Fiscal woes: Romania’s budget deficit rose by 50 pct in January-August on soaring wage, subsidies spending

Romania’s budget deficit rose by 50.6 percent in January-August compared with the first eight months of last year, to RON 21.9 billion (EUR 4.6 billion), as the government has major difficulties to cover soaring wage and subsidies spending.

In January-August 2018, the budget deficit amounted RON 14.6 billion.

Official data show that budget revenues rose by 11.9 percent year-on-year in January-August up to RON 204.1 billion (EUR 43 billion) while expenses increased by 14.8 percent to RON 226.1 billion.

The general budget in January-August closed with a deficit of RON 21.9 million, or 2.13 percent of estimated GDP.

Surging wage spending

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Revenues from social contributions rose by 15.8 percent, VAT revenues increased by 11.6 percent, profit tax revenues grew by 14.3 percent, while revenues from income tax – paid by individuals – increased by only 2.4 percent compared with January-August 2018.

In the same time, budgetary wage expenses increased by 20.9 percent against January-August 2018 and capital expenses surged by 26.4 percent. Expenses on goods and services increased by 14.8 percent year-on-year.

Last year, Romania has registered a budget deficit of 3.02 percent of GDP, slightly exceeding European Union’s ceiling of 3 percent of GDP.

Flat interest expense

Experts are particularly concerned about the rapid increase of government’s interest expenses. Last year, interest expense rose by 27.8 percent up to RON 12.9 billion.

But the Finance Ministry has managed this year to better control interest expenses, which unexpectedly decreased in January-August by 0.4 percent year-on-year to RON 8.99 billion as the government reduced borrowing in the local market.

Romania is the EU’s member state which pays the highest interest rates for its debt.

Running out of revenue sources, the government has introduced this year a tax on bank assets and special taxes of 2 percent of turnover on energy firms and 3 percent on telecom companies.

The measure was largely criticized by economists and businesses alike and the government stepped back by reducing some taxes, postponing others and even cancelling some of its decisions.

The 2019 budget bill indicates a budget deficit of 2.76 percent of GDP.

Is the deficit out of control?

Many experts warn that the deficit is already difficult to control and forecast that the level could approach 4 percent of GDP, exceeding the EU ceiling of 3 percent.

Last month, Fitch Ratings said that Romania’s public deficit will widen to 3.4 percent of GDP in 2019, from 3 percent last year, as the government’s projections rely on optimistic revenue assumptions.

“Overall, we think that political uncertainty increases risks to the public finances and of economic overheating heading into a busy electoral period. The ‘muddle through’ approach that has enabled Romania to meet the EU’s 3 percent deficit target in recent years may become more difficult as growth slows and opportunities to reduce spending at short notice become fewer,” the agency pointed out.

Other experts estimate that Romania’s budget deficit will exceed 4 percent of GDP this year without additional fiscal measures.

“Things seem to have deteriorated a bit on the fiscal policy front as the mid-year budget execution doesn’t leave much room to maneuver for the rest of 2019. Last time the consolidated budget came close to this figure was in 2011,” Valentin Tataru, economist at ING Bank Romania, said in a research note.

“In fact, so far in 2019, both the deficit numbers and execution pattern seem to resemble 2011 when we closed the year with a budget deficit of 4.2 percent of GDP,” he added.

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