Everyone expects a tax hike starting 2025-26 – a logical consequence of the correction coming after the deficit and consumption-on-credit feast years of 2023-24:
But the problem is NOT just budgetary:
The analysis below puts together numbers revealing complications on the economy – a kind of alignment of 8 mutually reinforcing black holes – and everyone can acknowledge their place either in these numbers or in the relationship between them.
This is not merely a joining of indicators – some sectors are approaching a crisis and will contribute in a surprising way to the problems of the next 2 to 3 years:
1. Economic growth in H1 was 0.7%. The forecast for the whole year – on which the budget and deficit calculations were made – is 3%.
2. The increase is shockingly small given the backdrop of a 10% year-on-year increase in consumption (consumption that reached a record high of 90% of the EU average, much higher even than that of some western states).
Does this mean that neither all-time high consumption-on-debt nor helicopter money can save us anymore?
3. The increase is shockingly small considering the future expenses of the population: at the end of June, 2024, Romanian households had taken out consumer loans for the whole year 2023 – and the trend shows no signs of stopping.
4. A completely ignored phenomenon: the collapse of housing construction by 22% compared to the same period in 2023, when we had a 10% drop compared to 2022. Already in big cities, rents are approaching Western prices.
5. Industry continues its decline (-0.9% in H1) – exports have a negative contribution to the GDP, and consumption, in the absence of production, increases trade deficit, current account deficit and debt costs.
6. Industry decline still does NOT positively change the structure of the GDP: industry dropped from 22% 4 years ago to 18%, IT only covered the decline by one percentage point (from 8 to 9%), construction maintains its position only through the construction of transport infrastructure. The rest is consumption + services, a sector subject to a violent process of tax evasion.
7. The number of companies that applied for insolvency in H1 2024 doubled against that of H1 2023: these are current, market insolvencies, but which show the vulnerability of the business ecosystem to government measures that disrupt the market or verticals in the market. And these companies mean not only GDP, but also employees, with all the contributions entailed.
8. All the above indicators stand against the backdrop of falling labor productivity – the main source of the economy – which has been falling for 2 years, although we are 25% behind the European average, which is still rising, while we are falling.
The budget problem for the next years is very big, despite the fact that it is possible that the European Union will approve our return to the deficit target within 7 years:
but it is NOT just a budget problem, which will complicate the „budget problem” itself:
The meaning of the combination of the above indicators from the outlook of 2025-2027: In 5 queries
1. Will import consumption on credit and economic growth power up as before, or will they enter a stage of mutual undermining, as would be logical?
Because, starting next year, it is hard to believe that we will see the salary increases of the last 2 years, pensions will increase only with inflation, and the sources of money pumped into consumption will decrease with the decrease of the budget deficit.
2. Pressure on the economy will increase – companies will be under pressure from the government to reduce the first tier of the budget deficit – tax increase will become inevitable. How will the economy react to a fiscal adjustment?
This question is posed along with several related ones:
– Will the population continue to go into debt for consumption, in an atmosphere of economic landing, or will it support GDP growth through blind credits? Even if taxes increase not only in the economy, but also on individuals?
– How much will the government collect from the taxation increase in economy, given that the economy is in the landing?
– How will tax increase affect the stock market, investments, the „irrigation” of the economy?
– How long can the National Bank keep the euro below 5 RON? They could manage it since there are reserves. The question is, what would be the reason to keep the RON overvalued, since they are also considering making economy lending cheaper?
If the NBR decides to pass the ceiling in 2025, how will it affect inflation? And how will they slow down inflation other than by slowing down consumption, that is, the main economic driver?
3. Romania is not an isolated village, with its private affairs. How much will weigh in coming years the hectic external situation of EU’s economic redesign, with a Germany that still hasn’t recovered from the old mid-tech paradigm supported by cheap energy, with fierce competition between national economies, with markets turbulence caused by the fear of recession in the US and slowdown in China’s growth?
4. How will Romania manage its budget deficit and indebtedness (which will reach 70% of GDP in 2-3 years), in order to complete investments started through PNRR (especially those in infrastructure), so that it doesn’t lose money in the end?
5. Romania must recover as soon as possible from the delusion of big numbers in order to understand what is happening with its own economy:
One such number is the annual growth of 4-5-6%, as forecasts never tire of giving annual budgets figures that no longer come true. There are also absolutely objective economic experiences of other states, which should be taken into account, at least on a general level:
In an issue of the magazine CRONICILE, professor Bogdan Murgescu published a study on the evolution of economic growth in the states newly entered into the European Union: the spectacular increases – of course – in the early years, faded not necessarily after a number of years: but entered a plateau phase when states exceeded the minimum wage of USD 500. That is, at the moment when they had to bring to the competitiveness table something other than the low wages:
Romania’s economy just exceeded the net minimum wage of EUR 500: what does it bring to the competitiveness table to replace the low wage?
Plans and their implementation: health and the illness keeping us alive
The economic reorganization of the European Union will begin in coming years, perhaps under the pressure of the Draghi Report, which everyone is waiting for as an update of the 10 commandments that the EU has been breaking for 20 years in terms of the economy as if it didn’t understand what was happening in the global economy.
Romania might have something to add to the great equation that should become Europe: energy is a spectacular card, IT is a sector with fabulous potential if removed from the establishment occult and supported as economic policy, chemical industries could be brought back in the country, where we hold the resources, and even the military industry is not completely lost:
The problem is that, until it gets to reap the dividends of participating in a new European economic equation, it has to hold on to 4-5 years of growth:
But as things stand today – based on the data above – it will be difficult to maintain increases of 2-3%.
Precisely because we are in the midst of a paradox:
We live through illness: without budget deficit and current account deficit throwing money into consumption, and without the huge evasion in the population services sector to fuel all the consumption – economy would collapse tomorrow morning.
How do we get healthy without dying?
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PS: The problem of the Giant’s clay feet (Romanian consumption), along with the havoc it wreaks on any plan to adapt the economy to competitiveness – covered in detail in the 77th issue of CRONICILE Curs De Guvernare coming out on August 28.
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