The Uses of Austerity: RomaniaImpressive improvisation on the short run, dark   structural clouds on the long run horizon ...
Summary•   Theory: the “unpleasant arithmetic”•   Romania as a perfect illustration•   Causes of the crisis•   Effects of ...
The unpleasant arithmetic
The unpleasant arithmetic                     “austerity”
The unpleasant arithmetic inRomania
The crisis set-up: Government           irresponsibility• 2007-2008:  – Growth at 6-7% GDP  – Deficit increases from 3% to...
GDP             (billions euro, reference year 2005)10098969492908886      2007       2008     2009     2010     2011    2...
GDP (% change)86420-2-4-6-8     2007   2008   2009   2010   2011   2012f
Government expenditure & revenue             (billions euro)6050403020100                                                 ...
Government expenditure & revenue                (% GDP)4540353025201510 50      2001                                      ...
Government deficit (% of GDP):             Net lending (+)/Net borrowing (-) 0 -1 -2 -3 -4 -5 -6 -7-8 -9-10      2005     ...
Government consolidated gross           debt (% of GDP)353025201510 50     2005   2006   2007   2008   2009   2010
Sovereign debt crisis• January-August 2009:  – The market loses confidence in Romania’s    ability to repay its debts
7                            10                                      12            6                    8                 ...
Why?• Romania looks like a textbook illustration  of Sargent & Wallace’s theory –  obviously, that wasn’t the intention• U...
IMF loan deal (May 2009)• The good:  – Commitments to low inflation  – Commitments to cut govt. spending• The bad:  – Rece...
Real inflation rate     (annual average rate of change %, Harmonised Indices of                        Consumer Prices)109...
Austerity measures: Government            spending cuts• Public sector wages cut by 25%• Number of state employees reduced...
Average wages (lei)230022002100200019001800170016001500       2008             2009         2010        2011            20...
Austerity measures: Tax increases• VAT increased from 19% to 24%• Gas taxes and sin taxes• Taxes paid by physical persons ...
Anti-tax evasion measures• Estimated tax evasion: 35%• Measures:  – Rising the budget of the National Agency of    Fiscal ...
Government expenditure & revenue             (billions euro)60504030                                                      ...
GDP (% change)86420-2-4                                 After austerity-6                                   measures-8    ...
The private sector response to thecrisis
Final consumption expenditure            (billions euro, reference year 2005)9290888684828078     2007       2008     2009...
Private debt      (% of GDP, non-consolidated, annual data)14012010080604020 0      2005    2006      2007   2008    2009 ...
Exports of goods and services            (billions euro, reference year 2005)45403530     2007       2008     2009     201...
Imports of goods and services            (billions euro, reference year 2005)60555045     2007       2008     2009     201...
Average wages (lei)230022002100200019001800170016001500       2008             2009         2010        2011            20...
6          5                                        7                                            82006M012006M042006M07200...
16                              19          15                    17                                                      ...
20                       0                               10                                              25               ...
240                 205                             215                                         225                       ...
Romania’s long term evolution
Romania’s politico-economic path       (based on Heritage index)
Romania’s politico-economic path       (based on Heritage index)
Conclusions• The private sector adapted rapidly to the  crisis• This is mainly a government crisis as it  stretched beyond...
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Aligica & Tarko - The Uses of Austerity, Romania 2007-2011

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Aligica & Tarko - The Uses of Austerity, Romania 2007-2011

  1. 1. The Uses of Austerity: RomaniaImpressive improvisation on the short run, dark structural clouds on the long run horizon Dragos Paul Aligica Vlad Tarko George Mason University, Mercatus Center
  2. 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
  3. 3. The unpleasant arithmetic
  4. 4. The unpleasant arithmetic “austerity”
  5. 5. The unpleasant arithmetic inRomania
  6. 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. 7. GDP (billions euro, reference year 2005)10098969492908886 2007 2008 2009 2010 2011 2012f
  8. 8. GDP (% change)86420-2-4-6-8 2007 2008 2009 2010 2011 2012f
  9. 9. Government expenditure & revenue (billions euro)6050403020100 2008 2005 2006 2007 2009 2003 2001 2004 2002 2010 Total general government expenditure Total general government revenue
  10. 10. Government expenditure & revenue (% GDP)4540353025201510 50 2001 2008 2002 2005 2010 2007 2003 2004 2006 2009 Total general government expenditure Total general government revenue
  11. 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. 12. Government consolidated gross debt (% of GDP)353025201510 50 2005 2006 2007 2008 2009 2010
  13. 13. Sovereign debt crisis• January-August 2009: – The market loses confidence in Romania’s ability to repay its debts
  14. 14. 7 10 12 6 8 9 112005M042005M072005M102006M012006M042006M072006M102007M012007M042007M072007M102008M012008M042008M072008M102009M012009M042009M072009M10 government bonds 2010M012010M042010M07 Long term interest rate on 2010M10 2011M05 2011M08 2011M112012M02
  15. 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. 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. 17. Real inflation rate (annual average rate of change %, Harmonised Indices of Consumer Prices)1098 765432 10 2005 2006 2007 2008 2009 2010 2011
  18. 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. 19. Average wages (lei)230022002100200019001800170016001500 2008 2009 2010 2011 2012 Public sector Entire economy Private sector
  20. 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. 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. 22. Government expenditure & revenue (billions euro)60504030 After austerity20 measures100 2008 2005 2006 2007 2009 2003 2001 2004 2002 2010 Total general government expenditure Total general government revenue
  23. 23. GDP (% change)86420-2-4 After austerity-6 measures-8 2007 2008 2009 2010 2011 2012f
  24. 24. The private sector response to thecrisis
  25. 25. Final consumption expenditure (billions euro, reference year 2005)9290888684828078 2007 2008 2009 2010 2011 2012f
  26. 26. Private debt (% of GDP, non-consolidated, annual data)14012010080604020 0 2005 2006 2007 2008 2009 2010
  27. 27. Exports of goods and services (billions euro, reference year 2005)45403530 2007 2008 2009 2010 2011 2012f
  28. 28. Imports of goods and services (billions euro, reference year 2005)60555045 2007 2008 2009 2010 2011 2012f
  29. 29. Average wages (lei)230022002100200019001800170016001500 2008 2009 2010 2011 2012 Public sector Entire economy Private sector
  30. 30. 6 5 7 82006M012006M042006M072006M102007M01 Boom that proved to be2007M04 unsustainable2007M072007M102008M012008M042008M072008M102009M012009M042009M072009M102010M012010M042010M07 restructuring (seasonally adjusted), percent2010M10 Total unemployment rate because of quick2011M01 continued to grow Private sector wages2011M042011M072011M102012M01
  31. 31. 16 19 15 17 24 18 23 25 22 20 212006M012006M042006M072006M102007M012007M042007M072007M102008M012008M042008M072008M102009M012009M042009M072009M102010M012010M04 (seasonally adjusted), percent2010M072010M102011M012011M04 Youth (under 25) unemployment rate2011M07
  32. 32. 20 0 10 25 5 15 1997M01 1997M06 1997M11 1998M04 1998M09 1999M02 1999M07 1999M12 2000M05 2000M10 2001M03 2001M08 2002M01 2002M06 2002M11 2003M04 2003M09Total 2004M02 2004M07 2004M12 2005M05 2005M10under 25 2006M03 2006M08 2007M01 2007M06 Unemployment rate, 1997-2012 2007M11 2008M04 2008M09 2009M02 2009M07 2009M12 2010M05 2010M10 2011M03 2011M08 2012M01
  33. 33. 240 205 215 225 250 230 200 245 210 220 2352007M062007M082007M10 2007M122008M022008M042008M062008M082008M102008M122009M022009M042009M062009M082009M102009M122010M022010M042010M062010M08 (euro, reference year 2005) 2010M10 2010M12 2011M02 Actual rentals for housing 2011M04 2011M06 2011M08 2011M10 2011M12
  34. 34. Romania’s long term evolution
  35. 35. Romania’s politico-economic path (based on Heritage index)
  36. 36. Romania’s politico-economic path (based on Heritage index)
  37. 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

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