed at increasing revenues and reducing dependence on external loans and European funds. Without such a fundamental change, Romania risks facing a deeper economic crisis, with severe consequences for citizens’ lives. It is time for the government to act responsibly and develop fiscal policies that ensure a stable and prosperous future for all Romanians, argues the Fiscal Council, an entity led by Daniel Daianu.
Source: www.cotidianul.ro
