The IMF warns that unrealistic fiscal relaxation could endanger Romania’s hard-earned macroeconomic stability

The International Monetary Fund (IMF) has advised Romania to temper the extent and speed of implementing the fiscal policy relaxation measures and the new spending plans, to be able to gradually reduce public debt, ease the tax burden, and fund new projects. “Romania has made important steps in the last seven years in improving its controversial public finance. We are worried that in its current form the Fiscal Code would jeopardize these achievements. It would involve an annual loss of revenues of about 2.2% of the GDP and an increase in the budget deficit of at least 3% of the GDP, thus placing public debt on an upward trajectory,” according to a letter called “Critical Decision” signed by Andrea Schaechter, the head of the IMF mission in Romania, and Guillermo Tolosa, IMF resident representative for Romania and Bulgaria. According to the two IMF representatives, the state would have to give up any new budget spending for infrastructure, defense, wages, health, and education to keep the deficit under control. “Is there an alternative third way that would allow Romania to gradually lower its public debt, alleviate the tax burden, and fund new projects? We believe there is, if the scope and speed of tax policy measures as well as new spending plans are more moderate,” the letter says. Fiscal stimulus measures should be well-timed. While the economic situation is still very difficult for many Romanians, the country is now growing at full speed and wages have risen this year by more than 7 percent. It is not evident that further stimulus is desirable at this point, if financed with more debt, according to the IMF. “Austerity would inevitably be needed when cheap and abundant financing stops and debt has reached higher levels. Romania has gone through such an unfortunate cycle of excessive stimulus in good times and strict austerity in bad times in the past decade. It should not be repeated,” the letter states. The IMF representatives also warn that the current proposed tax package is almost exclusively directed to spur consumption, which is already the fastest-growing part of the economy. “The benefits of consumption-boosting tax policy initiatives are likely to be short-lived if there is little growth in investment.” To benefit from lower taxes, Romania must also create the fiscal space for prudent tax cuts via more concrete actions such as better tax collection, more efficient public spending and the shift from nationally financed investment toward EU-funded projects. “In all three areas progress is under way, but when assessing the actual numbers they do not yet add up to the sizeable amounts needed to finance the Fiscal Code proposals.” Revisiting the Fiscal Code in Parliament is an opportunity to clarify the medium-term fiscal priorities, assess realistically the size of fiscal space and the speed at which it can be created, and rescale the proposed tax cuts accordingly. It will be a critical decision to preserve the hard-won achievements of macroeconomic stability, the letter concludes. The full letter is available