Romania’s budget balance deteriorates

Romania’s budget balance deteriorates
By Iulian Ernst in Bucharest April 30, 2018

Romania’s general government posted a deficit of RON4.46bn (nearly €1bn) in Q1, or 0.5% of the GDP projected for the whole year, against surpluses seasonally posted in the first quarters of the year. Detailed data show disappointing VAT collection and lower inflows from income and profit taxation compared to last year.

The figures are somewhat weaker than expected, even though the visible fiscal slippage is expected to bring the gap well above 3% of GDP this year. The Q1 performance could be used in the increasingly vocal argument between President Klaus Iohannis and the ruling coalition that he (and the central bank) blames for the deteriorating macroeconomic balances (rising interest rates and weaker currency).

Indeed, the Q1 data confirms expectations of continuing fiscal slippage. Romania’s budget posted a 0.2%-of-GDP surplus in Q1 last year (versus the 0.5% of GDP deficit this year), and the government ended the year with a 2.9%-of-GDP gap. In the years before 2017, the seasonal first-quarter surpluses were even wider: 0.4% of GDP in 2016 and 0.7% of GDP in 2015.

Full-year deficits in the respective years illustrate gradual fiscal slippage: the gap was 2.4% of GDP in 2016 and 1.4% of GDP in 2015, when the best budgetary performance was achieved following years of fiscal consolidation.

The 0.7%-of-GDP deterioration of the government’s budget balance in the first quarter of 2018 (versus Q1 2017) prepares the ground for major slippage in the full year, compared to the 2.9%-of-GDP deficit last year. The government is again targeting a gap of under 3% of GDP, but independent projections are closer to 4% of GDP.

It could be argued in favour of the government that budget surpluses in the first quarters of previous years have been a result of uneven distribution of public expenditures during the years, with the largest part of the full-year deficit accumulated in the final quarters. However, the deficit in the first quarter of this year was only to a very small extent due to higher expenditures on capital goods and services. The deficit was thus not the result of distributing public expenditures more evenly; they were higher this year partly because the government deferred such capital expenditure payments from the last days of 2017 to the first days of 2018.

The total revenues to budget increased by 11.5% y/y to RON66.4bn in Q1. Not including the transfers from the EU budget (44% larger than last year, or RON4.2bn), revenues increased by 9.8% y/y to RON62.2bn. The comparison of the detailed revenues data is complicated by the change in the income taxation system and the flow of social security contributions: social and medicare contributions increased by 31% y/y to RON22.0bn, or one-third of the total revenues to the general government budget (transfers from the EU budget included).

In contrast, revenues from VAT edged up by a mere 2.2% y/y. Indeed, retail sales growth eased from 11.8% y/y in January to 4.9% y/y in February and consumer confidence is deteriorating, while VAT collection remains unexpectedly weak. Even direct taxes contracted, by 8.9% y/y to RON10.9bn overall. Income taxes contracted by 14.9% y/y as the taxation of certain types of incomes was deferred amid repeated changes in the procedures. Profit taxes edged down by only 3.3% y/y to RON3.7bn.

Expenditures increased by 22.1% y/y to RON70.8bn. Not including the payments of funds transferred from the EU budget, expenditures increased by 20.8% y/y. Payroll and social security payments were responsible for 50% of the total rise of expenditures and for more than 60% of the total public expenditures. Capital expenditures indeed nearly quadrupled to RON4.45bn, but the sharp rise was due partly to the local administration being instructed to shift some of the payments in the last days of December, and partly to the low base effects. If not for infrastructure projects, capital expenditures will have to increase significantly this year (and in the years to come) in order to finance military spending.

General government budget        
(RON mn) Q1 17 Q1 18 y/y y/y
[1] Revenues 59,537 66,377 6,840 11.5%
Profit tax 3,816 3,689 -127 -3.3%
Income tax 7,722 6,574 -1,148 -14.9%
VAT collections 13,005 13,287 283 2.2%
Excise taxes 5,699 5,847 148 2.6%
Social sec. & Medicare contr. 16,763 21,969 5,206 31.1%
Transfers from EU budget 2,936 4,219 1,283 43.7%
[2] Expenditures 58,014 70,836 12,822 22.1%
Payroll 16,140 19,066 2,927 18.1%
Goods, services 7,828 8,803 975 12.5%
Capital 1,076 4,091 3,015 280.2%
Interest 2,293 2,715 422 18.4%
Social security 21,787 24,351 2,564 11.8%
EU-funded projects* 3,046 4,451 1,405 46.1%
Foreign-financed projects [loans] 57 39 -18 -31.9%
[3] Balance [1-2] 1,524 -4,459 -5,982 -393.0%
Rev, % of GDP 6.9% 7.2%    
Exp, % of GDP 6.8% 7.7%    
Balance, % of GDP 0.2% -0.5%    
Primary Balance 0.4% -0.2%    
GDP RON mn 858,333 924,200    
Source: MoF, IntelliNews        
         
         
Revenues w/o EU budget 56,601 62,158 5,557 9.8%
Expenditures w/o EU budget 54,968 66,385 11,417 20.8%
Balance w/o EU funds 1,633 -4,227    
Balance w/o EU funds 0.2% -0.5%    
capital expenditures, % of GDP 0.1% 0.4%    
capex+EU funds spent, % of GDP 0.5% 0.9%    

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