'No need for tax hike during recession!' BNR governor warns

The optimal adjustment solution for Romania aims at public expenditures, in the sense of reducing the expenditures on wages and the financial expenditures and of focusing on investments, with one of the alternatives to that consisting of tax hikes, 'which is precisely what we don't need during a recession,' Mugur Isarescu, the Governor of the National Bank of Romania (BNR), stated yesterday in a speech delivered to the Academy of Economic Studies (ASE) on the occasion of receiving the Virgil Madgearu diploma and a gold medal for his activity within the financial-economic domain.

'The financial and wage expenditures that do not create jobs and future revenues have to be cut and the resources have to be channeled towards investments. That would be the optimal solution for Romania,' the BNR official pointed out. At the same time he stated that Romania has no alternative to the international loan agreement that is mainly an agreement with the European Union and secondarily with the International Monetary Fund and the World Bank.

Thus, the BNR governor explained that 'there is an IMF dominant note' in using public funds to compensate for the brutal private capital movements and he reminded that Romania is an EU member.

He pointed out that the normal but 'illusory' desire to quickly transform the Romanian society into a welfare state was a message that created 'bitter and deep disillusions' against the backdrop in which the reality pointed to the wasting of public funds and to incompetence.

Isarescu continues to plead for savings and investments as the only equation that can allow an economic development on healthy bases. The BNR official believes that it is necessary for the public opinion to understand economic cycles and the fact that a period of growth is followed by one of adjustment but that an optimal adjustment is needed. At the same time the Governor warned that there is the need to reestablish the sturdy balances at economic level, not just from a financial point of view, and also 'at the level of society.'

'In 1990 there were 10 million taxpayers and fewer than one million public sector employees, with the industrial sector registering an excess of labour force. Now there are less than 5 million employees and 1.5 million public sector employees. At the same time in 1990 there were less than 3 million pensioners and socially-assisted persons, with that figure now standing at 5 million,' Isarescu stated. Likewise, he reiterated the fact that the revenues that outgrow labour productivity are 'cut by inflation and by the exchange rate adjustments.'

Optimal adjustment without electoral stake

In what concerns the current situation, an optimal adjustment could take place through a comprehensive program by coordinating all policies. Referring to the 'optimal adjustment' of the economy, Isarescu pointed out that what is needed is the resumption of the debate on that issue, 'without emotions and without an electoral stake,' with that being 'the economists' duty.'

'(...) I will state that BNR is doing its job; it will protect both the national interest and its goals, namely price stability and financial stability. It might find inspired solutions too, but it cannot ensure the optimum,' Isarescu added. He expressed his opinion that a correction done through the currency exchange rate does not represent the optimum because it would rekindle the inflation and it is unjust because it would fall precisely on the shoulders of those that are affected as it is.

'An elections year should not damage economic stability,' BNR Governor Mugur Isarescu stated, warning that Romania has to find 'the right way' between maintaining the macro-economic and financial balance and the elections. In the Governor's opinion, 2009 should be interpreted as an adjustment year that is connected to the previous periods of very high economic growth. 'Let's be honest, we wouldn't have done it (the adjustment - editor's note) if it wouldn't have been imposed from the outside, if it weren't for the crisis causing the withdrawal of the massive sums that flooded Romania and that accommodated the economy to large capital inflows,' Isarescu added.

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