THE FORMER AND CURRENT GOVERNMENT ARE WAGING A STATEMENT WAR CONCERNING THE STATE BUDGET Isar: "The auditing of the great tax evaders will continue to be avoided"

Reporter: PSD leader Liviu Dragnea says he found a "hole" in the budget of 10 - 14 billion lei, because of the positive rectification of November, and the technocrats are defending themselves claiming that the deficit of 2016 was below the target. Anca Dragu, former finance minister, says: "If the so-called hole existed, then in 2016 the deficit would have jumped to 4% of the GDP, but it only stood at 2.59% of the GDP", said Dragu.

What is your opinion on these accusations/statements?

Lucian Isar: As was obvious from Mr. Dragnea's statement, he didn't have all the information that he needed. Waiting for the complete information to arrive on the next day, Dragnea spoke about a "gap" without clarifying what that meant.

Going back and forth between 2017 and 2016 in his expose, the notion of gap of that size (that is, if the amounts weren't made bigger by adding more zeroes to add to make an impression) can have several meanings in a non-technical language, such as:

- It can mean the 2017 budget deficit, and in this case, the gap will certainly be bigger than 10 billion dollars;

- It can mean the deviation, the additional deficit pertaining to 2017, compared to the base scenario represented by the budgeting exercise of the Cioloş government. In that particular case, the handling of this gap in the budget is the appanage of the new government without having any consequences for the previous government;

- it can refer to a situation afferent to the year 2016, in which case clarifications are needed. If this refers to "creativity" in estimating revenues in order to justify certain expenses rigorousness in the statements is needed, as well as specifying things clearly;

- It can also refer to the "illusion" caused by the big deficit seen in December 2016, compared to the rest of the year, but that situation has also been encountered in the last few years and it represents just another confirmation of a precarious management of the public finances in Romania.

In order to be able to make relevant comments on one statement or another in this particular case more information is needed, that uses fewer metaphors.

Reporter: Throughout the year there have been voices claiming that the tax collection rate has been very low, and many investments weren't made. Liviu Dragnea says that the technocratic governments have made a budgetary revision in November, relying on higher tax receipts in the final months of 2016.

After the first 11 months of 2016, the deficit of the general consolidated budget of the state was 0.73% of the GDP, and in December a deficit of 1.9% of the GDP was obtained, a usual evolution in the last few years, when most budget expenses were incurred at the end of the year. Moreover, in December 2016, the Ministry of Finance scheduled the payment of advance amounts (approximately 630.2 million lei). Are there different calculation methodologies? What is the real situation like, in your opinion?

Lucian Isar: The haphazard management of public finances in Romania is a fact. The auditing of major tax evaders is still being avoided and the weakness of the Romanian authorities is being abused through consultants that are close to the authorities in question. In December, amounts that are near the agreed deficit limit get paid. Which is where the impression that there is a "gap in the budget" may come from.

Reporter: What is your opinion on the statement that the NBR governor made on Friday, that "the NBR salutes the commitment made by the current government to keep the budget deficit at a level of 3% of the GDP, but has additional measures ready if that ceiling gets exceeded"? As the NBR and the banks have constantly threatened the appearance of systemic risk following the pro-consumer legislative initiatives (the law of giving in payment, the conversion of CHF denominated loans), it now seems that the NBR isn't seeing a deficit increase as a risk, as president Iohannis warned the government that the deficit may increase following the electoral "presents". What is your take?

Lucian Isar: Throughout 2016, Isărescu had a fluctuating behaviour, trying to issue statements that supported the government and the PSD (economic would be "unsustainable" in the beginning of the year, only to become "sustainable" towards the end). That is how this flexibility from Isărescu when it comes to accommodating overshoots of the 3% budget deficit should be interpreted, as willingness to negotiate with the politicians.

On New Year's Eve, Isărescu forgot about structural deficit or about the fiscal compact.

Whereas in the previous years, Isărescu and his spokespersons would flame any deviation and would propose measures such as wage cuts, they are now announcing the willingness to help the government meet the deficit target regardless of any deviations. Indeed, Isărescu has several tools available, from creative accounting, like he did for Ponta in 2012, to interest rate cuts, minimum reserves and stimulating lending, in order to help a government to meet its deficit target. Obviously, Isărescu is offering these services "independently" and only under certain circumstances. It seems that 2017 is a special year and it will be more difficult than in 2016 for him to avoid an investigation by the parliament.

Reporter: Liviu Dragnea threatened with creating an commission to investigate that gap, by saying: "Whoever lied about that data, which is something that has never happened in Romania before, will have to pay''. Do sanctions for that exist or are we talking about a public threat?

Lucian Isar: The rhetoric must rely on concrete statements and data. In the case of budget revenue estimates and of discretionary spending, Mr. Dragnea may have some surprises if the investigations advance, because he had his own people in the government.

Reporter: Do you think that the deficit will stay below 3% with the current government?

Lucian Isar: In order to keep the deficit below 3%, the current government should take most of the following actions: speed up the approval of the implementation by law of the European Directive concerning the elimination of practices which erode the taxation base; adjusting the "royalties" levels to the European median level; the temporary reduction of the leeching of state institutions and companies, including by ending the insolvency procedures; cutting the cost of government borrowing since as a country, Romania has a monetary independence and negative inflation; lowering the borrowing cost of state-owned companies; getting interest on the gold owned by the Romanian state; appealing to the morality of "sponsors" that pay low taxes (sectors that have low taxes should at least pay those taxes that they owe); tax amnesty; the honest pursuit of the fulfilling of the off-set clauses and of the commitments in the contracts for the privatization of state-owned companies; the raising of European funds and the payment of projects upfront, because the time when it was the political party's line to sabotage the absorption of European funds is past.

Reporter: What is your take on the fact that the rich countries in the EU have grown using a deficit of approximately 7 - 8% of the GDP (many are in the excessive deficit procedure), whereas the EU is demanding that we have a deficit of 3%?

Lucian Isar: The 3% deficit as a target defined in the Maastricht criteria is the result of a mathematical calculation to determine the optimal stability, based on a number of economic criteria carried out which the major European powers met at the time of the initial negotiation. In short, it's not a magic figure, it is tied, for example, to the debt of 60% of the GDP and to a nominal economic growth of 5%. In Romania's case, a captive state, there's too much "leeching" going on. This is rather the real reason why it is dangerous to be working with deficits bigger than 3%. To the extent where leeching were cut, for real development and convergence, Romania would to apply the rule of "44 for a number of years. Certain Romanian politicians were inadequately advised in the past to accept without thinking through the terms in the fiscal compact, terms which were significantly harsher than the 3% budget deficit mentioned.