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3.2.2.5 Romania's Fiscal Sector


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Read also Public Debt of Romania and the Financial Crisis

By international standards, Romania is a low indebted country but debt has risen continuously during the nineties, mainly externally financed (cf. Albu & Pelinescu 2000: 4).[1] Nonetheless, in 1999 Romania witnessed a short financial crisis and barely avoided default, by massive balance of payment adjustments, including a reduction of the budget deficit by 50 % (cf. Dăianu & Kallai 2004: 4).

Romanian Government Debt

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While general foreign debt is still rising, Government debt in Romania as a percentage of GDP and budget deficits were moderate and declining over the last years (cf. Figure 3.13). Eurostat data from 1995 to 2006 suggests that the decline in Government debt as percentage of GDP in Romania seems to be due to both, a very sharp deceleration in making new debts and the accelerated growth of GDP in the last years, not due to a reduction of the absolute amount of debts.

According to the low standards of living, the basically home-made reforms in Romania after 1989 had the additional objective of improving the living conditions of the population (food, heating, electricity). A first increase in expenditure (for real wages, subsidies, pensions and transfers on the one side and a cut in taxation on the other side) seemed to some extent “inevitably” (Demekas & Khan 1991: 19). After starting in transition without notably debts Romania (some 230 million US-$ in 1990; cf. Albu & Pelinescu 2000: 2) managed to accumulate debts amounting closely to 40 % of GDP (domestic public debt plus foreign debt).[2]

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Main driving forces were the decline in output (shrinking GDP), an eroding tax base and, hence, shrinking revenues, combined with the costs of reform and restructuring, further intensified by the harder access to international capital markets (cf. ibid).  Other accelerators seem to be a “political business cycle” (ibid: 19) during the nineties and heterogeneous coalitions (ibid: 3). Public debt accelerated during the elections in 1992 and 1996 and increased only moderate afterwards (cf. ibid: 3). That observation seems to be valid also for the year 2000 but not for 2004. These accelerations also coincide with the peaks in inflation during the respective years and the freeze in disinflation during the year 2000 (cf. chapter 3.2.2.4). The notion of heterogeneous coalitions refers to the public finance theory rule of thumb that the more parties are involved into a coalition the more free-spending Governments tend to be.

Image 3.13: Romanian Government Debt and Romania’s Budget Deficits
Romanias Public Debt, Government Debt, External Debt and the Budget Deficit

Source: Eurostat, Gardo 2006, own graphic [3]

Public Debts due to the Fiscal Deficit

Academic Research paper and Study of the Economy of Romania and Romanian Business

Main source for the rise in public debts are large primary deficits. Conventional deficits might have been rather moderate but they were accompanied by large quasi-fiscal deficits of e.g. 8.2 % in 1992 or 6.5 % in 1996 (cf. ibid: 9). The latter were financed by seignorage as the tax system performed low. Toader (2005) demonstrated a descending taxation burden as a share of GDP from 35.5 % in 1990 down to 27.3 % by 2006. Tax burden was measured as total revenues from effectively collected taxes, duties and contributions to the general consolidated budget. The degree of taxation subsequently declined until 1997, experienced a short rise until 1999, decreased again until 2001 and remained more or less stable afterwards.

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Reasonable explanations are the low performance of the tax collection system and tax evasion. The government tried to defy the sharp fluctuations in revenues during the nineties with several tax reforms, which all aimed at a broadening of the tax base but also reduced marginal tax rates (ibid: Albu & Pelinescu 2000: 9). The latest tax reform removed the progressive income tax system by the introduction of a uniform flat tax of 16 % on personal and corporate earnings and the simultaneously removal of many exceptions. Some first progresses, especially in reducing the size of the shadow economy ,could be observed but social contributions still are fairly high and might hamper the efficiency of the tax reforms (cf. EC 2008 a: 11ff.).

Footnotes

[1] Domestic debt gained a risen importance only since the late nineties.

[2] It has to be noted that this chapter was one of the hardest to compile due to the sheer absence of coherent and complete data covering the entire period. For the nineties the assessment of Albu & Pelinescu (1999) is outstanding. Furthermore, it has to be stressed that the amount of public debt during the nineties was a very sensitive function of the definition of “public” as the Romanian state still owned large or even larger parts of domestic commercial banks (ibid: 1).

[3] Due to the absence of reliable, continuous and coherent data from one source for the whole period Figure 3‑13 has to be considered with some caution. Budget deficit data from 1990 – 2001 is taken from Gardo (2006: 657), likewise the data on foreign debt. General government debt and GDP at market prices are taken from Eurostat. Anyhow, the figure is broadly consistent with literature and might be sufficient for illustrating the general trends.