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Romania's economy slowed down in the second half of this year and the real GDP growth will probably be around 2%, below the forecast, according to the Convergence Analysis Report "Romania - Euro Zone MONITOR" no. 14/2023, coordinated by the academician Daniel Daianu.
"2023 was also a very complicated economic year for Romania. Inflation went down, in line with the evolution in Europe, even if slower. But the economy slowed down in the second part of the year and real GDP growth will probably be in around 2%, below the forecast. Romania's most acute problem (along with external deficits and institutional weaknesses) is the budget deficit, which in 2023 probably remained around 6% of GDP - as in 2022 (when the ESA deficit, European methodology, it was 6.23%. Romania is subject to the excessive deficit procedure and probably has the largest structural deficit in the EU. The target assumed by the Government for 2023, of 4.4% of GDP, was unrealistic and judged as such by the Fiscal Council in the opinion regarding the public budget, the construction of which was with grants (overestimated revenues and underestimated expenses). That is why it is necessary to adopt fiscal-budgetary measures that will allow the budget deficit to be brought down to 3% of GDP in a few years", the report states.
According to the quoted source, the public debate regarding the correction of the deficit, on the income side versus on the expenditure side highlighted a lot of demagoguery, detachment from reality, misunderstanding of inevitable trade-offs in economic policy.
Taxation reform also involves reforms regarding the labor market, which is strongly distorted. Of the active population, only 5.5 million have employment contracts.
"Many people work in the informal economy, over 1.5 million are paid the minimum wage, many citizens do not contribute to the insurance system. Romania has the lowest participation on the labor market in the EU - 68% compared to over 78% in EU. There is a lot to fix on the labor market, as the WB and IMF, EC reports also show. And the PNRR has provisions in this regard, as it has regarding the fiscal reform. The context outlined above regarding the Romanian economy underlines, even implicitly, the enormous importance of European funds (PNRR and CFM) - for necessary reforms and the financing of important projects, digitization, energy transition, infrastructure development, competitiveness. European money can mitigate the inevitable contractionary effect of the correction of the budget deficit. This correction is also necessary to reduce the current account deficit, which in 2023 is likely to be around 7% of GDP (below the almost 9% in 2022). It should be noted that the Romanian banking system has resisted the shocks well and that it will be put into operation in finally, the Development Bank," the report also shows.
