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January 23, 2022

Central bank governor Isarescu: Fiscal Code is inapplicable both in economic and financial terms

The draft Fiscal Code is inapplicable both in economic and financial terms, governor of the National Bank of Romania (BNR, the central bank) Mugur Isarescu told a specialist conference on Friday .

“The tax-cut package is economically and financially inapplicable. (…) The fact that the President of Romania sent the Tax Code back to Parliament for review is a wise thing. It’s an ongoing legal process, it’s one of the President’s rights, and there’s yet another thing… The fact that the institutions of the Romanian state react even to a piece of legislation that cleared Parliament with 100 percent approval. There are public institutions that react, like the Fiscal  Council, or the National Bank. (…) The Prime Minister’s decision to call an extraordinary session of Parliament is a wise one,” the BNR governor explained.

The Parliament passed the Fiscal Code on June 24. President Klaus Iohannis refused to sign it and returned it for reexamination on July 17.

In Isarescu’s opinion, some measures that would be highly beneficial for the economy are set forth in the Fiscal  Code, but the impact of 2.3 percent of GDP the Code’s enforcement as of January 1, 2016 would trigger is supposed to produce some major slippages in the Romanian economy, besides the effect of the wage rises announced for the public sector, which would account for an additional 1.3 percent of GDP.

“We already have 4 percent growth! Where do we plan to get? At 8 percent? Do we have the necessary traction for this? With an economic growth of 4 percent, we are at cruising speed. We should stay on autopilot mode, but all of a sudden we rev up. It’s 2.3 percent of GDP. (…) It’s a brutal, largely impactful move which, against a backdrop of economic growth, doesn’t make sense. When you witness economic growth, you don’t need higher deficits, but instead you need to keep the resources and spend them when economy will see a setback,” Isarescu added, according to Agerpres.

The governor said debate on a deviation of 0.1 – 0.2 percent from the established track is not just a problem of financing, but also a diversion from the announced policies. “If you want to divert from the established route, you have to say, … OK, when I reach 4 percent economic growth … I’ll switch to autopilot. This means that 1 percent deficit is normalcy. If you want to move out of it and advance from 4 to 5 percent, you must prove you have what it takes, the fuel, and powerful engines,” the BNR official added.

According to him, the fiscal-budgetary policy must be anti-cyclical. He reminded the introduction of the flat tax in 2005, which was a pro-cyclical move, the more so as the tax rate imposed has been 16, not 19 percent, causing a structural deficit which was offset by capital inflows. The policy led in 2008 was also pro-cyclical, Isarescu underscored, but we mustn’t relapse in 2016.

He cautioned that the obsession for a fast growth without taking macrostability into account could in time result in a highly costly slippage and “time, years of economic growth would go waste.”

The BNR governor also challenged the idea according to which economic growth is not possible without deficit. “I wonder where did we get this stupid idea we cannot dump,” he said, mentioning developments in recent years, when Romania’s economy has been growing without deficits, and is this year almost on a surplus. On the other hand, Isarescu warned that the already substantial social budget deficits will widen even further just for political and electoral purposes.

Putting the blame on international lenders and the “many a time peevish” attitude of the Romanian authorities in relation with the lenders has prevented Romania from getting an A rating from credit rating agencies, despite having performed well lately, the governor stressed. “The cost of financing is essential, it can eat up 2 – 3 percent of GDP if you don’t pay attention to the lenders. What would be our reason to spoil the relation with the [International Monetary] Fund, or the EU? Are we under the impression that they exploit us?,” Isarescu inquired.

The fact that the decision-makers disregarded the Fiscal  Council’s assessment report and the role of this institution should raise a red flag, Isarescu also argued.

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