Romania’s government drafts austere 2018 budget

Romania’s government drafts austere 2018 budget
By Iulian Ernst in Bucharest November 30, 2017

The Romanian government’s draft 2018 budget includes strict limits on expenditures in a radical departure from the policies pursued until now. 

After the record GDP growth of more than 6% this year (partly explained by the outstanding harvest), the growth rate is expected to decelerate, most likely below the government’s 5.5% projection, in the absence of the strong fiscal stimulus seen in recent years. 

The draft budget submitted by the government to trade unions for consultations envisages a deficit of 2.96% of GDP, but it also includes tough limitations on public expenditures, reported. 

This is in contrast to the promises voiced by the senior ruling Social Democratic Party (PSD) ahead of the December 2016 general elections, as well as the benefits and wage hikes extended during 2017.

As a result, the stimulus generated by fiscal and income policies in recent years will significantly weaken during 2018, though the rate depends on households’ reaction to the change in revenues and outlook. This comes in addition to the regulatory changes that have forced entrepreneurs and large companies to defer their investment plans with the predictable result of subdued demand for investments. 

The expenditures on goods and services for the functioning of public institutions will be cut by 10% in 2018 (compared to 2017) under the draft budget, and the spending limitations enforced in previous years will be maintained.

For every two employees that retire from the public sector, only one new employee will be hired. No financial compensation will be paid for overtime; employees will be compensated only in kind, with supplementary days off. A series of benefits, some of which were extended during 2017, will be scrapped, such as the €500 bonus for each newborn, and the holiday and gift tokens promised to civil servants.

The financial constraints are a result of the wage hikes already made during 2017 and in previous years, and of the cut in the tax rate levied on households’ incomes (from 16% to 10%). The public payroll will amount to 8.9% of GDP in 2018, from 7.9% envisaged in the 2017 budget, which was drafted in January 2017, when a 7.7% of GDP public payroll was planned for 2018.

The new budget is expected to spark a backlash, especially among public sector workers. While they have been promised a 25% pay hike, changes to the social security contributions system means they will see virtually no rise in their net pay when January comes around. Beside the expected decline of incomes of some employees in the private sector (including the employees in the IT sector), this is likely to generate public discontent and will depress consumer confidence.

Revenues in local administration units (set at local level under the unified wage bill enacted in 2017) are expected to decrease, as they are derived to a large extent as a share of the households’ income tax. Some have already run out of money.