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- 1. The Uses of Austerity: Romania Impressive improvisation on the short run, dark structural clouds on the long run horizon Dragos Paul Aligica Vlad Tarko George Mason University, Mercatus Center
- 2. Summary • Theory: the “unpleasant arithmetic” • Romania as a perfect illustration • Causes of the crisis • Effects of the crisis – Government response to the crisis – Private sector response to the crisis
- 4. The unpleasant arithmetic “austerity”
- 5. The unpleasant arithmetic in Romania
- 6. The crisis set-up: Government irresponsibility • 2007-2008: – Growth at 6-7% GDP – Deficit increases from 3% to 6% of GDP – Inflation increases from 5% to 8% • 2009: – Growth: -6.6% GDP – Deficit increases to 9% of GDP
- 7. GDP (billions euro, reference year 2005) 100 98 96 94 92 90 88 86 2007 2008 2009 2010 2011 2012f
- 8. GDP (% change) 8 6 4 2 0 -2 -4 -6 -8 2007 2008 2009 2010 2011 2012f
- 9. Government expenditure & revenue (billions euro) 60 50 40 30 20 10 0 2008 2005 2006 2007 2009 2003 2001 2004 2002 2010 Total general government expenditure Total general government revenue
- 10. Government expenditure & revenue (% GDP) 45 40 35 30 25 20 15 10 5 0 2001 2008 2002 2005 2010 2007 2003 2004 2006 2009 Total general government expenditure Total general government revenue
- 11. Government deficit (% of GDP): Net lending (+)/Net borrowing (-) 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -10 2005 2006 2007 2008 2009 2010
- 12. Government consolidated gross debt (% of GDP) 35 30 25 20 15 10 5 0 2005 2006 2007 2008 2009 2010
- 13. Sovereign debt crisis • January-August 2009: – The market loses confidence in Romania’s ability to repay its debts
- 14. 7 10 12 6 8 9 11 2005M04 2005M07 2005M10 2006M01 2006M04 2006M07 2006M10 2007M01 2007M04 2007M07 2007M10 2008M01 2008M04 2008M07 2008M10 2009M01 2009M04 2009M07 2009M10 government bonds 2010M01 2010M04 2010M07 Long term interest rate on 2010M10 2011M05 2011M08 2011M11 2012M02
- 15. Why? • Romania looks like a textbook illustration of Sargent & Wallace’s theory – obviously, that wasn’t the intention • Underlining public choice dynamic: – 2009 was an election year • “Impressive short-term improvisation” – From a public choice perspective one could have expected much worse! E.g. massive inflation as in the 1990s.
- 16. IMF loan deal (May 2009) • The good: – Commitments to low inflation – Commitments to cut govt. spending • The bad: – Recentralization of the public sector (in order to be able to implement the cuts fast) – Govt. spending cuts: • Done indiscriminately across the board • No structural reforms
- 17. Real inflation rate (annual average rate of change %, Harmonised Indices of Consumer Prices) 10 9 8 7 6 5 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011
- 18. Austerity measures: Government spending cuts • Public sector wages cut by 25% • Number of state employees reduced by ~200,000 in the 2009-2011 period • Unemployment and child benefits cut by 15% • Stopping pensions increases at the 2010 levels • “Elimination, merger or reorganization” of 141 government agencies • Estimated savings (according to govt.): – 700 million euros in 2010, i.e. ~3% of govt. expenditures
- 19. Average wages (lei) 2300 2200 2100 2000 1900 1800 1700 1600 1500 2008 2009 2010 2011 2012 Public sector Entire economy Private sector
- 20. Austerity measures: Tax increases • VAT increased from 19% to 24% • Gas taxes and sin taxes • Taxes paid by physical persons who own more than one house and for larger cars • Taxing pensions for the mandatory state medical insurance • Increasing the tax base by taxing – interest, – food stamps, – various other sources of personal income
- 21. Anti-tax evasion measures • Estimated tax evasion: 35% • Measures: – Rising the budget of the National Agency of Fiscal Administration – Increased border controls – Close monitoring of the transportation of specially taxed products (alcohol, cigarettes and gas) – Accounting requirements for small firms have been simplified
- 22. Government expenditure & revenue (billions euro) 60 50 40 30 After austerity 20 measures 10 0 2008 2005 2006 2007 2009 2003 2001 2004 2002 2010 Total general government expenditure Total general government revenue
- 23. GDP (% change) 8 6 4 2 0 -2 -4 After austerity -6 measures -8 2007 2008 2009 2010 2011 2012f
- 24. The private sector response to the crisis
- 25. Final consumption expenditure (billions euro, reference year 2005) 92 90 88 86 84 82 80 78 2007 2008 2009 2010 2011 2012f
- 26. Private debt (% of GDP, non-consolidated, annual data) 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010
- 27. Exports of goods and services (billions euro, reference year 2005) 45 40 35 30 2007 2008 2009 2010 2011 2012f
- 28. Imports of goods and services (billions euro, reference year 2005) 60 55 50 45 2007 2008 2009 2010 2011 2012f
- 29. Average wages (lei) 2300 2200 2100 2000 1900 1800 1700 1600 1500 2008 2009 2010 2011 2012 Public sector Entire economy Private sector
- 30. 6 5 7 8 2006M01 2006M04 2006M07 2006M10 2007M01 Boom that proved to be 2007M04 unsustainable 2007M07 2007M10 2008M01 2008M04 2008M07 2008M10 2009M01 2009M04 2009M07 2009M10 2010M01 2010M04 2010M07 restructuring (seasonally adjusted), percent 2010M10 Total unemployment rate because of quick 2011M01 continued to grow Private sector wages 2011M04 2011M07 2011M10 2012M01
- 31. 16 19 15 17 24 18 23 25 22 20 21 2006M01 2006M04 2006M07 2006M10 2007M01 2007M04 2007M07 2007M10 2008M01 2008M04 2008M07 2008M10 2009M01 2009M04 2009M07 2009M10 2010M01 2010M04 (seasonally adjusted), percent 2010M07 2010M10 2011M01 2011M04 Youth (under 25) unemployment rate 2011M07
- 32. 20 0 10 25 5 15 1997M01 1997M06 1997M11 1998M04 1998M09 1999M02 1999M07 1999M12 2000M05 2000M10 2001M03 2001M08 2002M01 2002M06 2002M11 2003M04 2003M09 Total 2004M02 2004M07 2004M12 2005M05 2005M10 under 25 2006M03 2006M08 2007M01 2007M06 Unemployment rate, 1997-2012 2007M11 2008M04 2008M09 2009M02 2009M07 2009M12 2010M05 2010M10 2011M03 2011M08 2012M01
- 33. 240 205 215 225 250 230 200 245 210 220 235 2007M06 2007M08 2007M10 2007M12 2008M02 2008M04 2008M06 2008M08 2008M10 2008M12 2009M02 2009M04 2009M06 2009M08 2009M10 2009M12 2010M02 2010M04 2010M06 2010M08 (euro, reference year 2005) 2010M10 2010M12 2011M02 Actual rentals for housing 2011M04 2011M06 2011M08 2011M10 2011M12
- 34. Romania’s long term evolution
- 35. Romania’s politico-economic path (based on Heritage index)
- 36. Romania’s politico-economic path (based on Heritage index)
- 37. Conclusions • The private sector adapted rapidly to the crisis • This is mainly a government crisis as it stretched beyond its means, in the 2006- 2008 period, and has difficulties readjusting