AmCham: Budgetary execution at 9 months indicates public investment still not a priority

The analysis of the budgetary execution in the first 9 months of 2018 indicates that the implementation of the investment plan is not a priority this year either, according to AmCham Romania. At the beginning of the current budgetary exercise, AmCham Romania was signaling through a similar analysis a series of potential vulnerabilities in the budgetary projection for 2018, specifically pointing to the need to observe the investment plan, which is critical in AmCham’s vision for a sustainable economic growth.

The analysis of the budgetary execution for the first 9 months of 2018 indicates a budgetary deficit amounting to RON 16.8 billion (1.77 percent of GDP), almost tripled compared to the value for the similar period in 2017, which reached RON 6.8 billion (0.79 percent of GDP).

That even in such circumstances, 2017 ended with a deficit of 2.88 percent, severely close to the 3 percent of the GDP maximum target provided by the Maastricht Treaty, confirms the concerns regarding the observance of the deficit target in 2018 and considerably reduces the possibilities to implement the investment plan for the current year.

Reducing investment allocations remains a control mechanism for the budgetary deficit

The most frequently used mechanisms to control the budgetary deficit are reducing planned expenditures allocated for investments, despite the negative impact that shrinking such allocations has in the real and potential economic growth.

During the first 9 months of 2018, expenditures for investments, which include capital expenditures as well as those related to programs developed through internal and external financing, reached RON 15,2 billion. Although 25.7 percent higher compared to the same period last year, related to the forecasted investments for this year, of RON 38.5 billion (4.2 percent of GDP), implemented investments only reached 39.5 percent (1.6 percent of GDP) during the first 9 months.

Even an intensification or the doubling of capital expenditures during the last 3 months of 2018, as it was the case in 2017, will not be sufficient to recover the potential lost by failing the investment plan during the first three quarters of 2018.

A long term sustainable economic growth cannot be achieved without a real commitment for investments and structural reforms to enhance the impact of investments in the economy and the society, by consolidating the performance of public institutions and increasing the quality of public expenditures.

The evolution of other types of expenditures compared to 2017

Compared to the 2017 results, this year’s budget (following the rectification approved in September 2018) provides an increase of the personnel expenditures by approximatively RON 16.6 billion and an increase of social aid expenses of approximately RON 7.8 billion.

Related to the same period in 2017, during the first 9 months of 2018, the increase of the personnel expenditures is in line with the forecasted allocations, reaching RON 12.8 billion, while the social aid expenditures have already exceeded RON 8.5 billion. An increase of RON 2.1 billion is also reported for goods and services expenditures, compared to the increase planned for the entire 2018.

However, a positive impact on the evolution of the budgetary deficit was generated by the increase by RON 3.2 billion of the non-fiscal budgetary revenues during the first 3 quarters in 2018, compared to the same period last year, from a forecasted RON 1.7 billion increase.

Expenditures related to interest on public debt have also increased following new contracted loans and also the general context of interest rates increases on the financial markets. Considering the normalization of the monetary policy that characterizes the global macroeconomic context, the expectations regarding the increase of the credit costs are linked with the upward trend of the loan interest.

Is the pro-cyclic character of the budgetary policy still adequate to Romania’s macroeconomic outlook?

From a macroeconomic perspective, the management model of the budgetary policy poses several important challenges.

The first is the pro-cyclic character of the budgetary policy which in our vision holds a risk for the prudential management of the macroeconomic policies in the context of a maturing economic cycle and of a transition towards a slower economic growth.

In a time of economic growth when Romania also faces a higher demand than the internal market can cover, as well as a labor force shortage, the risk of accelerated inflation also increases.

In such context, in the absence of a fiscal consolidation during the favorable stages of the economic cycle limits the adjustment space for policies to incentivize the economy that the Government can resort to. Consequently, a restructuring of the public spending, including social and investments allocations, becomes imminent.

Ambitious objectives for 2019

Observing the budgetary deficit threshold remains in our vision a very ambitious objective even in an ideal context when, despite the analysts’ predictions, the economy will increase by 5.5 percent in 2018 in real terms, the evolution of the budgetary revenues and expenditures will maintain last year’s structure and the investment plan will be fully implemented.

As for the projections for next year, AmCham Romania views as too optimistic the economic growth target of 5.7 percent (real growth) and an inflation rate of 2.8 percent – considerably different from the European Commission estimates – 4.1 percent economic growth and 3.4 percent average annual inflation, as outlined in the Framework agreement letter regarding the macroeconomic context, methodology for the elaboration of budgetary projects for 2019.

In conclusion, AmCham Romania reiterates the need for using investments as an active instrument for a sustainable economic growth by replacing the model of economic growth based on consumption with policies focused on competitiveness and a systematic development of capital, in all of its forms.

AmCham Romania will closely follow the evolution of the budgetary execution and to emphasize the opportunities for sustainable economic growth, the vulnerabilities that need to be addressed before they affect the macroeconomic balance and to reiterate the importance of observing the implementation of the investment plan. We also express our availability for dialogue and best practices exchange with the relevant institutions involved in the planning and execution of the state budget.

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