Romania's budget deficit exceeds worst expectations

Romania's budget deficit exceeds worst expectations
By Iulian Ernst in Bucharest June 4, 2019

Romania posted a 1.1%-of-GDP budget deficit in January-April, nearly twice as wide as the 0.64%-of-GDP deficit posted in the same period last year, after the gap nearly quadrupled in April when it soared by 0.58% of GDP. 

Prime Minister Viorica Dancila has responded to the growing deficit by appointing insolvency lawyer Remus Borza as her economic advisor, and sacked the head of the tax collection agency, ANAF, as the European Commission's 3.5%-of-GDP full year deficit forecast seems subject to upside risks. 

Even if fiscal data for a single month of the second quarter might not be fully relevant, the rising public payroll and social security leave very little fiscal room for capital expenditures and the expected recovery in the use of cohesion funds will predictably come at the cost of more pressure on the budget deficit because of the co-financing costs. 

The government targets a 3%-of-GDP budget deficit this year and looking at it on a proportional basis the 1.1%-of-GDP fiscal gap for the first four months might indicate the target would not be exceeded by much. But, seasonally, the gap is small in the first part of the year. Consequently, April fiscal data support the European Commission’s projection of a 3.5%-of-GDP deficit for the full year, which is close to the 3.4%-of-GDP forecast issued by Fitch.

Upward risks are significant, despite the tough measures announced by Borza. He pointed to real problems and appropriate solutions such as cutting employment in the public sector and cutting benefits — but he said this in his first day on his new job while, politically, such steps will be hard to take with the presidential election approaching in the autumn. 

Borza’s tough approach at state hydropower company Hidroelectrica as the company’s insolvency lawyer led to lawsuits with the company’s employees, which would be politically unacceptable where government employees are concerned, especially as they expect further pay hikes after years of similar steps.

At the same time, Dancila replaced the head of ANAF, Mihaela Triculescu, who had served in the position for only five months, with Mirela Calugareanu. This visibly brings more expertise, but cannot solve the deep problems at the agency in itself. Unlike Triculescu, appointed with no prior experience reportedly at the request of Borza’s predecessor Darius Valcov, the new ANAF head has served in the public administration since 2001 and even headed ANAF during the cabinet of Mihai Tudose in 2017. 

Taking over at ANAF, Calugareanu will have to meet the expectations of Finance Minister Eugen Teodorovici, who wants revenues to exceed the target set in the budget. Romania’s government set a 28%-of-GDP target for revenues when drafting the budget for 2019, but is really counting on 30%-of-GDP revenues, according to comments from Teodorovici.

The revenues to the budget increased by 11% y/y to RON99.5bn in January-April, while as a share of the year’s GDP they advanced from 9.5% to 9.7%. In April alone, the revenues advanced by only 6.9% y/y, though. The increase in revenues was thus positive in real terms and even compared to the optimistic GDP growth projected by the government for the full year (+5.5%). But this is visibly insufficient to cover the expenditures planned by the government.

Budget expenditures increased by 15.9% y/y to RON110.9bn in January-April after the growth rate accelerated to 23.9% y/y in April from 13.2% y/y in Q1. The increase in the public payroll slightly accelerated to 26.9% y/y in April from 25.7% y/y in Q1, Social security expenditures maintained a high growth rate of 14.8% in April compared to 15.0% in Q1. The increase in the two accounts, summed up to RON2.1bn, contributed to the RON5.9bn (0.6% of GDP) rise in the month’s expenditures. A moderate increase in the capital expenditures (+RON524mn) and co-financing expenditures (+RON621mn) added RON1.1bn to the total expenditures, but remain at a very low level compared to normal values required to support infrastructure projects. Furthermore, the RON811mn rise in the volume of subsidies in April, to a still moderate RON1.3bn (0.1% of GDP), added to the month’s expenditures, which ballooned in April. While this might be reversed in the months to come, the capital and co-financing expenditures should in principle increase, putting more pressure on the budget deficit and hence on the need to improve budget collection.