Romania’s government close to breaching EU’s public deficit limit of 3 pct of GDP as wage expenses soared

Sorin Melenciuc 31/12/2018 | 08:00

Romania is close to breaching in 2018 the European Union’s budget deficit ceiling of 3 percent of GDP for the first time since 2011 as the official data show a fiscal gap of 2.74 percent of GDP in January-November, and December is, historically, a high-deficit month for the Romanian budget.

Romania’s general consolidated budget, which includes fiscal and social budgets of the government, registered after the first 11 months of this year a deficit of RON 26 billion (EUR 5.6 billion), or 2.74 percent of estimated GDP, 2.5 times bigger compared with the same period of 2017 as soaring expenses overshadows revenue increase, according to the data released by the Finance Ministry.

Budget revenues rose by 14.6 percent against the first 11 months of 2017 but expenses surged by 20.6 percent.

The general budget in the first 11 months of 2018 closed with a deficit of RON 26 billion, or 1.77 percent of estimated GDP, compared with a deficit of RON 10.2 billion in the same period of 2017, Finance Ministry data show.

After the first 10 months of this year, the budget registered a deficit of RON 20.86 billion (EUR 4.6 billion), or 2.2 percent of GDP.

Official data suggest the deficit for the month of November was RON 5.1 billion (EUR 1.1 billion), making it almost impossible for the government to maintain the fiscal gap below its official target of 3 percent of GDP.

Experts have warned, following the last budget revision, that the official deficit target of 3 percent of GDP will be breached.

“The Fiscal Council considered it likely that the budget deficit target would be exceeded by about RON 6 billion, having as a source the overestimation regarding the VAT and excise tax revenues, as well as the underestimation of the social assistance expenditures,” Romania’s Fiscal Council said on December 4th, in a public opinion regarding the budget situation.

Revenues from social contributions rose by 37.5 percent, VAT revenues increased 10.5 percent, while revenues from income tax declined by 25.5 percent compared with January-November 2017.

In the same time, budgetary wage expenses increased by 25.5 percent during the first 11 months and capital expenses soared by 62.2 percent.

Expenses with goods and services increased by 11.2 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 25.3 percent during the first 11 months of this year, to RON 12.2 billion, from RON 9.7 billion in January-November 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 eight 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.

New taxes in 2019 

Desperately needing money to finance its soaring expenses,  the government has recentlty introduced a tax on bank assets of 0.3 percent from January 1st, 2019, and capped the retail and corporate gas price at RON 68/Mwh.

The government also imposed special taxes of 2 percent of turnover to energy firms and of 3 percent to telecom companies.

Experts say that capping internal natural gas prices will hit hard the two main gas producers in Romania, Romgaz and OMV Petrom, and will limit investment in gas fields, while the advantages for retail consumers are only for short term.

EU competition legislation bans such practices and energy directives impose a liberalization of gas prices, which Romania had already done by April 2017.

If the proposal passes, Romania may risk infringement procedures by the European Commission. Experts also argue that such a measure will favour gas imports from Russia.

Households in Romania paid in 2017 the lowest prices for gas and the fifth lowest prices for electricity among the 28 European Union member states, according to Eurostat.

The government has not released until now a budget project for 2019 and many experts say it has no money to finance its soaring spending on public servants’ wages and pensions.

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