Rising budget deficit in 2017 to threaten Romania’s stability, central bank governor warns

By bne IntelliNews March 15, 2016

Romanian central bank governor Mugur Isarescu warned on March 15 that raising the budget deficit to almost 4% of GDP next year will threaten the country’s macroeconomic stability and the economy’s convergence with the eurozone, local media reports.

Romania is targeting a budget deficit of 2.8% based on 4.1% GDP growth this year. The projection includes populist measures taken by the former government such as a 4pp cut in the VAT rate, lower taxation of dividends and a higher public payroll.

The independent Fiscal Council has warned that the budget deficit will rise above 3% of GDP in the coming two years, meaning the country will enter the EU’s excessive deficit procedure. The council has estimated a deficit of 3.7% of GDP for 2017. The European Commission has said it sees the deficit at 3.8% of GDP next year.

“We have to be realistic. Personally, I have never seen in the past 25 years greater dangers to the economic and financial stability of Romania,” Isarescu said, according to Agerpres news agency.

“The rise in the deficit in 2016 up to the 3% of GDP limit and mostly the prospect of a budget deficit of almost 4% of GDP in 2017 will surely lead to an upward trend for the public debt and shows us that we have not learned enough from the principle according to which in economic growth periods we have to save. When we have more, we don’t have to spend everything, we need to make reserves,” Isarescu added.

He warned that Romania risks not only economically stagnating, but also moving away from the eurozone it aims to join, if it fails to preserve the advantages it obtained in the past years.

He also pointed to the low level of investments in infrastructure, which prevent regional development in the country.

Romania’s GDP increased by a real 3.7% y/y to RON710.3bn (€159.8bn) in 2015, driven by strong domestic demand particularly for consumption.

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