Hyper-regulation deepens the deficit of trust (opinion by Daniel Apostol)

These days everyone is talking about deficit and deficits. International financial institutions, the European Commission and even the National Bank of Romania have issued warnings about the risk of deepening the budget deficit. On the national political scene, government and opposition are now dueling in figures and heavy words and pull the deficits up and down, as if they were elastic. The new Minister of Finance accuses the previous of falsifying the figures and hiding the true situation of public revenues and expenses. In front of the stage, the general public wants to know the truth: whether or not there are enough money for them to receive salaries, pensions, social allowances, children allowances, etc. fully and timely.

The problem is how big is the missing part, one that actually reflects the financial health of the country. If reflected in investment expenditure (which determines development and revenue multiplied over the long term), the budget deficit is not necessarily a problem. Normally, the budget deficit decreases during periods of sustained economic growth: state revenues increase as a result of the development of the economy and better cover the needs for public spending. However, in some places, even in economic growth – the deficit may increase due to the increase in government spending. This is what is happening now in Romania.

GDP growth will accelerate slightly this year to 4.1% (from 4% in 2018), but the economy will slow down to 3.6% in 2020 and 3.3% in 2021, the European Commission shows in its Autumn forecasts. Unemployment will rise to 4.2%. Threatening (because it will exceed the 3% threshold), the budget deficit would be around 4.4% of GDP (four times higher than in the euro area). According to the Commission’s analysis, “private consumption is expected to decrease, but will remain the main growth engine”, in the context of deeply pro-cyclical policies (relaxed taxation and financing of unsustainable budgetary bubbles – increases in salaries and pensions). The IMF, for its part, recommends that monetary policy should remain restrictive and that fiscal policy should be “anchored by medium-term budgetary objectives”. The Fitch rating agency also notes a gradual weakening of the public finances in the short and medium term, in the current political context.

Above all these, the INS draws another dark touch: the phenomenon of demographic aging is accentuated, the population aged 65 and over exceeding with 471,000 people the young population of 0-14 years, as of July 31, 2019 compared to July 31, 2018. INS shows that the average age of the population was 41.7 years, 0.3 years older than on July 1, 2018; the urban and the female population are the majority (56.4%, respectively 51.2%), and the largest share in the total population is held by the age group 40-44 years (8.6%). According to PwC estimates, to support a 3.5% economic growth, another 1 million employees are needed by 2022 and, paradoxically, although we have one of the lowest unemployment rates in the EU (3.2%, the lowest in the last 30 years), we also have the third highest level of inactive population among the member states.

We have many deficits in Romania. But how do we get rid of the budget deficit? First of all, the state can improve the tax collection; here it is very visible the historical inability of ANAF (whose IT system is on the verge of collapse) and of the state to make efficient the collection of tax revenues and to substantially reduce tax evasion. Then, the state can borrow to cover the budget hole; this is already happening, Romania over-indebting the next generation to pay current pensions and salaries. The solution cannot hold for long, because a state living on debt loses credibility and, as a result, pays higher interest rates. A third option is for the state to force the reduction of public spending by applying a strict budgetary discipline. But what to do then with the electorate, who is waiting for the state to respect its promises. And what to do with the party clients, who are also waiting for their slice of cake as a result of victory in elections? Fourth, the state can reduce the budget deficit by increasing taxes. But who has the courage to ask the voter for his vote at the same time as he puts his hand in his pocket to thin his wallet?

At best, the government can counteract the budget deficit by measures of sound economic growth (through investments, not by consumption), by reducing government spending and by simplifying tax regimes, thus leading to economic conditions favorable for development and a business environment confident in public policies.

As written above, Romania faces many types of deficits. The trade deficit represents the negative result of the trade balance in which the imports of a country exceed its exports. The money that comes out of the economy in exchange for goods or services purchased from abroad is more than the money brought into the country by the export of goods and services. Theoretically, the trade deficit is not necessarily a bad thing: the trade deficit resulting from the increase of imports for refurbishment has long-term positive effects as opposed to the imports for consumption. Exactly the opposite is happening in Romania. We mainly import consumer goods and too little technology for investments. Today, Romania does not produce enough goods for its citizens, and when domestic production is low, imported goods from other countries increase. In the food sector alone, the trade deficit deepened up to 24%.

But in Romania we are facing another deficit, which I see to be the most dangerous today – the deficit of confidence. The people no longer trusts public policies. People don’t believe in governments anymore. The voter goes to the ballot box without little confidence in the one the voter votes for, the hope rather than the confidence is the engine for voting. The business environment does not trust the policies of the state, as the private economy does crazy slalom in the legislative thicket, adverse for most of the times. According to a BestJobs poll, three out of ten Romanian employees would never work for politicians, regardless of the money they would be offered, while almost half of them would accept a job offer from a political party, but only under certain conditions, and that says a lot about the lack of trust in the political environment. When it comes to attitude towards politics, a quarter of respondents say that they have been judged or ironized at work by bosses or colleagues because of their political choices. On the other hand, 16% of the respondents would enter into contradictory discussions even with their managers, if they found out that those have different political options, trying to convince them that their choice is wrong. However, three out of ten respondents prefer not to discuss their own political sympathies at the office, and one in two is not interested in anyone’s political choices.

One of the causes of deepening the deficit of confidence is the chaotic way in which the state produces rules, ordinances and laws. Hyper-regulation of markets in the absence of professional impact studies, without direct consultations with the parties involved in and affected by the new regulations, the lack of predictability and stability of the legislative framework have produced a serious divide in society. The gap between the decisive environment and the real economy is based on the acute lack of credibility of the state in front of the taxpayers. The lack of confidence is the cause of many shortcomings in Romania. An unfortunate example is the way in which GEO 114 was imposed, which has produced significant distortions in many economic fields and especially in the energy sector, far from achieving the goals set out initially. The deficit of confidence deepened once again.

As showed, Romania is facing at the same time the accentuation of multiple deficits that are difficult to cover: we lose people and we lose money, we lose confidence in the administration and in the capacity of the state to provide a better life to its citizens, the economy loses investments and is more and more vulnerable to external risks. In order to achieve the recovery of Romania, the recovery of the economy and the recovery of society, the government must fight more and more with the deficit of confidence, at the same time as it must manage the deficit in public finances. The deficit of confidence deepens the budget deficit, but especially deepens the state’s dysfunctions in relation to the real economy.

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This article firstly appeared in the printed edition of energynomics.ro Magazine, issued in December 2019.

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