The budget - dilemmas and turbulence

(story to be published in tomorrow’s issue, March 24)

The year 2000 budget and the IMF dilemma – Analysis by Lucian Croitoru

The submission of the year 2000 budget for Parliament approval occasioned, as in every year, various commentaries and analyses. As usual, criticism has focused on two points. The first, should we call it the internal component of criticism, focused on the analysis of revenue distribution by destination, in the attempt to decipher the Government’s economic policy priorities through the prism of the budget. The second one, call it the foreign component of criticism, focused on the analysis of IMF’s position on Romania’s public budget. Here, too, are two components of criticism: one that regards as normal that IMF should be intransigent, to demand a deficit below 3% of GDP; and another, which believes that IMF policies have rather led to recession and should be aborted. My comments will refer to the foreign component. I think the key idea that should predominate in any analysis is that realism should be maintained. In the case of any budget, and in the year 2000 budget as well, two issues should be said about realism: a) to what extent the policies underlying the budget correspond to the needs of the Romanian economy, are they the best that can be done under existing circumstances, and consistent between themselves, and b) how precisely can one predict the deficit resulting from these policies. Policy measures adopted in year 2000 bring improvements to the stockpile of regulations the 1999 budget was adopted on. The adopted measures are consistent between themselves and are aimed at satisfying the following needs Romania has: (i) encourage investments, reduce tax evasion and stop the underground economy by reducing marginal taxation rates, eliminating exemptions and simplifying the tax structure; (ii) reduce lavishing, inefficiency and over-employment in administration; (iii) better spending control; (iv) reduce inequities to available resources. These budget priorities are considered national and sustained by the IMF. The problem that seems more difficult to conciliate is the budget deficit. Here are two problems: a) the estimate of the deficit and b) the deficit goal. The size of the deficit determined by the stockpile of economic policy measures underlying the budget is difficult to estimate. For reasons of maintaining credibility and monitoring performances, the IMF can only operate with realistic projections. For the same reasons, the Government must have realistic projections. If, as I said, the set of policies underlying the budget is agreed by the IMF, then, in principle, the realism can be proved by similar projections, and there will be no difference between the two projections. The problem comes at the moment when the IMF does not agree to signing the accord unless the estimated budget is at a certain level, say, 3% of GDP, or lower, as the year 2000 budget is demanding. If the supposedly realistic estimates lead to a 3.5% deficit, and the deficit goal is rigidly fixed at 3%, the accord cannot be signed. Since the 0.5% difference is of little importance for economic and financial developments, there is the question: if the accord is not signed, the negative economic implications for Romania can be worse if the accord had been signed with a deficit just slightly above the initial goal. IMF’s rejection of the budget would only undermine the Government’s entire economic programme. In this situation, the IMF could opt for flexibility. This would not hurt at all its international credibility. If financing the deficit will not generate inflation, a 3% or 3.5% deficit is equally compatible with the inflation goal. And the eviction effect will not be too big because in Romania in the last two years, companies have been financing almost 65% of the investments from retained profits.

United in suffering – Analysis by Dragos Negrescu

The draft budget submitted to Parliament does not offer too many novelties, and it was not expected to, so long as the major expected innovations must be prepared in time. For instance, this year the disappointment repeated that a “budget of programmes” cannot be adopted. A worthy intention, of course, but which stands little chance of becoming materialised as long as existing resources allow nothing but the covering of “maintenance” costs. A real budget of programmes assumes the existence of additional resources that could be allocated. Identifying such resources is even more difficult considering that the number of special funds has not been decreased, and their share in the consolidated budget spending has risen. The problem of special funds is not only quantitative. It reflects a strange philosophy that prevails in ministries and agencies they manage, the acquisition of a certain independence from the Finance Ministry, which reflects the decreased degree of government cohesion and each ministry’s tendency to prompt their own agenda. Additionally, it reduces abnormally the manoeuvring margin in budget policy, which is the contrary of a widely spread opinion according to which it should be approached much less passively than before. I have great reserves as to the real possibility to release additional resources by reducing personnel in central public administration. This point of view neglects the truth that adopting and enforcing the community acquis is a task that consumes a lot of administrative resources. One solution is to nationalise government agencies that have proliferated in the last few years without having a precise mandate or covering sectors with no clear relation to the acquis. The ARD and the Mining Areas Reconstruction Agency are two typical examples. The diffusion of responsibilities in the SME sector should also be clarified, which involves at least three different institutions: ANDR, ANOFP and ANIMM. And it is difficult to understand why a ministry like that of Industry and Trade has in its organisational structure departments whose mandate superimposes that of specially created institutions (e.g., OPC, Competition Office). Discouraging prospects also arise from the conclusion that the ping-pong continues, although less intensely, between the Government and Parliament on tax incentives. It is profoundly regrettable that, less than two months after the rationalisation of the facilities system by a massive restraint of favourable treatments, the Lower Chamber should vote a draft law stipulating tax incentives for so-called “industrial parks.” Not even at the end of a year when instability of normative framework reached its apogee, with enormous costs in terms of credibility, it was not understood that legislative initiatives that are too generous do not serve even those purposes they are destined for. Instead of benefiting from them, the business environment worsens.

Constraints and mentalities – Analysis by Florin Pogonaru

Usually, when a budget construction is under way, many scenarios are considered, each obviously leading to a different result. To the final structure of the draft budget then contribute all these results, to a lesser or larger extent, depending on the probability of each scenario occurring. The frailty of the budget proposed by the Isarescu Government lies in the fact that, out of the need to harmonise acceptability and (supportability) criteria of all parties involved (loan takers, international financial institutions, ordinary taxpayers), the most optimistic variant was chosen. It is clear that the Romanian economy will not find it easy to attain the goals imposed by the current budget, as its unstable equilibrium can be tipped not only by the endless string of political intrusion that confuses Government activity (an instance is the recent crisis in the coalition related to the Defence minister’s situation) and by the possible sharpening of any deviations from the stated values (let us not forget the first alert signal already sounded by the high inflation in January). But it is just as clear that, as a well-versed commentator said, it is an effort worth taking. A constraint the Government must consider is the distortions in the real economy that makes resource allocation inefficient. Since one of the budget’s force directions is the emphasis on investments, it is possible that, besides low resources and the IMF-induced politics, one of the main causes why the investments’ GDP share should remain below that for 1997 is the awareness of the fact that lacking a resizing of the economy, resources would be wasted to no avail. The Government’s constraints do not come only from the real economy. They also come from the system. For instance, the legislative jungle that has grown out of proportion, about which the Prime Minister himself, a usually moderately spoken person, said “I’m at my wits’ end.” We must also remind a fact that has no implications and will not bring spectacular improvements of the balance: the Premier’s suggestion that ministers should discover and use alternative financing sources. Perhaps some would take it as a cynical advice or an attempt to “share the burden” with subordinates, but I think it is an encouragement to change mentalities.

A new beginning – Analysis by Claudiu Doltu

This year’s budget seems to assume a different economic concept compared to the previous years – a healthy economic growth cannot be obtained as long as fiscal pressure determined a drop in savings. The living level in any country depends on their inhabitants’ capacity to produce goods and services, on economic growth. The higher the savings, the higher investments are. Without sufficiently high investments, no country can improve the way it produces goods and services. Consequently, for the most part of the populace, welfare will remain an illusion. Too many years had to go before this concept was accepted, and immediately spectacular results are out of the question. The 2000 budget reflects the tax reform measures adopted at the beginning of the year and hopes to have positive economic growth, but also the fact that it is an election year. Positive economic growth will be confirmed if tax reform measures will trigger a growth in savings in the non-governmental sector. On this basis, investments can be expected to grow due to the private sector. From the prospect of budget revenues, the price of these positive effects is a rapid drop in budget revenues as a result of lower profit taxes, salary tax revenues and VAT revenues. The change in the structure of budget revenues and expenditures will determine certain evolutions in consumption. A slight rise in private consumption is expected, as well as a larger rise in government consumption. This is the consequence of maintaining a wide government sector, whose operation, although austere, requires major consumption. At the same time, political constrains in an election year do not allow a significant resizing of spending in this sector. What is likely is a growth in investments and exports, while the current account deficit will not change significantly (as a GDP percentage). Year 2000 could be the beginning of a new stage where attaining a budget deficit target will no longer be the essential preoccupation in fiscal policy, but only an important parameter that is considered when macroeconomic policy mixes are being designed, so that the fundamental correlation in the economy are not affected. In the years ahead, the deepening of the neutral character of tax policy can eventually extract the Romanian economy from the vicious circle of dropping savings, of falling investments and the economic decline, and can put the economy into a virtuous circle of rising savings and investments, generating increased welfare.

The budget, vehicle of European accession – Analysis by Valentin Lazea

The Romanian society is learning, slowly but seriously, that no gain comes gratis, without certain costs. One of the preliminary conditions for accession to the European Union is to attain compatible macroeconomic indicators, and first of all, a low inflation. What can Romania expect while monthly inflation exceeds the annual target in EU member countries, namely 2%? To avoid sterile talking about accession, a major condition is a tight control of the budget deficit. Indeed, this year’s budget, with the ambitious deficit target, comes to support these desiderata. Romania needs a few years of considerable primary surpluses (revenues above spending, excluding interest spending), if it wants to come to order with financing. A telling example is Greece, which in 1993 had a 1.5% GDP decline and almost 15% inflation, with a 13% budget deficit (of which more than 11% were interest payments). Last week, Greece submitted its candidacy for the Monetary and Economic Union, will all of its economic indicators compatible with those of partner states. A miracle? Not exactly. The budget deficit has been dropping year after year (to less than 2% in the last two years) by attaining primary surpluses over 5%. As a result, inflation dropped below 3%, and real GDP is growing by 3% a year. Another lesson from the Greek experience, which our budget will unfortunately never learn, is that the budget should be balanced by raising revenues and not by reducing expenses. While in 1993, Greek budget revenues were 35% of GDP, today they are almost 41%. As more is learned about accession, the Romanian state will have, willingly or not, to adopt the same conduct. Only a sensible growth of budget revenues can attain the European standards on human capital (education, health), public services (defence, order, justice) and environment. Of course, there is not a question of more spending on subsidies and transfers, which in Romania are already very generous. The real issue is, why is it that in our country, every time a budget where spending meets European norms (38-40% of GDP), the entire economy cries foul? The explanation is that about a third of all economic agents are unprofitable, because of slow restructuring, and many of those profitable are hiding in the “grey economy.” Therefore, fiscal pressure on fair taxpayers becomes indeed high. It is proved once again that without restructuring and in-depth privatisation, however painful, the Romanian economy stands no chance of a positive future.