Daniel Dăianu: "European funds cannot prevent the need for budget correction"

European funds represent a "golden nugget", which can mitigate the costs of macroeconomic adjustment, facilitate the necessary reforms (including the modernization of the Romanian state), facilitate the financing of the balance of payments, increase the competitiveness of national production, but "European money cannot prevent the need for budget correction" , says Daniel Dăianu, the president of the Fiscal Council, in the preface of the work in the Convergence Analysis Report "Romania - Euro Monitor Zone" - The Union faced with the "polycrisis", published yesterday on the website of the National Bank of Romania.

The document coordinated by the academician Daniel Dăianu shows that at this moment for our country the main economic challenge is the budget deficit.

"Now, the structural budget deficit is probably over 5.5% of GDP. Last year, the budget deficit (ESA) was approx. 6.2%, and this year, in the absence of clear and credible measures, the deficit would be higher. The size of the structural deficit is to be judged and related to public investments, which were usually between 5-6% of GDP in the last decade. If we exclude funds from the EU budget from public investment, it can be seen that the deficit would be almost double the capital expenditure. It's a situation that should make many people think", says Daniel Dăianu.

The President of the Fiscal Council mentions that, although public debt is around 50% of GDP, it is not high compared to the EU average (where it is over 80%), but it is much increased compared to 2008, when it was 15% of GDP .

"The debt may be increasingly threatening if the deficit is not reduced, especially since monetary policies have tightened a lot in the US and Europe, which influences the conditions on the financial markets. The budget deficit target of 4.4% of GDP in 2023 was not realistic, given the economic situation and the construction of the budget. A decrease in the budget deficit from over 6% to 3% of GDP is considerable and equates to a reduction of over 3% of GDP in domestic absorption; this necessary correction would allow the equivalent reduction in relative terms of the need for external financing. An adjustment of such scope is difficult, and the effort (cost) should be distributed as equitably as possible", claims Daniel Dăianu.

His Majesty points out that the problem of the budget deficit is augmented by the imbalance of the external balance, with a current account deficit that, last year, exceeded 9% of GDP and which in 2023 will be below 8% of GDP, against the background of the improvement of the exchange rate external (terms of trade).

"It is assumed that a reduction of the structural budget deficit below 3% of GDP will lead the current account deficit to 5% of GDP. The development of the internal production of tradables (exportable and importable goods) would bring the current account deficit lower," states the president of the Fiscal Council in the quoted document.

He also claims that it would be good if the correction program announced by the Government "allows the budget deficit to be around, just below 5.5% of GDP, and the reduction to continue in 2024".

"It is difficult to achieve this objective because, it is repeated, a large-scale correction cannot take place without costs. And the adjustment cannot be made only on the expenditure side; it also calls for increases in budget revenues - as noted by numerous economists, analyzes by international financial institutions, the European Commission, the Fiscal Council. The correction extended over 2-3 years will be a severe test for Romanian society, which must not enter into a "distributional war", the signs of which are already visible. As much as the economy is dominated by individual and group interests, by the desire for profit, there is a need for solidarity and perception of society's interest, from the perspective of an implacable external financing constraint", says Daniel Dăianu.

Much better collection of tax revenues, higher non-tax revenues (including increased royalties), rethinking of the tax regime, which must be fair (it is now regressive, with lower incomes generally paying proportionately more), more public spending efficiency and the reduction of waste, are measures that can contribute to reducing the budget deficit, says the coordinator of the work published yesterday by the central bank.

Mr. Dăianu claims that, if the fiscal/budgetary adjustment takes place, either with an extended horizon to 2025, it is possible to enter the MCS2 in 2026-2027 and join the euro zone towards the end of this decade.