Central bank governor: Romania’s problem is much more serious fiscally, the decision is political

Isarescu: Let's prepare for inflation correlated with rising wage costs.

BNR Governor Mugur Isărescu stated on Wednesday that the National Bank fully supports a fiscal adjustment program of the government. He emphasized that the decision is political, not fiscal. The political decision is not easy, Isărescu said.

“We support a government program of fiscal adjustment, not to call it a correction, because it sounds more serious. We fully support this one. How it will turn out is the attribute of the government, it has the fiscal policy, we will work with it. Personally, and my colleagues, they expressed their views on some measures, sometimes they were charged. We did not shy away from expressing our views, but we do not want to create another row now. We do not have technical decisions in front of us.”

“The decision is political, not technical. You cannot ask me, I am a state institution with a precise mandate. The government must adjust and consolidate, but also ensure stability and social cohesion. Without political stability and social cohesion we cannot have financial stability. The political decision is not easy, it’s a hard job, I did the reform in 2000 and I know what it’s like. Romania’s fiscal problem is much more serious than it is discussed in pieces, the country wants quality public services, highways, quality schools, hospitals and health , if you add them up you reach 40-50% of GDP. Now they are more than 40% and we want to cover them with 27% of income? Hard work.”

The BNR governor added the central bank cannot make many recommendations. “At most, we are discussing a package that is balanced, helps the country, lowers inflation, corrects the deficits,” declared Isărescu.

Warning on future price developments

BNR Governor Mugur Isărescu also said that the relative lack of labor continues to give employees greater bargaining power, arguing this is not happening only in Romania.

“I have recently attended an international seminar in Dubrovnik (Croatia) organized with the support of the IMF. A message from a specialist from the Fund was to prepare for inflation linked to rising wage costs (…) it is a pretty dangerous inflation because you don’t fight it easily. It is a warning related to the future evolution of prices not only in Romania, but in Europe in general,” the BNR governor also declared.

Central bank governor added that only some increased taxes alone lead to an increase in inflation, namely the direct taxes on consumption: excise taxes and VAT. “Raising income taxes, for example, may even have the opposite effect. It’s harder to calculate. The increase in income taxation leads to a decrease in aggregate demand”, Isarescu argued.

“You raise income taxation, people earn less, aggregate demand falls. It might, depending on aggregate demand and aggregate supply, prices might even go down if you raise income taxes.”

In his view, this inflation outlook is influenced by uncertainties. “We do not know what the program will be like in the end, nor the effects of these measures to cap the commercial addition. Uncertainties cause our inflation forecast to suffer. It can be up and down,” he explained.

Isarescu slams fiscal privileges

BNR Governor also considers that the business environment should not be burdened with taxes and that tax privileges like tax exemptions must be granted on short-term, like for 1, 2, 3, 5 years.

“When you exceed 15 years, they are no longer privileges, they become annuities. They become rents that distort the market and also create problems in terms of solidarity and cohesion. Now I understand that some people want annuities. That’s not possible. Speaking of the fiscal environment. It’s not about burdening them too much, but gradually we have to give up them, the tax privileges. It is difficult to negotiate because everyone has their own electorate. I’m not saying it will be easy to negotiate.”

BNRcentral bankcostsfiscalGDPgovernorinflationMugur IsarescuNational Bank of RomaniapoliticalRomaniawage
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