General government budget gap widens to 2.1% of GDP in Romania

The general government budget deficit widened to more than 2.1% of GDP in January-August from less than 1.8% of GDP a month before, according to figures released by the finance ministry. The balance worsening was on the back of the RON3.8bn gap (0.4% of GDP) recorded in August alone. Besides, the gap in August jumped by 44.1% y/y, whereas the January-August gap was up by 50.6% compared to the same period in 2018.

Like in almost all previous months in 2019, the wider deficit in August was due to a faster expenditure growth compared to revenue. Budget revenue rose by 11.7% y/y in August, mostly driven by social and health insurance, corporate and personal income tax. VAT collection did not improve much, even though consumption was still robust in August. Transfers from the EU were somewhat lower than in July but rose by about 42.1% y/y to RON1.0bn. Meanwhile, expenditure kept on rising with double-digit paces and was up by nearly 15.3% y/y in August, driven by personnel and social expenditures. Capital expenditure reported another robust increase (48.1% y/y in August). Even through the growth was milder than in July it might back another solid rise in gross fixed capital formation.

Revenue growth eased to less than 12.0% y/y in January-August, slightly slower than a month ago and was once more mainly driven by social and health insurance contributions, which continued rising by 15.8% y/y in the period. That was mostly on the back of growing wages and some moderate increase in the number of employees reported earlier this year. Tax revenue increased by a faster 9.3% y/y in January-August and remained mainly fueled by VAT collection and by corporate income tax collections. Growth speeding was very probably due to consumption rebound in July. Revenue from personal income tax stopped falling in July, but the rise was insignificant and perhaps driven by wage increases and vacation bonuses. Transfers from the EU increased stronger by 17.0% y/y to RON9.6bn in January-August.

Expenditure growth was stronger, up by 14.8% y/y in January-August. Spending on personnel rose by 20.9% y/y, mirroring public sector wage hikes, while social transfers were up 10.7% y/y, reflecting pension hikes. Those components remained the major growth drivers on the expenditure side and represented more than 63% of total. Capital spending also increased, by 26.4% y/y, mainly on the back of some more significant investment spending as of May.

Overall, the gap in January-August reached a level that makes the annual fiscal target almost impossible to meet in our view. Personnel and social expenditure keep a worryingly high share in total, leaving the government very little fiscal space in case of need. At the same time, tax revenue is performing unsatisfactory compared to economic developments, indicating that fiscal evasion is still high. Also, that would very probably result into another year with a very low share to GDP of total fiscal revenue. We note that the government estimated about RON28bn budget deficit in the entire 2019 whereas the negative balance by the end of August was at nearly RON22bn. In fact, the government estimated a slight fiscal adjustment and sees the 2019 deficit at 2.75% of GDP, less than 2.90% of GDP reported in 2018.

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