Romania’s government endorsed the 2017 budget, based on optimistic expectations of 5.2% GDP growth (up from 4.8% last year), on January 31. The deficit target was set close to 3% of GDP, up from 2.4% in 2016. The gap is not expected to fall below 2% of GDP over the 2017-2020 forecast horizon.

The government’s fiscal projections rest on risky assumptions of abundant transfers from the EU and a thriving labour market driven by robust GDP growth revised up 0.9pp to 5.2% y/y by the state forecasting body as part of the budget planning process. If these fail to materialise the deficit could rise above the 3% of GDP threshold.

Revisions to the budget to accommodate below-target revenues are likely, the head of the Fiscal Council Ionut Dumitru commented to Agerpres, speaking of the risks related to the budget planning. He mentioned that no independent macroeconomic forecast puts GDP growth above (or even near to) 5% this year.

Indeed, the government will most likely incur arrears to suppliers of goods and services and will come under pressure to raise taxation toward the end of the year. Rising interest rates, particularly likely if the political situation deteriorates, and local currency deviation from the (again optimistic) estimate of RON4.46 to the euro will further complicate the budget execution. Under the assumptions of moderate use of funds from the EU budget, public investments will remain subdued, since the government has envisaged record low financing from the national budget.

On January 23, the government issued a detailed first budget draft, but it amended the distribution of money among ministries and the financing sources without touching the overall revenues and expenditures on January 27. The Fiscal Council criticised the January 23 draft as risky, and has not yet had the chance to say more about the January 27 draft other than that it adds supplementary puzzling elements.

Revenues are projected to rise rise by 13.9% y/y (7.2% y/y excluding the transfers from the EU budget) and expenditures by 15.2% y/y (9.1% y/y excluding the transfers from the EU budget). The revenue to GDP ratio, not including transfers from the EU, are expected at 28.5% of GDP down from 28.6% in 2016, which seems a conservative forecast. However, the drop in revenues prompted by tax cuts are offset by an uncertain rise in revenues. The expenditure to GDP ratio will increase to 31.5% from 31% in 2016. The moderate rise, planned despite higher public wages and social benefits, was achieved by further cutting investments from the national budget.