The economic myths that cost us billions of lei: a renowned expert explains Romania's economic reality

Romania has been living for many years between false perceptions and harsh economic realities. Economist Ionuț Dumitru, former president of the Fiscal Council, currently Chief Economist of Raiffeisen Bank and Honorary Advisor to the Prime Minister, recently dismantled, in an extensive presentation, seven myths that circulate intensively in the public space — from austerity and taxes, to investments and economic incentives.

Numbers don't lie, even if myths can be comfortable. See here the presentation made by Ionuț Dumitru on Tuesday, at the Governance Course conference held at ASE.

Myth 1: “Austerity could be avoided” — false

Dumitru puts it bluntly: the alternative to a controlled adjustment was a brutal market-imposed correction. Romania has reached deficits of over 7% of GDP for five consecutive years, an unsustainable situation even for mature economies.

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“The big deficit only exists as long as it's financed. When markets lose confidence, the adjustment becomes automatic and painful,” he explains.

The purpose of austerity is not punishment, but to restore investor confidence and avoid a debt crisis. Today, Romania has a public debt of over 57% of GDP, compared to only 12% in 2007 — an explosive growth that forces caution.

Myth 2: “If we cut spending, we wouldn't go into recession” — false

All consolidation measures, whether through taxes or cuts, have a short-term negative effect on economic growth, the economist says, citing OECD studies. The difference lies in the magnitude of the impact.

Romania has low fiscal multipliers – that is, each leu introduced into the economy through public spending produces less than 1 leu of growth. In other words, says Dumitru, fiscal policy is ineffective.

Austerity is painful but inevitable. “The art is to choose the measures that do the least harm, not to think that you can avoid the cost,” said Dumitru.

Myth 3: “VAT and excise duties are the worst taxes” — false

Modern economies turn to taxes on consumption, property, and the environment when they need to raise revenue, because they have the least impact on economic growth.

Progressive or profit taxation paradoxically has a more harmful effect in the long run — it lowers investment and discourages formalization. “Equity is important, but it should not be confused with efficiency,” emphasized the economist.

Myth 4: “Public investment has stalled” — completely false

On the contrary, Romania has the largest volume of public investments in its history — 8% of GDP. It is a record level in the European Union. The problem is not the lack of money, but the inefficiency of spending it.

“We have a country full of construction sites, but not all of them are visible in the GDP”, remarked Dumitru ironically. Economic growth of only 0.3% in the first half of the year, despite record spending, confirms the diagnosis: too many facade projects, too few productive investments.

Myth 5: “The deficit isn't coming down because measures aren't working” — false

The 2025 budget was built, says Dumitru, on unrealistic assumptions: overestimated revenues and underestimated expenses by 25 billion lei.

Even so, the deficit is reduced from 9.3% to 8.4% of GDP – a considerable correction, achieved through two packages of fiscal measures which, cumulatively, bring 3.6% of GDP in a full year.

Without these measures, the deficit would have exceeded 10%, a dangerous level for Romania's financial stability.

Myth 6: “We can stimulate the economy and reduce the deficit at the same time” — false

Romania no longer has the fiscal space for massive economic stimulation programs.

“The only measures compatible with reducing the deficit are European funds and structural reforms,” ​​says Dumitru.

That is, PNRR, digitization, de-bureaucratization, investment efficiency and support for SMEs – no new debt spending.

Myth 7: “Private investment does not increase because of pessimism” — partly true

The main bottleneck, the economist explains, is fiscal: the minimum turnover tax (IMCA) makes many companies pay an effective tax rate of 30% or even more, although the official rate is 16%.

“You cannot attract investments when the companies end up sharing half of the profit with the state,” warns Dumitru.

To these are added bureaucracy, legislative instability, high financing costs and a shortage of skilled labor.

The wider context: between consumption and competitiveness

Ionuț Dumitru's speech brings back to the fore the fundamental imbalance of the Romanian economy: Romania stimulated demand, not supply.

Since 2015, wages and pensions have increased by 90% in real terms, but value added to the economy by only 32%. The difference was in imports and public debt.

“We stimulated other people's economies, not ours,” summed up Dumitru.

Romania cannot avoid adjustment, but it can do it rationally, he believes. “We must return to a sustainable convergence, not a forced one”, concludes Ionuț Dumitru.