Fiscal Council: Budget deficit to rise to 3.5 percent of GDP in 2019

Aurel Dragan 11/03/2019 | 14:56

The Fiscal Council published its opinion on the draft budget for 2019 and it says that the fiscal deficit will exceed the 3 percent target even if the greed tax on bank assets remains at its current levels. According to the Fiscal Council, the budget deficit will rise to 3.5 percent of GDP, almost one percentage point over the 2.76 percent deficit estimated in the draft budget.

“Income and total expenditures are higher by RON 1.16 billion, with significant differences in sizing aggregates of expenditures. Thus, on revenue, the increase is located exclusively at the level of estimated non-reimbursable EU funds, and these seem to be together with the corresponding co-financing at the level of capital expenditures (higher by RON 2.47 billion, of which RON 1.4 billion correspond to the additional revenues from the EU and its co-financing). Beyond the above-mentioned increase from capital expenditures, significant increases occur on the level of expenditures on goods and services (+ RON 1.5 billion) and other expenses (+ RON 0.5 billion). In compensation, there are cuts in social assistance spending (- RON 2.2 billion) and other transfers (- RON 0.7 billion). Both spending cuts appear to be extremely problematic and we therefore believe that there are additional pressures at the beginning of the consolidated budget deficit compared to those already identified in the Tax Board’s opinion on February 5, 2019,” says Ionut Dumitru, Fiscal Council chairman.

The Fiscal Council finds that the deficit will likely be underestimated by RON 3.5 billion, coming mostly from expenditures with social assistance (RON 0.9 billion) and from the budget for social insurance (state pensions), underestimated by RON 1.2 billion.

“Following the parliamentary debates, the 2019 consolidated budget version approved by the government recorded an increase in total expenditure and deficit of RON 2.13 billion, having as main source the increase by RON 2.03 billion of the expenditures for assistance social change generated by the adoption of the amendment on the doubling of the children allowance, plus a rise in expenditure on goods and services (+ RON 0.47 billion) and of the capital expenditures (RON 0.28 billion), partly offset by the reduction of the estimate for the public sector wage bill of RON 0.42 billion. The annualized impact of the increase in child allowances (RON 2.56 billion) is also found at the level of medium-term budget projections (2020 and 2021), the deficit targets having been increased by that amount in relation to the version notified to the Tax Council on 31 January.”

The Fiscal Council also notes that, for the first time since its establishment, its budget deficit target is increased after submission of the draft budget to Parliament, in direct contradiction with the provisions of art. 15 of the Public Finance Act.

“In conclusion, the increase in the budget deficit target for 2019 and under-sizing of the social assistance expenditure and of the contribution to the EU budget implies a deficit in the immediate vicinity of the 3 percent of GDP mark even ignoring the issues of overstimulating budget revenues identified in the context the opinion of the Fiscal Council of February 5, 2019 (RON 4.5 billion, given the tax on assets bank would be maintained in the current form). Taking into account this oversize, we appreciate it that the budget deficit at the end of this year is likely to reach about 3.5 percent of GDP if current policies are maintained. In terms of term developments the Fiscal Council maintains its assertion that the risk balance is tilted overwhelmingly in the direction of registering deficits higher than those envisaged by the Fiscal-Budget Strategy for 2019-2021, well above the 3 percent of GDP reference level related to the corrective arm of the Stability and Growth Pact.”

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