Academic journal article Romanian Journal of Political Science

Romanian Fiscal Policies: Do They Fight or Exacerbate the Crisis?

Academic journal article Romanian Journal of Political Science

Romanian Fiscal Policies: Do They Fight or Exacerbate the Crisis?

Article excerpt


It is now undisputed that the world faces the most serious economic downturn since the Great Depression. There are more and more voices calling for action against the financial crisis, and expectations on governments worldwide grow accordingly. In the past months several fiscal measures and stimuli packages were proposed to help the ailing economies. Most notably, the IMF issued a note proposing a coherent fiscal stimulus package, to tackle in an effective manner the economic and financial crisis. However, the extent to which these proposed measures could possibly be applied in Romania remains uncertain, mainly because of the poor institutional setup of the public sector overall (systemic inefficiencies, governance and transparency issues), but also the costly commitments made in the elections year 2008, which have recurrent effects (wage increases, improperly targeted social spending).

The following paper examines the applicability of an effective fiscal package in Romania, and suggests improvements in the existing institutions to enhance the Government's control over its own instruments--budget revenues and public spending. Contrary to the widespread, more pessimistic views, we believe that the crisis is an opportunity for reform: as revenues drop in proportion to the economic downturn, a wise Government would have the best incentives to reduce inefficient spending and understand the importance of a longer term vision. Or--luckily, this is our case--it would be forced to do so by foreign aid conditionality. However, there is a downside risk as well: since 2009 is again an elections year, the pattern of wasteful spending to attract votes could be maintained, while cuts are operated in the most important areas: the investments in complex programs and infrastructure. The following paragraphs describe the general recommendations for the use of fiscal instruments against the crisis. What can fiscal policies do against the crisis?

The IMF suggested approach (1)

The IMF suggests a policy package to address both the financial crisis and the fall in aggregate demand simultaneously. Such a two-pronged policy is needed to address issues which are complementary in nature: on one hand, the recapitalization of banks would improve credit flows, and aggregate demand would be further boosted by targeted measures such as support for the housing market. IMF recommends that the fiscal stimulus be timely, large, durable as to last over the period of recession, with diversified measures, and, maybe most importantly, sustainable as to avoid excessive debt or other short-term catastrophic effects. The fiscal measures which are most likely to lead to good results consist of increased spending (preferred to tax cuts), and at the same time spending instruments need to be diversified to limit the risk that fiscal multipliers are not estimated correctly during crisis.

Indeed, increasing spending is a challenge in many country environments, as the most obvious risk is to simply waste public funds allocating them for issues which are not a priority. In order to avoid this, the best solution regarding major public works is to allocate funds for the "first-under-the-line" public programs (in a budget based on priorities, these are the programs which have been appraised and would be the top priority projects sustainable with a budget increment). Other measures could be targeted directly at consumers, to fight the three major causes of the plummet in consumer demand: loss of wealth, credit constraints, "under-the-mattress" savings in times of uncertainty. The solutions proposed are tax cuts and transfers to mitigate the hardships generated by credit constraints; and a clear commitment for government support against uncertainties.

The IMF however warns that whatever fiscal policy instrument is used, it must be sustainable in the medium term. Crucially, such measures should be implemented without generating serious macroeconomic and fiscal imbalances, such as excessive debt or recurrent spending that cripples the fiscal sector in the long run. …

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