Romania’s government slightly reduces budget gap to RON 5.2 bln in January-February by cutting public investment

Romania’s budget deficit declined by 5 percent in January-February compared with the first two months of last year, to RON 5.21 billion (EUR 1.1 billion), as soaring wage and pensions spending was financed through a severe cut in public investment.

In January-February 2018, the budget deficit amounted RON 5.48 billion.

Official data show that budget revenues rose by 10.4 percent year-on-year in January-February while expenses increased by 8.6 percent.

The general budget in January-February closed with a deficit of RON 5.21 million, or 0.51 percent of estimated GDP.

Surging wage spending and investment cut

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Revenues from social contributions rose by 27 percent, VAT revenues increased by 14.1 percent, while revenues from income tax – paid by individuals – declined by 25.2 percent compared with January-February 2018.

In the same time, budgetary wage expenses increased by 25.2 percent against January-February 2018 and capital expenses dropped by 78.3 percent.

Expenses with goods and services increased by 21.5 percent year-on-year in January-February.

Last year, Romania has managed to keep the budget deficit below the European Union’s ceiling of 3 percent of GDP as the official data show a fiscal gap of 2.9 percent of GDP at end-2018 in national “cash” terms, according to the Ministry of Finance.

Surging 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.

The trend continued this year as interest expenses increased in January-February by 15.7 percent year-on-year to RON 2.29 billion as the government had lower access to financing from local banks after it imposed a tax on assets since the beginning of this year.

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

Romania’s sovereign 10-year bonds yield, a barometer for the cost of financing in the economy, is now close to 5 percent, amid growing concerns regarding the health of public finances.

New taxes and high uncertainties in 2019

Running out of revenue sources, the government has recently introduced a tax on bank assets of 1.2 percent per annum since January 1st, 2019.

The government also imposed 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 budget bill approved last month indicates a budget deficit of 2.76 percent of GDP in 2019.

In the absence of an approved budget for the current year, monthly budget spending in Romania has been capped during the first 3 months of this year at 1/12 of the total spending registered in 2018.