1. Fiscal Policy in Romania: Vicious circles, Secondarity, and Dilemmas
Article IV: Economic Policies for a Sustainable Growth
National Institute of Statistics – The Conference Hall
June 14th, 2016
Article IV: Economic Policies for a Sustainable Growth
National Institute of Statistics – The Conference Hall
June 14th, 2016
Fiscal Policy in Romania: Vicious circles, Secondarity, and Dilemmas
Lucian Croitoru
Presentation prepared for the seminar
Article IV: economic Policies for Sustainable Growth
National Institute of Statistics
Conference Hall
June

2. I. The Romanian fiscal policy before the 2009 recession

3. Three vicious circles before 2008
The savings vicious cicle:
Corruption leads to low savings at firms level
Low savings leads to low investment
Low investment leads to weak competitivenes
Insufficient competitivenes leads to corruption
The fiscal vicious circle:
The number of voters dependent on redistribution is high
The government fails to cut inefficient spending to keep the budget deficit sustainable
Higher taxex are used to move savings from the private sector to the public budget
The informal (hidden) economy vicious cicle:
More firms migrate to the informl sector
The tax base narrows
Higher taxex are needed

4. Three vicious circles before 2008
The savings vicious cicle:
Corruption leads to low savings at firms level
Low savings leads to low investment
Low investment leads to weak competitivenes
Insufficient competitivenes leads to corruption
The fiscal vicious circle:
The number of voters dependent on redistribution is high
The government fails to cut inefficient spending to keep the budget deficit sustainable
LOWER taxex are used WITHOUT RESTRUCTURING EXPENDITURE
The informal (hidden) economy vicious cicle: PSTPONED FOR NOW
BUT ANTICIPATIONS THAT HIGHER TAXEX WILL BE NEEDED ARE LOOMING

5. II. The recent experience compared to the cyclical position of the economy: the greate excape

8. III. Is there a SECONDARITY process in Romania?

9. The hypothesis of secondarity and implications for monetary policy in Romania
Secondarity: the global surplus of savings is generated in an increasing number of countries, whereas the overwhelming part of the global deficit of savings is located in the US (Croitoru, 2015b)
The US are far better equipped to accommodate swift capital outflows, currency depreciation, an abrupt decline in domestic asset prices, banking system weakening, and the flagging domestic demand

14. A new policy dilemma? (I)
Actual growth rates above potential; GDP gap clossed in 2013; see Croitoru (Are We Sistematically Wrong when Estimating Potential Output and the Natural Rate of Interest?)
GDP growth rates above potential and low global interest rates will pose again a dilemma to monetary policy in Romania:
A higher policy rate would be needed to tame inflationary pressure from the positive GDP gap
A lower policy rate would be needed to avoid the leu appreciation
If a current account surplus emerged, as the secondarity suggests, the policy rate dilemma would not appear. However, we will not have a current account surplus.
However, the new Fiscal Code based on tax cuts together with wage increases would lead to fiscal deficits above 3 percent in 2016 and 2017, eliminating the issue of the interest rate dilemma, but creating other serious problems to the macroeconomic stability of Romania.

15. A new policy dilemma? (II)
The likelyhood of a USA recession is high
A Minsky journey from hedged borrowers to speculative borrowers and finally to Ponzi borrowers is happening, with the share of speculative borrowers becoming higher and higher
The last USA expansion lasted 73 months; the longest lasted 120 years
The likelywood of an USA recession emerging in the period is high. Most probably, it will take palce in the vecinity of 2019
However, the actual fiscal policy will leave our budget in a „catch 22” position: a larger one will be needed, but no one will be desiring to finance it

16. References
Croitoru, Lucian și Cornel Târhoacă (1999), „Fiscal Policy in Romania: Three Vicious Circles of the Romanian Economy”, in sau în D. Dăianu și C. Rühl (ed.) (1999), „Economic Transition in Romania: Past, Present and Future”, Proceeedings of the conference Romania Years of Transition-Past, Present and Future, October 21st – 22nd, The World Bank and The Romanian Center for Economic Policies.
Croitoru, Lucian (2014), Cercul vicios al politicii fiscale,
Croitoru, Lucian (2015), “The Tendency Towards Secondarity in Managing Global Imbalances”, Scientific Annals of the “Alexandru Ioan Cuza” University of Iași, Economic Sciences, Vol. 62, No. 3, pp
Croitoru, Lucian (2016a), „Are We Systematically wrong when estimating potential output and the natural rate of interest?” Journal of Economic forecasting (forthcoming)
Croitoru, Lucian (2016b), „Când va fi următoarea recesiune și cum ne pregătim pentru ea?” și