In a time when economists keep saying money should go to investments in schools, hospitals and roads first of all to ensure future economic growth, the government forgot about the investment component, and cut investments from 4.2% of GDP the year before it came in power, 2011, to 2.5% last year.
“Capital expenditures are the guarantee of sustainable economic growth in the future. The decline in the past years was caused by an improvement in the spending efficiency and, especially lately by a drop in the number of projects started and funded,” says Radu Craciun, chief economist of Romania’s largest lender BCR.
“This latter trend is a reason for concern because the business sector will have no way of developing in the absence of a sound infrastructure and demand and consumption will be met by increasing imports.”
Capital expenditures dropped from 4.2% of the GDP in 2011 to 3.3% in 2012, 2.9% in 2013 and 2.5% last year only to reach a decade low in January-July 2015.
In 2007, the last full year of economic boom, when crisis was nowhere in sight in Romania, the capital expenditures stood at 3.7% of GDP, or 56% of the total spending on public sector employees (6.7% of GDP). In 2014, capital expenditures stood at 2.5% of GDP, one third of the spending on public sector employees (7.5% of GDP).
Investment, both public and private only increased in 2011 since the onset of the crisis in 2009 and went down in all the other years.
Economist Laurian Lungu has the following explanation:
“The requirement to keep the budget deficit within the target agreed under the stand-by arrangements with the IMF as of 2009 required a budget adjustment component. Public investments were and still are this component, especially because of their position in the priority list of budgetary spending.”
The Maastricht criteria and the MTO (medium term objective) will keep these constraints in place in the future, as long as budget revenues do not see significant growth or the budget policy strategy does not change, he added.
(English version by Loredana Fratila-Cristescu)