Romania’s general government budget gap narrows by 33.5% y/y in Feb

The general government turned to RON2.6bn (0.32% of GDP) deficit in February from a RON3bn (0.37% of projected GDP) surplus in January, the finance ministry said in a release last evening. Still, the monthly gap was by 33.5% y/y lower than in February last year. As a result, the Jan-Feb surplus decreased by 49.6% y/y to RON397.1m and accounted for 0.05% of GDP, down from 0.10% of GDP in the same period last year.

In Feb, revenues rose by 4.5% y/y while spending was down by 3.4% y/y. The revenues rise was mainly supported by a more notable increase of inflows from social and healthcare contributions, after the government hiked the minimum wage and increased wages in the public sector again. We note that VAT collections increased slightly y/y in February, even if the rate was cut again by 1ppt to 19% as of January this year. The only more significant negative influence on the budget revenues in February came from the excises and non-tax revenues, most probably the latter being affected by the elimination of the 102 non-tax levies enforced as of February. As for the expenditures’ fall in February, it was mainly triggered by a major drop of transfers, mostly those covering the national co-financing of EU-backed projects, which is not a good sign for the authorities’ investments target for this year. Not surprisingly, the personnel and social expenses were among the only relatively more significant factors putting upward pressure on budget expenditures in February, after the enforcement of higher wages in the public sector and after the pension indexation applied as of the beginning of 2017.

Looking at Jan-Feb, budget revenues were by 1.4% y/y lower and represented 4.3% of GDP, down from 4.7% of GDP in the same period a year before. The revenues’ deterioration mainly came from weaker VAT and excise collections. The VAT collections drop was generated by the VAT rate cut by 4pps to 20% as of January 2016 (which reflected in the budget revenues in Feb last year) and by another rate cut to 19% as of 2017 (which reflected in the budget revenues in Feb this year). The excises decreased y/y in Jan-Feb due to some other tax cuts for some energy products implemented in Jan 2017, the finance ministry explained.

The expenditures dropped by 0.3% y/y in Jan-Feb and were down to 4.2% of GDP from 4.6% in the same period in 2016. The most severe expenditure drops were in transfers, especially in the national co-financing for EU-backed projects, capital expenses and other transfers. Thus, the investment expenses severely deteriorated to RON870.1m in Jan-Feb this year (0.11% of GDP) from RON2.7bn (0.40% of GDP) in the same period last year. We remind that the ruling coalition pledged to raise the public investment to RON34.4bn this year (4.2% of GDP), of which more than 65% should come from EU structural and cohesion funds, so the developments so far are not encouraging with the view of reaching the target. The budget expenditures notably jumped though in the personnel and social expenses chapters, following the wage hikes applied in H2 last year and as of January this year, together with the pension point rise and with the base expansion of some social benefits. Subsidies also rose by 51.1% y/y, mostly fuelled by the farming subsidies granted earlier this year.

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