Romania can afford 3%-of-GDP budget deficit, but just for one year – c-bank

By bne IntelliNews November 18, 2015

There is no major problem if Romania misses the 1%-of-GDP Medium Term Objective (MTO) set for the country's structural deficit under the Fiscal Compact, but the deviation should not be wider than 1%-2% of GDP and it should last for only one year, the central bank’s head of financial stability department, Eugen Radulescu, said on November 17.

The deviation from the fiscal consolidation accepted by the monetary authority coincides with the one-year term of the new government.

If all the measures announced, most of which were enacted already, are accepted by the new government, expenditures should be adjusted accordingly, Radulescu said.

A budget deficit of 3%-of-GDP would not damage the country's macroeconomic sustainability, Radulescu argued. Public debt is currently at only 40% of GDP and the government holds a 4%-5% of GDP buffer, which alone could cover such deficits for one year, he explained. However, a deficit of 3.5% of GDP would prompt higher borrowing cost, maybe double the current levels, Radulescu warned.

The European Commission projected, in its Autumn Forecast, that the country’s budget deficit would widen from 1.6% of GDP this year to 2.8% of GDP in 2016, and 3.7% in 2017. The fiscal slippage from the 1%-of-GDP structural deficit medium term objective is the main concern expressed in the Commission’s report. The main impact stems from the new fiscal code, which implies tax cuts of around 1.25% of GDP in 2017. Fiscal easing boosts growth but puts consolidation at risk, the forecast said. 

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