General government budget cash gap widens to almost 2% of GDP in Romania

The general government budget deficit increased to almost RON20bn (1.98% of GDP in cash terms) in H1, according to figures of the finance ministry. The deficit level was higher by 33.4% y/y, compared to RON15.0bn (1.58% of GDP) in the same period of 2018. In June alone, the deficit added up to RON5.3bn (0.51% of GDP), growing by as much as 23.0% y/y.

Revenue growth reached 12.6% y/y in H1, faster than a month ago and still mainly driven by social and health insurance contributions, which continued rising by 17.1% y/y in the period. It was mostly on the back of growing wages and moderate increase in the number of employees. Tax revenue increased by a milder 6.7% y/y in H1 and remained mainly fueled by VAT collection. Yet, growth eased compared to January-May, very probably due to consumption moderation in June. Revenue from personal income tax continued falling, as a result of the tax cut to 10% from 16% last year. A positive development was reported by the corporate income tax, which accelerated to 11.3% y/y, probably benefiting from profitability improvement of domestic companies earlier in 2019. Transfers from the EU increased moderately by 8.8% y/y to RON7.4bn in H1. Even though that money only transits the budget, we should note that the absorbed amount in June was the biggest in 2019, which can only have positive effects on economic activity’s future development.

As it often happened before, expenditure growth was stronger, up by 14.7% y/y in H1. Spending on personnel rose by 23.4% y/y, reflecting public sector wage hikes, while social transfers were up 11.4% y/y, reflecting pension hikes. Those components remained the major growth drivers on the expenditure side. Capital spending also increased satisfactory, by 12.3% y/y, mainly on the back of some more significant investment spending in March and May, yet not enough to sustain continuation or start of the pledged major infrastructure projects.

Overall, even though June prints could have been worse, but the H1 deficit is still up to nearly 2% of GDP. That makes the 2.75%-of-GDP fiscal target in 2019 very close to impossible to meet. However, Finance Minister Teodorovici and PM Dancila constantly assure markets that the deficit will be kept under control. Although they seem committed not to exceed the deficit cap, we do not see how that could happen without correction measures. Thus, we are almost certain that the budget revision scheduled to be revealed for public debate this week will very likely come with something to revive budget revenue rise and to ease expenditure growth. Teodorovici already announced he intended to put a tax on high pensions and cut some useless staff in the central administration. At the same time, finance ministry sources said to local media that some excises will be hiked and other new ones introduced.

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