THE GROWTH OF GOVERNMENT BORROWING WILL SUFFOCATE THE ECONOMY  The government can run, but it can"t hide

Călin Rechea

The current government, just like all the others in the last 20 years, is incapable of understanding that a country can not develop, even under favorable foreign conditions, without economic freedom. The government is using the economic international crisis as a justification of the domestic crisis, and to cover two decades of disastrous economic policies.

States in the post-war period have always acted as a parasite, by creating increasingly bigger and rigid institutions. The justification of this expansion, the creation of a better and fairer social structure, was accepted when times were good.

The economic crisis creates serious troubles for parasites, because the host gets sick. A "clever" parasite would reduce its consumption needs, drastically if needed, because its survival depends on the host"s survival.

In Romania, the parasite seems to have lost even its self-preservation instinct. Does it think that after killing its host it"s going to find another one?

Through the steps it has announced so far, the government in Bucharest seems to act only with the short term in mind, and more specifically the presidential elections. If this is the only thing its is they are concerned with, then the first installment of the IMF loan may very well be the last.

The main goal of the agreement with the international organizations, before the authorities admitted they might use the funds for paying wages, was to help keep afloat a rotten economy. The desperate measures taken these last few days, including a new cancellation of the state companies" debts, together with increased taxation, shows that the EUR 20 billion will be squandered.

On top of this foreign "aid", the state also shows an unchecked appetite for borrowing, in order to finance or refinance the budget deficit. It is very likely that Romania"s economic implosion, which will be obvious even after the first economic "growth" data of Q1 2009, will force the government to revise the state budget again.

Since Romania can"t bear any more taxes, the government should completely let go of its "anti-crisis strategy" and to dramatically cut the fiscal burden as well as the size of state apparatus. None of the "accomplishments" of these past 20 years justify the current size of local and central authorities.

The evolution of government borrowing unfortunately shows the opposite. Even without the irresponsible lump sum tax, the booming growth of government borrowing increases competition for attracting financial resources. Data from the Central Bank shows a growth of 189.3% of government borrowing YOY, up to 29.3 billion lei (see chart).

Those who are expected to pay for it, namely private companies and individual citizens, have lowered their borrowing for the moment, given the deepening of the crisis. The private sector has probably come the conclusion that the current economic structure is no longer sustainable, and a relaunch of borrowing given these circumstances can not bring about anything good.

The latest data from the BIS (Bank for International Settlements) shows that foreign bank"s have significantly reduced their exposure to Eastern Europe"s emerging markets ever since Q3 2008, and the trend will probably continue at least until the end of this year. The chance of money going into the economies of emerging countries like they used to before the crisis, once the first signs of stabilization appear, is non-existent.

The pressure of government borrowing has not yet begun to affect the private sector, because non-government borrowing has shrunk almost three times between March 2008 and March 2009, down to 23.1%. The difference between the dynamics of the two types of borrowing, private and public, are a warning of the pressure that Romanian companies will face in the near future. Apart for this competition for financial resources, the private sector will be faced with the increase of taxes, which will thus be a new burden for Romania"s economy.

The results of a recent Synovate, which were not only reproduced in the financial press, should give the authorities serious food for thought. While only 78% of Romanians are worried about tax hikes this year, the tax hikes in the coming years should concern all of them. Where will the demand for new loans come from, if companies dissolve to avoid the lump sum tax and individuals are expecting taxes to hike?

The government has thus created an environment that won"t even allow a consumption based recovery of the economy. What will the post-crisis economic environment look like? Like a lifeless desert, filled with people of people living on unemployment aid. The first instalment of the IMF loan only provides the Romanian government with an illusionary respite from the crisis, just like the reduction of the interest rate does.

The government can try and run from the economic crisis for a while, but it can not hide from its effects, not even in the short term. Can Romania hope for a recovery of the self-preservation instinct of the Government?