Băsescu’s fat man returns on high horses

Let’s observe the language in the speech, saturated with moral labels – insensitivity, plague, disease, privileged, in a rhetoric based on the division between the bad (those with special salaries and pensions) and the good (the Romanians who are “tired of bear injustice”). It is precisely the same morally depressed speech that Traian Băsescu used in 2010 when he justified cutting salaries and pensions with the famous
image of the state perched on the back of the private, like a 200-kilogram man on the back of a 50-kilogram man. Until Ciolacu, the current governors never used Băsescu’s speech so directly. The fact that the head of the PSD is doing this proves that, just like in 2010, the government has reached a situation where it has to pack in an acceptable electoral package several measures of
austerity demanded by external financiers than society would be willing to bear.

Some commentators fell into the trap of this speech, just like in Băsescu’s time, and they also began to interpret the situation in a moral key. Why should we tax incomes over 25,000 lei indiscriminately instead of imposing some performance criteria? Why cut from the rich, we’re just not in communism? Why only incomes over 25,000 lei, since no budget worker works hard enough to deserve his money? These are just some of the irrelevant tracks followed by the commentators – irrelevant because the discussion about taxation has nothing to do with the moral criteria circulated by politicians for the use of voters, but only with the fiscal balance of the state and especially with its prospects to spend and more in the future, without the possibility of collecting adequate income.

The fiscal balance of the state is by no means treated in a moral way by the international financiers – the European Commission and the guarantees of the measures requested by it, i.e. the World Bank and the IMF. It does not matter from which chapter the government cuts money or to whom it increases the tax burden: it is important that the state falls within the EU ceilings, that is, a budget deficit below 3% of GDP and a public debt below 60% of GDP. Ciolacu’s government colleague, the columnist Marcel Boloş, openly declared that the only ways Romania can have access to the money from the PNRR are salary cuts, the dismissal of budget officers or the revision of fiscal policy. The latest IMF country report for Romania, the one from September last year, contains recommendations that both the more sincere governors, such as Boloş, and those like Nicolae Ciucă or Marcel Ciolacu, who are now giving assurances that there will be no more austerity as in 2010.

Both the IMF and the World Bank recommended the transition to progressive taxation, prepared by three measures: the elimination of various exemptions or reductions (IT, agriculture, construction, dividends,
micro-enterprises), eliminating the reduced VAT rate where it exists (medicines, food, tourism) and increasing property taxes. In last autumn’s report, the IMF wrote that “the introduction of progressive taxation for those with the highest incomes could generate additional revenues and reduce the very high income inequality in Romania, accompanied by the introduction of tax credits for low-income people”. But that was not a moral verdict: inequality is relevant there only because it affects the budget, in the sense that if the government gives tax credits to those with low incomes, it “encourages their participation in the official labor market” and thus obtains an increase in the tax base .

If we understand this, we will be less surprised why the same IMF also recommended a measure that the government managed to resist until now, thus saving from rapid pauperization a very
large number of households and companies that would not have been able to afford to pay the full price for energy and gas.

“Limited support to vulnerable people is necessary, but the price of energy for the rest of the population must be gradually increased, to limit pressures on the budget, it would encourage people to
save energy and avoid steep increases next year, when the current program expires,” the IMF said last year, while the energy bill subsidy program was planned to end
ends in March 2023. In the meantime, however, the government has expanded subsidy coverage and extended the program to 2025, and the first-quarter budget execution confirms the IMF’s estimate at the time that “the amounts needed for compensation to energy suppliers will be higher than predicted by the authorities”.

We saw that the execution of the budget for the first quarter, published the other day, ended with a below-expected increase in revenues (by approx. 10% against 14%) and above expectations of expenses (by approx. 14% against 10%). It is more important to note the explanation given by Finance: the gap comes primarily from the higher expenses with investments (including those for programs financed from internal and external sources), with the compensation of energy and gas bills, with pensions after increasing the pension point and with drug settlements. None of these chapters have the prospect of decreasing during the rest of the year, on the contrary. A few days ago, the vice-governor of the BNR, Florin Georgescu, also drew attention to the fact that the economic incentives from the pandemic and the costs brought by the war in Ukraine, i.e. energy subsidies and the increase in the budget for armaments, put pressure on public finances.

Again, none of these chapters have the prospect of falling, except in the scenario where the government agrees to give up most of its energy subsidies early, as the IMF has recommended. Furthermore, the government recently pretended that it was going to eliminate the increases given during the pandemic, but the press wrote that in fact it would have given up, on the grounds that there is still Covid-19. As for armaments, this is the real elephant in the room, if we look at the most terrifying information in recent times, the Bloomberg analysis that shows that because of the war in Ukraine, European states have already borrowed 32 billion dollars in the first quarter , three times more than in the same period of 2022, and for the first time in ten years, three Eastern countries – Poland, Romania and Hungary – reached the top 5 of emerging debtors, with 9, 6 and 5 billion dollars borrowers.

And the easterners get into debt so quickly because they need money for energy subsidies, for the purchase of weapons and for the maintenance of Ukrainian refugees. The Bloomberg analysis suggested that as the war drags on, not only will spending swell, but the cost at which countries borrow from financial markets will rise, both because of the growing demand for money and because of the deterioration of national economies. , due to inflation and gradual interest rate hikes by central banks (and which the head of the IMF for Europe now says the European Central Bank should continue until 2024).

So far, Romania has already increased the budget for the army to 2.5% of GDP, and the only certain news lately are those about the new imports of planes, tanks, anti-aircraft systems, ships, drones. The burden on the budget of these purchases is not a matter that can be addressed by Romania on its own; it looks at all of Europe and the long-term reform of its tax rules, which is being discussed exactly these days. A report by the European Bruegel Institute estimated that in the EU, the total additional spending on armaments, combating climate change and digitization will exceed 1% of GDP every year from now on, which will be especially problematic for countries already in debt. public or the deficit exceeds the EU ceilings, such as Italy, Spain, Portugal, France or Belgium.

This is why Ciolacu’s speech is important, because it is much easier for the public to accept the idea that taxes and fees will inevitably be increased (and maybe also the price of energy) if the government at least shows that it is willing to symbolically increase taxes for a few dozen thousands of ultra-rich budget holders. For the rest, therefore, it is better not to look at the other spending chapters in the budget, because there the discussions are much more complicated or exceed Romania’s ability to decide on its own. It’s easier to go back to the image of the fat man and the thin man, instinctively following the classic method: when you have a new problem that scares you, you first try to reduce the unknown to something you already know.