The general government budget widened by almost 44.2% y/y to RON5.1bn (0.54% of GDP) in November, according to the finance ministry. Thus, the deficit reached almost RON26bn (2.74% of GDP) in January-November, up from 1.20% of GDP in January-October and by 2.6 times higher than the gap in January-November 2017.
The deterioration in November was generated by another robust expenditure growth, in spite of a robust revenue rebound. In fact, budget revenue posted one of the best performances in 2018 in November, mainly supported by nearly RON7.4bn transfers from the EU. We should note though that the EU funds ministry has not reported any significant boost in EU funds absorption rate in November, but it might be reflected by December prints. Obviously, another positive influence came from a more than RON2.1bn rise in social and health insurance collection that was largely fueled by the shift in the labor tax burden from employers to employees as of the beginning of 2018. Meanwhile, VAT collection accelerated its increase in November, so it added more than RON1.1bn to overall revenue growth. That was partially sustained by some consumption and activity rebound reported in November, which we think was temporary. Some negative influence came from non-tax revenue (RON477m) and from personal income tax, which kept on collapsing, down by 19.7% y/y in the period, mostly over a high base. As recalled, the government hiked wages in some public-sector segments in September 2017, boosting personal income tax collection.
Expenditures jumped by almost 43.2% y/y after some milder growth reported in October. The rise was mainly fueled by more than RON7.5bn transfers for projects using EU co-financing. Still, national co-financing remained low and even dropped y/y in November, which indicates that the major projects have not started yet. Similar to the previous periods, personnel and social expenses remained major contributors to expenditure’s growth, adding almost RON2.4bn to the November spending. Those represented more than 48% in total government spending in November. Capital spending was up again, but slower than in October, reaching RON2.7bn in November.
Overall, the budget balance deteriorated significantly again in November, mostly over a very weak performance of revenues, but also because spending growth remained robust. The revenues rebound was mostly backed by a significant transfer from the EU, which only transits the budget accounts. The gap reached almost RON26bn in January-November, whereas the government projects a deficit at most of RON28.1bn (2.97% of GDP) by the end of the year (revised nominal GDP for 2018). It means that the December deficit should be at around RON 2.1bn, an unusual print for the last month of a fiscal year. Thus, we do not see how the fiscal target would be achieved when looking at general government budget performance in past years, as the monthly deficit in December is traditionally higher than the entire gap in January-November. In addition, spending on interest, subventions and goods and services keeps rising worryingly, adding more upwards pressure on expenditures. At the same time, revenue fails to keep up with spending, mostly over a poor performance of tax collection. The government will probably freeze all spending in December or push forward some expenses for 2019, when some new taxes were already announced, in our view.