Economic growth above potential hides a structural deficit that is wider than the cash deficit, but today's structural deficit is the cash deficit that will have to be funded under terms that could turn adverse to emerging economies, deputy governor of the National Bank of Romania (BNR) Liviu Voinea told the conference for the presentation of the Financial Stability Report this Monday.
"When economic growth is above potential, as in Romania's case now, it is advisable to save in the sense of fiscal consolidation. The extra revenues from above-potential economic growth only allow for the financing of additional expenditures in the short term, but these expenditures are permanent while revenues are temporary because they will decrease, ceteris paribus, when the economy reverts to the normal or potential growth rate. Hence, the economic growth above potential hides a structural deficit that is wider than the cash deficit, but today's structural deficit is the cash deficit of tomorrow, that will have to be funded under terms that can turn adverse to emerging economies," said Liviu Voinea.
He noted that the evolution of twin deficits - fiscal and current account deficit - is worrisome as it highlights the above-potential nature of the current economic growth, which may endanger financial stability in the medium term.
"The expansionary tax policy begun in 2016 through the enforcement of the Tax Code adopted in 2015 continued in 2017, eating up the fiscal leeway obtained in the previous period, 2010 - 2015. The current account deficit measured against the GDP, although far lower than before the crisis, has a divergent evolution as to other emerging EU economies. In 2016 the structural deficit significantly overshot the 1 percent medium-term target and is projected to stand at 3.9 percent in 2017. As a matter of fact, the European Commission has included Romania in the procedure of significant deviation from the medium-term objective," Voinea said.
The BNR deputy governor mentioned that in 2009, when Romania's economy slid into recession, the structural deficit of the previous years turned into a cash deficit and it then took six years of fiscal consolidation.
"This combination of an expansionary fiscal and budget policy against the backdrop of above-potential economic growth and the deterioration of the foreign markets' sentiment for emerging economies overall can enhance volatility and affect financial stability through several channels: interest rate, exchange rate, inflation rate," Liviu Voinea said.
AGERPRES .
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