ROMANIAS FISCAL IMPLICATIONS DURING THE GLOBAL [601574]

ROMANIA'S FISCAL IMPLICATIONS DURING THE GLOBAL
FINANCIAL CRISIS

Student: [anonimizat], Romania
[anonimizat]

Abstract
In this paper we will present some implications of the financial crisis in Romania and
the meas ures taken at the government and at the bank level. In 2008 the global economy
confronted with the biggest economic crisis since the 1930’s Great Recession, which
affected both developed and emerging countries, demonstrating the degree of
interdependence o f world economies.
Keywords: fiscal policy, financial crisis, Romania
JEL Classification: E32, E62, G18

1. INTRODUCTION
Since the last quarter of 2008 the crisis spread in Romania in the context in
which our country's economy registered an unsustainable gr owth (7.3% in
2008) that fuelled excessive current account deficit of about 11.6% of GDP in
2008. As in other countries, managing economic boom has proved difficult
because fiscal policy fuelled by income imbalances by spending income related
to further gr owth, which led to higher fiscal deficits. The degree of impairment
of the world economies by the crisis depend upon the vulnerabilities of each
economy and how governments respond depends on available resources,
institutions and instruments used.

2. ROMANIA AND THE CRISIS
In this context, any economist , aware of the power machinery of the
monetary system , should applaud the action taken by the German Chancellor
Angela Merkel who correctly identifies the nature of the monetarist economic
cycle and explicitly references the root causes: " no crisis occurred because I
injected too little money in the markets, but because I supported gro wth by
injecting too much money , and now we see that this growth is not sustainable"
otherwise , as cla ssical economists demonstr ated, expansionary monetary policy
underpins any serious theories on economic busin ess cycle . From here we
deduce, therefore , increased responsibility in managing mo netary authorities
gait economy , not just short term but long term for the entire productio n
structure a nd for certain economy sectors . Political pressure in the context of the
crisis in the United States and Europe led to the adoption of comprehensive anti

-cyclical fiscal programs whose results seem to be, at least for the time being,
extremel y doubtful.
Initial turbulence in the real estate sector transferred quickly in the
financial sector led to a decrease in investment and an anticipated lower level of
demand has led to a decline in industrial production. As a result, consumption
decreased and unemployment rose, events that have exacerbated a spiral fall in
demand. Under these circumstances, economic activity fell below potential
GDP, a measure that tries to capture, based on historical trend, sustainable pace
of growth of an economy in the absence of shocks.
In terms of economic activity falls below its normal level, Keynesian
theory argues that in the absence of a stabilizing government intervention , the
downward spiral will increase until it reaches an equilibrium point lower than
the level at which previous work. For this reason, a large part of governments,
both in developed economies and emerging economies into recession or
affected by a slowdown in economic growth, considered that anti – cyclical
efforts in monetary policy should be backed by strong intervention tax level. As
a result , we have adopted a number of programs designed to stimu late
consumption and investment , either through public spending ( finance d by
increasing budget deficits ) or temporary tax cuts (without a correspond ing
reduction in public spending , so also funded by budget deficits) . The explosive
growth of the budget deficit due to lower tax revenues means attracting massive
private funding internally or externally. If this is done by foreign loans, this
means an in crease in public debt or, in other words, an increase in future tax
burden on local taxpayers. Anticipation of higher taxes in the future will lead to
an increase in savings and a reduction in spending – a situation contrary to the
objectives of an anti – cyclical policy to stimulate demand in the present. If the
budget deficit is financed by attracting domestic savings, this will lead to a
diversion of resources from the private to the public sector. Investment and
consumption generated by public spending will be made with the price of
investment and consumption that could be generated by the private sector
without government intervention. Consequently, the fiscal policy multiplier will
be zero or insignificant.
Among the anti -crisis fiscal measures adopted by the Romanian
Government in the period 2009 – 2010 was:
– Encouraging investment by not taxing reinvested profit. This measure
was applied relatively late (Law no. 329/2009). According to the Ministry of
Finance, 2009, the tax exemption was nearly £ 18 million, and for 2010, about
320 million euro. Even if the impact of this measure is relatively low on a short
term, medium term and long term effects on the economy will be beneficial
(assuming that this will be maintained for at least a few years) – both in terms of
physical and human capital accumulation . This can be seen as a measure to
support companies.
– In February 2010 the government adopted an emergency ordinance
(Ordinance 13/2010) which states that firms that hire unemployed people will

be exem pt from social security contributions for up to six months. This measure
is rather passive and does not involve any cost to the budget. But it does not
directly target the main causes – companies are facing a falling demand at the
moment, so the problem is not necessarily the cost of labour , but to achieve an
adequate production level.
– Deferred payment of outstanding tax obligations of economic operators
for a period of six months. It is a difficult measure applied late (too late after the
crisis) which m ay punish competitive firms and can increase the volume of
arrears in the system.
– Support for SMEs. In 2009 -2011 a sum of € 100 million has been
allocated to support the SME sector. This measure is positive, but the effect will
be marginal. In addition, other measures taken by the government, such as the
introduction of flat -rate tax, affected in a negative way a num ber of SMEs on
the edge of existence.
– From July 2010, governmen t salaries have decreased by 25 % and VAT
increased by 5 percentage points to 24%. Increasing taxes impose a cost in the
economy, and therefore the private sector, which already heavily adjust ed in
response to the economic crisis. It has a counterproductive effect, delaying
recovery. In addition, it led to a decline in the competitiveness of the economy
at a time when the growth of exports could be a support for the economic
recovery. Reducing government wage bills has led to a particularly strong
imbalance in the system which was not sustainable anyway.
From a macroeconomic perspective, the proposed measures could correct
some imbalances but their means of application may increase social imbala nce
in a difficult time for the economy. Measures to reduce wages (and possibly
later, pensions) should take into account the existing asymmetries in the income
levels of the two systems. To maintain purchasing power for those with low
incomes should be re served, or the indirect effect of the measures taken can
greatly increase. These measures should be complemented by proposals to
various taxes for those on low incomes.
As a general remark, fiscal measures based simply on reducing costs –
without tax incre ases – have a much higher probability to reduce budget deficits
and public debt. Fiscal stimulus aimed at reducing taxes has a greater impact on
growth than measures based on increasing spending. Theoretically, after some
calculation, at this time, an incr ease in VAT by one percentage point would
theoretically budget revenues equivalent to about 0.35% of GDP.
For profit tax and income tax figures are 0.15% of GDP and 0.2% of GDP
respectively. But basically, these amounts will be reduced by adverse effects.
Romania has the most ambitious program of fiscal adjustment in the EU. But
the government has not taken into account a number of issues that relate to tax
adjustments covering an average of six years, the average speed of adjustment
(taking into account th e reduction in the cyclically adjusted primary deficit) is
of 1.3 -1.4% of GDP, annual average and thirdly important – successful fiscal
adjustments are made in the period in which there are no strong global financial

crisis, in order to enable exports and to increase foreign direct investment in
seeking economic recovery.
In the year 2013 in Romania according to a release of NIS, the real GDP
grew by 1.6% quarterly in the third quarter of 2013 in acceleration compared to
the value corresponding to the pr evious quarter (0.8 %) compared to the
previous report.
Regarding the quarterly evolution of the real GDP from the demand
perspective, the decis ive role in accelerating to 1.6 % growth rate during the
same period belo nged to the domestic absorption while a positive gap
cancellation rate of exports and imports of goods and services has led to a
negative contribution of net external demand ( -1.5 percentage points), similar
developments.
In annual terms, the only segment with an economic relevance for the
domes tic demand which has improved during the previous quarter was final
household consumption (+0.3% and, therefore, a contribution of 0.2 percentage
points to real GDP growth ), the final government consumption and gross fixed
capital formation interrupted its growth (-3.3% and -0.2% respectively). In
conclusion, dynamic real GDP was done mainly by inventories and statistical
discrepancy, items which have cumulative intake of 3 percentage points.
On the supply side , favourable influences on variation in quarter ly real
GDP have been exercised by all economic sectors in the services and
construction conditions have reversed trajectories (increases of 0.5% and 2.6%)
and industry and agriculture have been the fourth successive increase .
In total, quarterly growth a ccelerated by 0.3 percentage points (to 1.1%),
explaining the less than two -thirds of real GDP growth – this result highlights
this time, too, the relatively large contribution of the residual ("statistical
discrepancy") position
External demand was still the main driver of economic growth, the new
acceleration in the annual rate of exports of goods and services (up 21.7%)
generating maintains a significant rate difference on imports (+13.7 percentage
points) from exports, favourable developments were reco rded in both the
supplies of goods (19.1% – the fastest -growing in the last ten quarters) and that
of revenues from services, whose growth rate has remained remarkably alert
(over 30%, returning significant contribution of transport services).
On the stock exchange plan, the upward trend of the past few months
(2013), which rose in the third quarter to 14.8% in BET and by 8.6% in the last
quarter of 2013 and early this year, is a signal Romania's economy could
accelerate growth this year.
There is a close relationship between changes in the real economy and
performance indices in that anticipates market developments in the real
economy with a lag of several quarters (depending from one economy to
another). The relationship between the stock market and GDP r eflects practical
correlations between the financial economy and the real economy, the balance
between the two spheres is ensured by the investment climate.

Good signals from the stock exchange market anticipated resumption of
large investment projects an d hence, if they prove sustainable, it wi ll enter a
new economic cycle.
Bucharest Stock Exchange anticipated global crisis several months before
its disastrous effects flowed on the Romanian economy. After several years of
significant increases in both the stock market and the economy, the stock
market began to drop sharp ly in the first quarter of 2008 , and six months later
the Romanian economy started to slow dow n powerful to an advance of 9.6% in
the second quarter to 6.4 % in the third quarter. The Stock Exchange stopped
declining in the first quarter of 2009, after the market fell by over 80 % for six
months later the pace of decline for the economy to improve first time since the
onset of the crisis, from minus 8.7% in the second quarter to minus 7.1% in the
third quarter of the year.
Faulty economic developments between 2010 and the first half of 2013,
which was more of stagnation, and the BET, fluctuated during this period in a
tight range of scores. Last year, in November the BET managed to overcome
the summer highs BET of 2010 and reached a maximum of the last five years.
Latest data on economic growth in the third quarter of last year first place
Romania in the EU, with a growth of 4.1 % over the same period last year,
thanks to good agricultural year.
This was the highest growth recorded by Romania during the last two
years, and the evolution of stocks in recent years gives hop e that the economy
will recover , although it will not be supported by an as good agriculture year .
According to some authors , the transmission mechanism of stock market
and the economy starts to improve the climate of the capital markets which
show that the perception of investment risk has been reduced; the financing
costs recently reached record lows and therefore generate bette r preconditions
for financing investment plans in the real economy.
Basically, sustainable growth of stocks will lead to a sustainable recovery
with investments in the real economy. Reviving investment will lead to a more
dynamic labour market. Hence priva te consumption rebounds. Investments are
the engine of an econo my's role in the economic cycle .
Developed markets, where stock has a significant share in the economy,
increased stocks drives and consumer feelings improved, leading to the
recovery of consum er demand and thus a recovery of the economy.
Although the Bucharest Stock Exchange listed companies that are currently
very im portant locally, such as Petrom , BRD or ROMGAZ, there are a small
number of investors . However , Romanian economy could benefit in the next
period from increases in European markets, which are by far the most important
trading partner, whose return could lead to an increase in exports.
In developed countries, too, there are similar signals, especially in the euro
area, which show a r eturn of investment, they gradually increase to a record low
in 1999 – the year of launching the European Monetary Union.

3. CONCLUSIONS
The improvement of the perception on investment risk in Romania was
determined by adjusting the progress in recent year s, such as on current account,
which last year became surplus, the budget deficit got down, and the deficit
financing that the banking se ctor confronts reached only 2.1 % of GDP in the
autumn of this year. Internally , the concern remains about the consisten t
implementation of the set of structural reforms agreed upon by the international
institutions (EU, IMF and WB) , especially in the context of th is election year,
any delay and/ or complete failure commitments may lead to propagation effects
of adverse shocks, internal or external, on inflation and economic growth.

References

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