Public Finance Sustainability In Romania. Recent Developments

The main objective of this paper is to evaluate the sustainability of public finance in Romania and to explore the fiscal threats Romania might face in the future. A sound fiscal policy implies avoiding excessive liabilities of the government, but at the same time delivering the proper public goods and services, including the necessary safety net in times of crisis. An unsustainable fiscal position negatively impacts on macroeconomic stability; moreover, if public finances are perceived to be unsustainable in the long run, the reaction of the international financial markets could generate a fiscal crisis, which might surprise the fiscal planners. The main findings of the paper are the following: i) according to the multidimensional approach of the European Commission, in the short run, it seems that Romania is free from fiscal stress, there is a low risk in the medium term, and in the long run the risk becomes medium; ii) a potential medium-term fiscal sustainability risk derives from the accumulation of losses and arrears in the business and companies sectors in which the state is a majority shareholder; iii) Romania records one of the lowest budget revenues to GDP ratios in EU, while the Romanian tax system is characterized by a poor tax collection, inefficient administration and excessive bureaucracy; iv) the structure of public spending in Romania is characterized by the predominance of wage spending and social assistance, while the poor state of the public pension system is an important vulnerability of the public finance position; v) overall, the degree of tax compliance in Romania was only 55.8% in 2013, and according to the calculations made by the Fiscal Council, tax evasion represented 16.2% of GDP in 2013. All these aspects make up a grim picture of sustainability of public finances, which has to be considered by the public decision makers regarding future fiscal policy actions.