Romania’s public deficit exceeds EUR 3 bln at end-August amid worries about fiscal policy

Romania’s general consolidated budget, which includes fiscal and social budgets of the government, registered after the first eight months of this year a deficit of RON 14.56 billion (EUR 3.1 billion), or 1.54 percent of GDP, 2.2 times bigger compared with the same period of 2017 as soaring expenses overshadows revenue increase, according to the data of the Finance Ministry.

Budget revenues rose 13.7 percent against the first eight months of 2017 but the expenses surged by 18 percent.

The general budget in the first eight months of 2018 closed with a deficit of RON 14.56 billion, or 1.54 percent of GDP, compared with a deficit of RON 6.5 billion in the same period of 2017, Finance Ministry data show.

After the first seven months of this year, the budget registered a deficit of RON 11.9 billion, or 1.26 percent of GDP.

Official data suggest the deficit for the month of August was close to RON 2.6 billion (EUR 564 million), making it more difficult for the government to maintain the fiscal gap below its target of 3 percent of GDP.

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Social contributions rose by 37.5 percent, VAT revenues increased by 8.6 percent, while revenues from income tax declined by 23.9 percent compared with January-August 2017.

In the same time, budgetary wage expenses increased by 25.2 percent during the first eight months and capital expenses soared 50.4 percent.

Expenses with goods and services increased by 8.9 percent compared with the same period of 2017.

Soaring interest expense

But experts are particularly concerned about the rapid increase of government’s interest expenses. Official data show that interest expense rose by 21.3 percent during the first eight months of this year, to RON 9.03 billion, from RON 7.4 billion in January-August 2017.

Higher deficits can make it more difficult for the Romanian government to raise funds in order to finance the public debt.

Romania is already EU’s member state which pays the highest interest rates for its debt (3.96 percent per year in 2017) and recent Eurostat data showed Romania posted the highest annual inflation rate among the European Union member states for seven months in a row this year.

Romania’s sovereign 10-year bonds yield, a barometer for the cost of financing in the economy, reached this year a 4-year high of more than 5 percent, amid growing concerns regarding the health of public finances.

Warnings

Following this sharp deterioration of Romania’s fiscal position, the Fiscal Council has issued a warning regarding Romania’s risk of exceeding its deficit target and implicitly its reference level of 3 percent of the GDP for the budget balance.

The Fiscal Council has warned that the budget revision managed to keep the deficit at 2.97 percent of GDP only due to an upward revision of the nominal GDP level, which is probably excessive.

In the report, the Fiscal Council says the first budget revision project of this year doesn’t follow any of the fiscal rules established in the Fiscal-Budgetary Responsibility Law, with the exception of the provision regarding the deficit level as a percentage of the GDP.

Last year, Romania recorded a public deficit of 2.9 percent of GDP, according to Eurostat, compared with deficits of 1.7 percent of GDP in Poland, 1 percent in Slovakia, 2 percent in Hungary.

The Czech Republic and Bulgaria have posted budget surpluses in 2017.

A recent BR Analysis showed that Romania looks out of the region with its large external and fiscal deficits.