You cannot achieve a fiscal consolidation that reduces a deficit from between 7-8% to the target of 3% of GDP solely by cutting expenditures, claims Professor Daniel Dăianu, president of the Fiscal Council..
‘To create fiscal space, you need to aim for 2% of GDP, considering that budget pressures will increase next year.Think about it: 5% of GDP represents fiscal-budgetary consolidation.Believing that you can achieve this solely through expenditure cuts is nonsense.It’s not feasible.Let’s look at Romania’s budget and see how fragile it is.Revenues are at their lowest,’ he explained during a conference organized by Financial Intelligence.
According to him, we are facing a syndrome of high twin deficits and a major imbalance in the trade balance.
‘The large budget deficit exerts a fiscal dominance over the mix of economic policies and monetary policy.It does not favor an improvement in the sovereign rating and impacts inflation and interest rates,’ Dăianu explained.
He further stated that large deficits fuel aggregate demand, which is not reflected in investment traction.
‘Certainly, the State makes investments, but these should not translate into white elephants.We need investments that are directed toward the production of tradable goods, which support export and can replace imports,’ emphasized the president of the Fiscal Council.
In his opinion, this aggregate demand, supported by a pro-cyclical policy, also affects interest rates.
‘Let us look at how interest rates have decreased in our country.The National Bank of Romania (BNR) is not relaxing the monetary policy interest rate.Let’s be clear.When inflation declines, you can have a strengthened monetary policy.If inflation decreases faster than the decline in nominal and real rates in the market, this can be observed in other countries as well.That’s why some central banks, including the ECB, are rushing to lower rates to avoid hindering the economy, but they will remain positive,’ Daniel Dăianu concluded.
