Romania’s budget gap slightly narrows to almost 1.8% of GDP

The general government budget deficit narrowed to less than 1.8% of GDP in January-July from 1.9% of GDP a month before, according to figures released by the finance ministry. The balance improvement was on the back of the more than RON1.8bn surplus recorded in July alone. Still, the surplus in July was by almost 40% y/y smaller, whereas the January-July gap increased by 52% compared to the same period in 2018.

The smaller surplus in July was due to a faster expenditure growth compared to revenue. Budget revenue rose by 9.2% y/y in July, mostly driven by social and health insurances, corporate and personal income tax. VAT collection did not improve much, even though consumption picked up unexpectedly in July. Transfers from the EU were somewhat lower than in June, but jumped by nearly 75% y/y to RON1.1bn. Meanwhile, expenditure kept on rising with double-digit paces and was up by nearly 15% y/y in July, driven by personnel and social expenditures. Some good news came from capital expenditure, which increased by 82% to more than RON2.3bn in the period. That was reflected by a civil engineering works growth in July, probably backing the state’s building rehabilitation projects for improving energy efficiency in construction.

Revenue growth eased to 12% y/y in January-July, slightly slower than a month ago and was once more mainly driven by social and health insurance contributions, which continued rising by 16.3% y/y in the period. That was mostly on the back of growing wages and moderate increase in the number of employees. Tax revenue increased by a faster 8.6% y/y in January-July and remained mainly fuelled 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, but the rise was insignificant perhaps driven by higher wages and vacation bonuses granted in July. Another positive development was reported by the corporate income tax, which kept on accelerating to 16% y/y, probably benefiting from profitability improvement of domestic companies earlier in 2019. Transfers from the EU increased stronger by 15% y/y to RON8.6bn in January-July.

As it happened before in 2019, expenditure growth was stronger, up by 14.7% y/y in January-July. Spending on personnel rose by 21.5% y/y, reflecting public sector wage hikes, while social transfers were up 11.1% y/y, reflecting pension hikes. Those components remained the major growth drivers on the expenditure side and represented more than 63% in total. Capital spending also increased, by 23% 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.

Generally, even though the gap slightly narrowed in Jan-Jul compared to end-H1, it was only on the back of seasonal factors, as July usually comes with surpluses due to corporate and income tax payments at half year. When compared to July 2018, the surplus dropped notably whereas the January-July deficit jumped by double-digit pace again, remaining above RON18bn. We remind that the government targets a 2.75%-of-GDP fiscal target or more than RON28bn in cash terms in 2019, which is very close to impossible to meet unless more serious adjustment measures are not implemented. The mild attempts announced with the recent budget revision are far from enough to cover the strong expenditure boost with similar revenue performance. Finance Minister Eugen Teodorovici constantly assure that the deficit will be kept under control, making us believe that he is either planning some one-off measures later or he is very optimistic about improving collection and reducing tax evasion by the end of 2019.

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