Romanian government approves 2018 budget laws, fiscal target is set at 2.96% of GDP

The government approved the state budget and the social insurance budget for next year in the meeting on Wednesday. The general government budget deficit target was set at 2.96% of GDP (ESA terms) and 2.97% of GDP in cash terms respectively. The authority admits that the structural deficit will continue widening next year, as it is estimated to reach 3.17% of GDP, more than 3.06% of GDP estimated for this year. However, despite international institutions warnings on macroeconomic imbalances and increasing vulnerabilities, the fiscal adjustment is seen to occur only as of 2019. Nevertheless, the public debt-to-GDP ratio would remain below 40% next year too and by 2021, according to the government’s estimations.

Budget indicators, % of GDP, 2016-2021

 

2016

2017

2018

2019

2020

2021

Budget revenues, cash terms

29.4

30.5

31.7

31.9

32.0

31.9

Budget expenditures, cash terms

31.8

33.4

34.6

34.4

33.8

33.1

Budget balance, cash terms

-2.40

-2.96

-2.97

-2.58

-1.89

-1.23

Budget balance, ESA terms

-3.00

-2.96

-2.96

-2.38

-1.82

-1.45

Structural balance

-2.20

-3.06

-3.17

-2.71

-2.22

-1.71

Source: Finance ministry

Stimulating consumption remains among major objectives, yet some public spending restrictions join framework

The government plans to further stimulate economic growth in 2018 and sees GDP rising by 5.5% next year, yet slower than the 6.1% growth forecasted in 2017. The major objectives are to increase labour market participation, to improve VAT collections by implementing the split VAT accounts measure, to support the business environment through the corporate income tax cut to 10% from 16%, by reducing social contributions by 2pps and by reducing the number of social contribution categories to three from nine. The government also aims to back the SMEs with new or by continuing state aid schemes in the field that encourage investments and with offering support for local SMEs to expand abroad. Structural reforms in state enterprises, consolidation of public investments in infrastructure and increasing EU funds absorption are also among the major objectives of the government in 2018. The government aims to reach 72.5% absorption rate by end-2020 and 100% by end-2023. The public investments target was set at 4.2% of GDP for next year, but should reach 4.8% of GDP by 2021.

Some of the measures further stimulate consumption, such as another hike of the minimum wage to RON 1,900 from RON 1,450 as of January next year, another increase of the pension point to RON 1,100 from RON 1,000 as of July 2018 and the personal income tax cut to 10% from 16%.

Not surprisingly, the government also had to take some expenditures limitation measures, which were already raising more discontent among the ruling coalition’s supporters. Thus, the regional and central administrations will have to apply hiring restrictions, specifically, would be allowed to hire only one person for two vacancies. The overtimes in the public sector will no longer be financially rewarded but compensated with free time, the public institutions will have to reduce staff as much as possible, to eliminate bonuses, financial aid at retirement or other benefits and to cut expenses on goods and services by 10%.

Some macroeconomic assumptions may be too optimistic, public investments rebound could brighten outlook

Romania’s GDP will exceed EUR 200bn next year, according to the government’s estimations. The average inflation rate is seen at 3.1%, slightly below the NBR end-year estimation of 3.2%. The inflation expectations of the government might be too low though, as the central bank estimates a strong acceleration in Q1, when the CPI might approach 4.0%. The projected 4.55 average EUR/RON rate might also be underestimated when compared to most of the analyst’s forecasts that place the rate around 4.7 or even above. The number of unemployed is estimated slightly below the print recorded in October this year, which reflects that the central authorities do not count on a significant job creation process in 2018, whereas the labour market would most probably remain tight.

Selected macroeconomic indicators

 

2017

2018

2019

2020

2021

GDP, current prices, RON bn

842.5

907.9

977.2

1051.9

1126.6

GDP growth, real, %

6.1

5.5

5.7

5.7

5.0

CA gap, EUR bn

-5.25

-5.18

-4.85

-4.78

-4.64

CA gap, % of GDP

-2.8

-2.6

-2.3

-2.1

-1.9

Inflation

         

 year-end

2.2

2.6

2.2

2.0

1.8

 average

1.1

3.1

2.3

2.2

2.0

EUR/RON rate

4.56

4.55

4.54

4.52

4.50

Number of employees, average

4,931

5,138

5,335

5,530

5,725

Number of unemployed, year-end

378

351

341

312

325

Registered unemployment rate

4.2

3.9

3.7

3.4

3.5

Source: Finance ministry

The projected 5.5% economic growth in 2018 will be mostly fuelled by the domestic demand, the government says. Final consumption will increase by 6.5% y/y and have a 4.5pps contribution to the growth, remaining the major GDP increase driver and keeping the imports at high levels. In fact, the net exports negative contribution to the economic growth will worsen compared to this year, as the local production will not be able to keep up with the consumption dynamics, according to the projections. The exports outlook is not cheerful either, with negative effects on the industry’s contribution to the economic developments too. However, even if the government admits a deterioration of the trade balance next year, the authority sees the CA gap improving slightly to 2.6% of GDP in 2018, notably smaller than the estimations of most of the international institutions.

Contributions to GDP growth

 

2017

2018

Output

Agriculture

0.2

0.1

Industry

1.8

1.3

Constructions

0.1

0.4

Services

3.7

3.3

Net taxes on product

0.4

0.4

Demand

Final consumption

5.9

4.5

Private

5.5

4.0

Government

0.4

0.5

Gross capital investment

0.5

1.7

Inventory change

0.4

0.0

Net exports

-0.6

-0.7

GDP

6.1

5.5

Source: Finance ministry

On a more positive note though, we note that the authorities are very optimistic regarding the investments, with the gross fixed capital formation adding 1.7ppt to the GDP rise next year, more than only 0.5pps this year.

Public investments spending

 

2016

2017

2018

2019

2020

2021

Total govt expenditures, RON bn

242.2

281.8

314.5

336.6

356.0

372.8

Total investments spending, RON bn

28.7

27.0

38.5

45.5

53.3

54.4

Investment spending, % of GDP

3.76

3.21

4.24

4.66

5.07

4.83

Source: Finance ministry

Nevertheless, despite positive expectations regarding public investments, the most spectacular public expenditures rise is by far in the personnel and social assistance expenses. The social assistance expenditures will rise to RON 98.6bn or 10.9% of GDP next year. The boost in this category is fuelled by the pension hikes, by higher retirement benefits and other social assistance benefit increases. At the same time, the public-sector wage expenses would reach 8.9% of GDP next year, up from 8.3% estimated this year and 7.5% of GDP in 2016. Thus, the numerous wage hikes applied by the central administration in public administration, education and healthcare pushed up the state wage expenses to the highest level since 2009 (9.5% of GDP), when the austerity measures package negotiated with the IFIs resulted into a major staff and wage cuts in the public sector. Broadly, the wages of the 1.2mn public-sector employees will amount to RON 81.2bn next year, by 17% above the 2017 estimation and by 42% more than in 2016.

The unitary wage law that will be enforced as of January next year provides 25% wage increases in the entire public sector. Nevertheless, that latter salary hike will have effects only on the gross wages, because the employees will pay a higher level of social contributions. We remind that the social contributions will decrease by 2pps as of next year, but will be entirely paid by the employees, instead of about equal shares of both employers and employees currently. Some public-sector union representatives have announced that the net wage rise would be of about 4%, which is almost fully cancelled by the inflation. The unions are already on the verge of starting new protests and strikes.

Risks 

Broadly, the government managed to set up the next year budget on a less than 3% of GDP fiscal gap. However, some major pillar estimations seem too optimistic, some revenues overestimated, and some expenditures underestimated. In addition, the structural balance is widening notably increasing the country’s vulnerabilities to shocks. The Brexit effects on the Romanian economy are not assessed as significant generally, but the oil price developments proved to have major impacts on the country’s major economic indicators. As for the internal risks, a monetary policy tightening might lead to some notable revisions in the budget setup. A policy rate hike is very probable, especially if the inflation trajectory moves up above projections, as the local currency depreciation is very likely to be steeper than expected.

 

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