The Fiscal Council, led by Daniel Daianu, issued an opinion on Thursday regarding the Romanian government’s budget revision project and the semestrial report on the fiscal and budgetary status. The main takeaway of the document released by the Fiscal Council is that its members are confident that the budget deficit target of 3 percent of GDP will be exceeded this year and reach 3.4-3.7 percent of GDP unless some “additional credible compensatory measures” will be taken in due time.
The Finance Ministry had announced a positive budget revision and said that the budget deficit would only reach 2.76 percent of GDP this year. Several ministries will have their budgets cut through this budget revision, most notably the Education Ministry, the European Funds Ministry and the Research Ministry, while infrastructure and agriculture will also lose some of their allocated budgets.
The cuts will mostly be used to finance pension raises and put more money into local budgets, a measure designed to boost support from mayors for the ruling coalition before the next election cycle.
The Fiscal Council calls for more transparency in the communication of budget constructions by publishing and using as a point of reference the general consolidated budget, as opposed to only “parts of it”.
The main points made by the Fiscal Council in its report:
• The forecast of the macroeconomic framework related to the first budgetary revision is based on a plausible advance of nominal GDP resulting from a lower real economic growth and a probably higher deflator. Assumptions regarding the labor market are also optimistic, especially in terms of the growth in the number of employees.
• From the initial construction, the consolidated general budget provided for a large deviation from the rule on structural balance and furthermore, there was a risk of exceeding even the 3 percent of GDP threshold – given the proximity of the initial target to this ceiling.
• The Fiscal Council believes that a possible positive budgetary impact of both measures to increase collection efficiency as well as the fiscal amnesty cannot be taken into account ex ante in the projection of the budgetary revenues when taking into account the principle of prudence, as established by the LRFB.
• The Fiscal Council has significant reservations compared to the proposed level of budgetary revenues – especially in the case of VAT and social insurance contributions – as a cumulative income deficit between RON 5.8-6.8 billion is identified.
• As for budgetary spending, the Fiscal Council has reservations regarding the proposed levels for social assistance expenses and those related to the purchase of goods and services, as it sees a sub-budgeting of RON 3.5-4.5 billion for these expenses. A lower absorption of European funds, undesirable from the perspective of economic development, could reduce the budget deficit by RON 2.5-3.5 billion.
• The fiscal-budgetary policy entails significant risks generated internally by the severe tightening of the budgetary construction. This is determined by the very low level of tax revenues and the high degree of spending rigidity, by excessively ambitious commitments in relation to available resources. The external context, illustrated by a slowdown of economic activity as well as the effects of the trade/currency war between big states, also intervenes. It is worth noting in this context the relatively high and singular twin deficits in the region that characterize the Romanian economy.
• The Council believes that serious budgetary consolidation measures are required considering both the current deficit level and the medium-term perspective, by increasing revenues and/or streamlining costs. A substantial increase in budget revenues seems a sine-qua-non condition in this consolidation process.