The general government budget deficit increased significantly by 65.4% y/y to more than RON 6.8bn (0.73% of GDP) in June, the finance ministry said in a release. The deterioration was generated by a strong jump of expenditures, while revenues’ annual growth slowed down. Thus, the deficit reached 1.61% of GDP (almost RON 15.0bn) in H1, which shows a notable worsening in public finances compared to the same period in 2017, when the general government budget reported a deficit at 0.73% of GDP (RON 6.3bn). However, the print remains below the finance ministry’s 2.21%-of-GDP projection for the period, the authority said. We remind that the government targets a 3%-of-GDP (RON 27.6bn) deficit in 2018. Hence, the finance ministry probably expects major surpluses in July and October, when most tax payments are due, in order to reach the fiscal target in 2018.
As for June, revenue grew by 12.3% y/y to RON 21.1bn. Growth was again almost entirely fuelled by another strong jump of social and healthcare insurance inflows (up by almost 43% y/y or RON 2.6bn), as a result of wage and pension hikes implemented in the past years, as well as due to higher contributions paid by employees. Tax revenue, which generally represents about half of total, dropped by 3.2% y/y in June, largely over a 30.8% y/y slump of personal income tax collection. Obviously, the drop in personal income tax collection was generated by a tax cut to 10% from 16% enforced as of this year. That indicates that the major wage increases in the public sector and some relatively more moderate in the private sector failed to cushion the negative effects on the state budget.
VAT collection registered another good performance, rising by 15.6% y/y, yet weaker than in May. We note that VAT collection started to perform well only as of May, even if consumption remained robust at the beginning of 2018. Excise tax collection decreased, which is rather surprising, considering the excise tax rise implemented on tobacco as of April. Transfers from the EU amounted to about RON 862mn in June, down by 13.8% on the year. EC disbursements were more significant at the beginning of the year, mostly backed by the agriculture ministry’s direct payments absorption. Inflows from the EU partially cushioned the fiscal deterioration in Q1, yet those amounts only transit the budget, without positive effects on structural deficiencies.
Expenditure rose by 21.8% y/y to RON 28.0bn in June, mostly fuelled personnel and social expenses. The same components backed the expenditure’s growth in June. In fact, they represented almost 63% in total June expenditures, so the state’s financial efforts were mostly focused on paying wages and pensions. Capital expenditure and spending with EU-backed projects remained at around RON 1bn each in June, too low to conclude on a public investment rebound.
Generally, budget revenues in H1 remained strongly affected by the government’s fiscal relaxation in the past years, which translated into weak VAT collection, a notable drop in inflows from taxes on use of goods or activities (after the elimination of cars pollution tax) and a major decrease in proceeds from personal income tax. At the same time, expenditure was boosted by significant wage and pension increases. Thus, pro-cyclical policy had a major negative effect on the structural balance, pushing authorities to give up investment. Only a significant rebound in tax collection or in EU funds absorption could give a hand to the government for meeting the fiscal target this year, in our view. However, both have proven to be too difficult for the government to achieve so far, so we rather expect another forced adjustment of the nominal GDP after the July budget revision for making prints look better.