Fiscal Policy in Romania : Vicious circles, Secondarity, and Dilemmas

1. Article IV: Economic Policies for a Sustainable Growth National Institute of Statistics – The Conference Hall June 14th, 2016 Article IV: Economic Policies for a Sustainable Growth National Institute of Statistics – The Conference Hall June 14th, 2016 Fiscal Policy in Romania: Vicious circles, Secondarity, and Dilemmas Lucian Croitoru Presentation prepared for the seminar Article IV: economic Policies for Sustainable Growth National Institute of Statistics Conference Hall June 14 2016

2. I. The Romanian fiscal policy before the 2009 recession

3. Three vicious circles before 2008 • The savings vicious cicle: • Corruption leads to low savings at firms level • Low savings leads to low investment • Low investment leads to weak competitivenes • Insufficient competitivenes leads to corruption • The fiscal vicious circle: • The number of voters dependent on redistribution is high • The government fails to cut inefficient spending to keep the budget deficit sustainable • Higher taxex are used to move savings from the private sector to the public budget • The informal (hidden) economy vicious cicle: • More firms migrate to the informl sector • The tax base narrows • Higher taxex are needed

4. Three vicious circles before 2008 • The savings vicious cicle: • Corruption leads to low savings at firms level • Low savings leads to low investment • Low investment leads to weak competitivenes • Insufficient competitivenes leads to corruption • The fiscal vicious circle: • The number of voters dependent on redistribution is high • The government fails to cut inefficient spending to keep the budget deficit sustainable • LOWER taxex are used WITHOUT RESTRUCTURING EXPENDITURE • The informal (hidden) economy vicious cicle: PSTPONED FOR NOW • BUT ANTICIPATIONS THAT HIGHER TAXEX WILL BE NEEDED ARE LOOMING

5. II. The recent experience compared to the cyclical position of the economy: the greate excape

8. III. Is there a SECONDARITY process in Romania?

9. The hypothesis of secondarity and implications for monetary policy in Romania • Secondarity: the global surplus of savings is generated in an increasing number of countries, whereas the overwhelming part of the global deficit of savings is located in the US (Croitoru, 2015b) • The US are far better equipped to accommodate swift capital outflows, currency depreciation, an abrupt decline in domestic asset prices, banking system weakening, and the flagging domestic demand

14. A new policy dilemma? (I) • Actualgrowth rates above potential; GDP gap clossed in 2013; see Croitoru 2016 (Are We Sistematically Wrong when Estimating Potential Output and the Natural Rate of Interest?) • GDP growth rates above potential and low global interest rates will pose again a dilemma to monetary policy in Romania: • A higher policy rate would be needed to tame inflationary pressure from the positive GDP gap • A lower policy rate would be needed to avoid the leu appreciation • If a current account surplus emerged, as the secondarity suggests, the policy rate dilemma would not appear. However, we will not have a current account surplus. • However, the new Fiscal Code based on tax cutstogether with wage increases would lead to fiscal deficits above 3percent in 2016 and 2017, eliminating the issue of the interest rate dilemma, but creating other serious problems to the macroeconomic stability of Romania.

15. A new policy dilemma? (II) • The likelyhood of a USA recession is high • A Minsky journey from hedged borrowers to speculative borrowers and finally to Ponzi borrowers is happening, with the share of speculative borrowers becoming higher and higher • The last USA expansion lasted 73 months; the longest lasted 120 years • The likelywood of an USA recession emerging in the period 2017-2019 is high. Most probably, it will take palce in the vecinity of 2019 • However, the actual fiscal policy will leave our budget in a „catch 22” position: a larger one will be needed, but no one will be desiring to finance it

16. References Croitoru, Lucian și Cornel Târhoacă (1999), „Fiscal Policy in Romania: Three Vicious Circles of the Romanian Economy”, in http://pdc.ceu.hu/archive/00001042/01/8.pdf sau în D. Dăianu și C. Rühl (ed.) (1999), „Economic Transition in Romania: Past, Present and Future”, Proceeedings of the conference Romania 2000. 10 Years of Transition-Past, Present and Future, October 21st – 22nd, The World Bank and The Romanian Center for Economic Policies. Croitoru, Lucian (2014), Cercul vicios al politicii fiscale, www.bnro.ro Croitoru, Lucian (2015), “The Tendency Towards Secondarity in Managing Global Imbalances”, Scientific Annals of the “Alexandru IoanCuza” University of Iași, Economic Sciences, Vol. 62, No. 3, pp. 291-311 Croitoru, Lucian (2016a), „Are We Systematicallywrong when estimating potential output and the natural rate of interest?” Journal of Economic forecasting (forthcoming) Croitoru, Lucian (2016b), „Când va fi următoarea recesiune și cum ne pregătim pentru ea?”www.hotnews.ro, www.luciancroitoru.ri și www.opiniibnr.ro