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Beyond the Romanian consumption data: increased public debt and unchanged savings level

During recent weeks, Eurostat published an interesting map showing the volume index of per capita consumption in 2022. These figures have been a big hit in the domestic press. The map shows that Romania is now ahead of the Czech Republic, Slovakia, Croatia, Greece, Estonia and Latvia in terms of this indicator, and is almost on a par with Poland, Spain, Portugal and Slovenia. Moreover, it exceeds the comparable Hungarian indicator by exactly 15%. At the same time, it is important to add a few elements to better understand the consumption level of the Romanian economy.

Between 2020 and 2022, only Bulgaria and Croatia could overtake Romania in terms of per capita consumption growth. All other countries experienced more modest growth, and in some cases even a decline in consumption. What is the explanation behind the Romanian indicator? Our conclusions are that the main reason is that the Romanian trend is underpinned by a high level of indebtedness, modest capital accumulation and a decline in savings, even though remittances have increased spectacularly and household indebtedness is lower than in Hungary.

It is worth reviewing the first half of the list as well. As in the previous years, Luxembourg had the highest level of consumption per capita in the EU, with a 38% surplus on the EU average. This was followed by Austria and Germany (both 18% above the EU average), then the Netherlands (16% above the EU average) and Belgium (15% above the EU average). In 2022, nine EU countries had higher per capita consumption than the EU average. A look at the map shows that the southern and eastern periphery of Europe continues to have a more modest level of consumption.

Fig. 1. Actual individual consumption volume index per capita, 2022 Source: Eurostat (2023)

In the EU, the lowest levels of consumption per capita were recorded in Bulgaria (31% below the EU average), Hungary (29% below the EU average), Croatia and Latvia (both 24% below the EU average) and Slovakia (23% below the EU average). However, there was also progress in the bottom third, with Bulgaria, Croatia and Romania seeing more significant increases in standards between 2020 and 2022. In Hungary, there was a 1% improvement, with the indicator jumping from 70 to 71 compared to the EU average of 100.

Compared to the EU average, the level of per capita consumption has changed in most countries over the last three years, with 18 EU countries seeing an increase between 2020 and 2022. As mentioned above, the most significant increases were recorded in Bulgaria (69% of the EU average in 2022 compared to 60% in 2020), Croatia (76% and 69%), Romania (86% and 81%) and Ireland (94% and 89%). In contrast, consumption levels decreased in 7 EU countries. The largest decreases were recorded in Denmark (110% in 2022 compared to 121% in 2020), Germany (118% compared to 124% in 2020) and Finland (109% compared to 114% in 2020). Of course, this does not mean that these latter countries are “impoverished”.

In 2022, as in 2020 and 2021, Luxembourg and Ireland had the highest levels of GDP per capita in PPS (purchasing power standard) in the EU, at 156% and 135% above the EU average respectively. After Luxembourg and Ireland, Denmark (36% above the EU average), the Netherlands (30% above the EU average), Austria (24% above the EU average) and Belgium (20% above the EU average) top the list. Among the countries suffering the biggest falls, Germany has a GDP per capita 17% higher than the EU average, while in Finland’s case this figure is 10%. In contrast, Bulgaria (38% below the EU average), Greece (33% below) and Slovakia (29% below) recorded the lowest GDP per capita. In Hungary, GDP per capita is 76 out of 100, 24% lower than the EU average. Romania has a similar indicator to Hungary.

On their own, these figures may help us to draw several conclusions, but it is worth highlighting some explanatory and underlying factors to get a more complete picture. In the Hungarian economic press, the comparison of the situation of the Hungarian-Romanian economy and the living standards of the people living there is almost a constant feature, so let us look at the case of Romania and, in some cases, Hungary. The first and most striking two trends are shown in the graph below:

Source: Szabolcs Pásztor, https://public.flourish.studio/visualisation/16813686/

Between 2006 and 2022, Romania’s public debt-to-GDP ratio rose spectacularly, almost quadrupling from 12.4% to 47.2%. From a Hungarian perspective, this is not a problem, as the domestic indicator is roughly 75%. However, sustainability is questionable on the Romanian side, because while the Hungarian indicator has been relatively stable in the recent period, Romania’s public debt increased by more than 10% per year on average between 2008 and 2022.

The graph also shows the size of gross savings as a percentage of GDP. While there was an upward period from 2006 to 2022, with a best indicator of 24.7%, by 2022 savings had returned to roughly 2008-2009 levels. The conclusion from the figures is that there was a spectacular increase in public debt over the period under review, almost none of which was absorbed by savings in the economy. The Victor Ponta-led government placed particular emphasis on stimulating consumption, which was ended by austerity measures in 2018. In Romania, even before the pandemic, the 3% budget deficit target was not met and a number of budget-boosting measures were proposed at the end of 2018: tax increases, special taxes, excise duty hikes. In addition, expenditure-cutting measures were also formulated: overtime pay cuts for public sector workers. The graph below shows that the nature of the fiscal deficit trajectories was almost identical in Hungary and Romania, with slightly more moderate deviations in Hungary.

Source: Szabolcs Pásztor, https://public.flourish.studio/visualisation/16813704/

In Romania, before the austerity measures, the central government therefore sought to stimulate final consumption from the growing public debt through demand stimulus elements. In this context, it may be useful to examine final consumption expenditure of households and non-profit institutions serving households as a percentage of GDP. On this point, it is worth making a comparison between Hungary and Romania. Two facts are immediately apparent from the graph. Romania has historically had a higher final consumption of households as a share of GDP than Hungary. Over the time horizon, there is a stable Romanian “advantage” of roughly 15%. The indicator has remained relatively stable in both Romania and Hungary.

Source: Szabolcs Pásztor, https://public.flourish.studio/visualisation/16813668/

So, we have seen that there is a consumption surplus in Romania, but it might also be interesting to compare the gross saving(s) to GDP ratio of the two countries. In 2006, Hungary had a saving to GDP ratio of 18.1%, which was the same as the similar Romanian ratio. Then, roughly until 2015, the two indicators move closely together, and for several years there is even a spectacular Romanian surplus. The turning point is 2015, when the positive trend actually continues on the Hungarian side, while Romania’s gross savings rate “falls”. By 2022, a Hungarian surplus of more than 7% is achieved (25.9% vs. 18.8% respectively). This means that while Hungary’s savings increase while maintaining the previous consumption profile, Romania’s savings fall spectacularly. This could even imply that all or part of the disappearing savings are being channelled to maintain or increase consumption.

Source: Szabolcs Pásztor, https://public.flourish.studio/visualisation/16813683/

Another indicator shows the trajectories of the Hungarian and Romanian development paths and sustainability. Gross capital formation includes the value of tangible and intangible assets purchased or produced in-house during the accounting period, the value added to tangible assets in use, the import of tangible assets from abroad and the value of tangible assets acquired under finance leasing arrangements. The depreciation of fixed capital stock in the current period or the value of asset disposals are not deducted from the gross fixed capital formation, so the change in national wealth associated with the accumulation of fixed capital is shown on the accruals side. Monitoring the evolution of this indicator may also be important because favourable trends can set a sustainable path for economic growth, while more modest and/or declining indicators foreshadow a decline in the potential of the economy. The graph below compares Hungarian and Romanian data between 2006 and 2022.

Source: Szabolcs Pásztor, https://public.flourish.studio/visualisation/16813692/

The graph shows that in the case of gross capital formation, a Romanian advantage of about 1.5% emerges in 2006, which suddenly jumps to 8% in 2008. In contrast, in Hungary the indicator declines until 2012, when it reaches a negative record of 20.2%. However, it is striking that the rate in Romania falls from 27.2% in 2009 to 23.3% in 2018, while Hungary sees a spectacular increase between 2012 and 2022. The latest data show a Hungarian advantage of almost 6% in gross capital formation in 2022, pointing to a more sustainable growth path.

The nexus of growth, consumption and savings also raises the question of whether Hungarian and Romanian households are taking advantage of the debt instrument. If they are covering their consumption by borrowing, this indicates a less sustainable growth model. The household debt-to-GDP ratio provides a more complete picture. Hungary and Romania have a more modest credit penetration compared to Western Europe, but we also see a difference between the two countries. In this respect, Hungary has an “advantage,” with a roughly 7.7% higher debt-to-GDP ratio in 2022 than Romania. In 2010, however, the difference was in the 20% range. Romanian household debt remains relatively stable, while the domestic indicator shows a spectacular decline from 39.4% in 2010 to 19.8% in 2022. This represents a halving of the indicator.

Source: Szabolcs Pásztor, https://public.flourish.studio/visualisation/16813672/

Household consumption and savings can also be significantly influenced by the size of personal remittances sent home each year. This is particularly important as, according to the latest official figures from the Romanian Ministry of Foreign Affairs, 5.7 million Romanians live abroad. However, according to Georghe-Florin Cârciu, Secretary of State at the Department for Romanians Everywhere, the real figure is now over 8 million. In France alone there are 500,000 Romanians, more than the 106,000 officially counted by the French authorities. There are several countries in Europe with at least one million Romanian residents each. In Hungary, according to official statistics from the Hungarian Central Statistical Office (KSH), 110-120 thousand people work abroad, but it is possible that the real figure could be higher. It is clear, however, that there is a considerable difference between the two countries, which can also be seen in the size of remittances. Romania received nearly USD 9 billion in remittances in 2022 (almost 3% of GDP), while Hungary received “only” USD 3.6 billion (2% of GDP). Hungary “led” the indicator until 2013, but afterwards the gap between the two countries increased dramatically, with a Romanian surplus of more than USD 5 billion by 2022. In addition to the total indicator, it is also worth taking into account the volume of remittances per capita. According to the latest statistics, Romania’s population is already below 20 million, compared to roughly 9.7 million in Hungary. Accordingly, Romania’s per capita remittances are around USD 437, while Hungary’s are around USD 370, resulting in a Romanian “surplus” of around USD 70 per capita.

Source: Szabolcs Pásztor, https://public.flourish.studio/visualisation/16813715/

Source: Szabolcs Pásztor, https://public.flourish.studio/visualisation/16813689/

This surplus of 5 billion could explain the spectacular transformation in the level of Romanian consumption. While remittances do not directly translate into GDP, they may, for of example, lead to an increase in consumption levels via households. This may be one explanation for the recent Eurostat data, but if we return to the household consumption expenditure as a percentage of GDP indicators, we do not really see any significant improvement. Empirical research shows that remittances contribute to economic growth through consumption and have a positive impact on savings and investment. However, it is also important to point out that remittances can also have a negative impact on growth in host countries by reducing incentives to work and thus decreasing the labour supply or labour market participation. This may cause an appreciation of the real exchange rate in host economies and lead to a reallocation of resources between different sectors of the economy, and may also negatively affect long-term growth trends through the so-called Dutch disease. The figures show that after 2015 Romania’s dependence on remittances increased spectacularly.

Eurostat’s map and data therefore give a realistic picture of the evolution of consumption, but provide little information to understand the underlying trends. This brief overview has allowed us to draw the following conclusions: (i) Romania’s public debt quadrupled between 2006 and 2022, while gross savings have not improved significantly. (ii) Romania’s budget deficit is large and shows larger fluctuations than the Hungarian deficit. (iii) Romania’s household consumption expenditure is historically higher than Hungary’s. (iv) Hungary has a large advantage in terms of gross savings as a share of GDP. (v) In terms of the gross capital formation indicator, the previous Hungarian disadvantage has disappeared and turned into a visible advantage. (vi) Household debt is slightly higher in Hungary, but overall the two countries have a more modest credit penetration (consumption is not financed by credit). (vii) Romania has seen a spectacular increase in remittances, which can now generate a per capita consumption surplus of around USD 70 per year.

Kutatási igazgató | Published writings

Szabolcs Pásztor is an associate professor at the Department of Economics and International Economics of the University of Public Service (Budapest, Hungary). Previously he worked at the Central Bank of Hungary and as an advisor for the Hungarian Banking Association. He joined the Oeconomus Economic Research Foundation in 2020. He has taught at various universities in Australia, China, Belgium, France, Czechia, Italy, Russia, Turkey, Republic of South Africa, Kenya, Ethiopia and other countries. His main research interests are related to the issues of economic and financial transformation in developing countries.

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