The Romanian Fiscal Council represents an institutional transposition and an integration of the European fiscal regulations into the domestic law. Although it is a relatively new institution at European and national levels, the Fiscal Council has an important mission in the Romanian context for several reasons:

• The European fiscal legislation - embodied in the Romanian legislation mostly through the Law no. 69/2010 republished - has its origin also in the lessons of the Great Recession. Countries with vulnerabilities, augmented by pro-cyclical fiscal policies, external deficits and increased indebtedness fueled by the unrestricted capital movement (specific to the Single Market) and by the lack of macro-prudential tools, have suffered painful corrections after 2009. This reality calls for prudence and caution when formulating economic policies, manifested in the fiscal-budgetary area, through the accumulation of fiscal space. Even if the European legislation will be simplified and, perhaps, enlarged - through a "European fiscal capability" - Romania should obey the letter and, above all, the spirit expressed by the Fiscal Responsibility Law. This spirit implies transparency, predictability and comprehensiveness in the construction and execution of public budgets and a fair tax regime.

• The fiscal space is vital in emerging economies which, by definition, do not issue reserve currency. Such economies need appropriate "buffers", especially in times of high uncertainty and rapidly changing financial markets. The Romanian leu is not a reserve currency and the National Bank of Romania does not have a space for maneuver similar to large central banks. That is why imbalances must be a cause for serious concern in order to avoid the deterioration of financial stability, sovereign risk assessment, financing and the dynamics of the economy.

• The public debt is at a reasonable level (around 35% of GDP in 2018, according to EU methodology), but the deepening of the "twin deficits" in recent years, especially the external one (the current account deficit will probably exceed 5% of GDP in 2019), coupled with a deteriorating structure of its funding, singles out Romania among other Member States in the region; a correction is needed in the fiscal-budgetary policy.

• The exodus of human capital and rising labor shortages led to wage increases directed at mitigating this phenomenon. However, excessive external imbalances are not forgiving and can demand drastic adjustments when the international environment becomes unfavorable; wage increases must take into account productivity and the competitiveness of the economy.

• A proper calibration of the macroeconomic policy mix is essential to protect the economic balance. These policies must take into account the medium and long-term objectives of the Romanian economy, avoiding ad-hoc measures, not based on a thorough analysis, which are counterproductive. Policies must be sustainable.

• The issue of economic policy harmonization is all the more important as the benchmarks to be achieved are not confined to managing the current situation, but have a very ambitious objective - as proposed by the report drafted under the supervision of the National Commission, as well as by the associated Action Plan - that of joining the Euro Area (and, in advance, entering the Exchange Rate Mechanism - ERM2); a country with large deficits can neither join the Euro Area, nor enter ERM2.

• Tax revenues need to increase given the underfunding of basic public goods - education, health and infrastructure. Tax revenues of about 26% of GDP are considerably below the requirements and needs of an EU Member State. The necessity to increase tax revenues should also take into account the new pension law. This law seeks to restructure the pension system on a more equitable basis, but has a major impact on the public budget and will greatly complicate the effort to reduce the structural deficit.

• While concrete fiscal and budgetary corrections are a matter of public and political debate - they can be achieved both by increasing revenues (increasing tax rates, collection efficiency, or both; collection can be improved by computerization and robust measures against tax evasion and tax “optimization”), as well as by adjusting the structure of public expenditures, while respecting the principle of efficiency - the need for broader adjustments of the consolidated budget cannot be called into question.

• Therefore, the actual questions that need to be answered are: How will the adjustments be made? What effects will they have for people and firms? What is the time span of these effects?

The opportunity to represent a new team invested by Parliament with a mandate - in the letter and spirit of European law - at the Fiscal Council, is an honor and an obligation at the same time. The mission is to serve the society with professional honesty, to evaluate the design and implementation of fiscal-budgetary policies and the relationship with other components of economic policy.

A difficult stage - that of institutional building - has been covered in the previous mandate and now it must be continued by dedicating the best efforts in the service of Romania's overall economic interests as an EU Member State.
 

Daniel DĂIANU

Chairman of The Fiscal Council