Accusations fly over drop in Romanian budget revenues

Accusations fly over drop in Romanian budget revenues
PSD leader Liviu Dragnea outlines spending plans ahead of December 2016 election.
By Iulian Ernst in Bucharest January 10, 2017

A spat has erupted between Romania’s new Socialist government and members of the outgoing technocratic government over the lower than expected 2016 budget revenues. This has created concern and irritation within the new ruling coalition, as it has complicated planning for the 2017 budget. 

The new Social Democratic Party (PSD) led government was planning to forecast even higher revenues for this year and thus finance its electoral promises. However, it now risks being unable to make good on the pledges for higher wages and public spending made in advance of the December 2016 election. 

Revenues to Romania's general government budget decreased by 5% y/y to RON221.5bn (29.2% of GDP) according to unofficial sources within the ministry of finance quoted by Ziarul Financiar daily.

The revenues were RON14bn below those projected under the latest budget revision made by the former government of Prime Minister Dacian Ciolos in November. Revenues had to be maintained under the budget revision, or else the projects financed from the EU budget would have lost the chance to receive money in December, government officials explained.

Expenditure was also below target and the deficit was only 2.6% of GDP, 0.2% of GDP below target, they explained. However, revenues reportedly plunged by 33% y/y to RON16bn in December. The outgoing finance minister justified this by saying that RON0.63bn was paid in advance as VAT returned to companies on December 29, thus diminishing net VAT collection. But this accounts for only a small part of the 33% y/y lower revenues.

President Klaus Iohannis, the ruling coalition’s main political rival, has summoned Prime Minister Sorin Grindeanu to explain the budget planning on January 10.  

Ahead of the December election, PSD leader Liviu Dragnea outlined the party’s spending plans at a press conference on December 8. These included an average 20% pay rise for public sector employees, a national reindustrialisation programme, and spending hikes for health, education, defence and agriculture. The party’s return to power has to a large extent been attributed to its generous spending programme in contrast to the fiscal prudence of the outgoing government, which failed to appeal to voters. 

However, the weak budget revenues last year invalidate the plans of the ruling coalition for RON253bn revenues planned for this year and this has reportedly created panic within the PSD.

Having apparently overestimated last year’s budget revenues, the new ruling coalition appears to be desperately seeking a way to accommodate its promises with the existing resources while keeping its political credibility.

Dragnea has accused Ciolos and former Finance Minister Anca Dragu of being responsible for RON14bn (€3bn, nearly 2% of GDP) being “missing from last year’s budget”.

A parliamentary committee to investigate the situation will be set up, Dragnea warned. This is visibly aimed at buying time for the new government to draft a revised budget based on last year’s lower revenues. This further complicates the budget planning dilemma, which has already raised concerns in regard to the sustainability of the higher public wages, pensions and other social benefits promised by the new ruling coalition.