Romania’s budget deficit narrowed nominally by 2.4% y/y to RON 6.63 [EUR 1.5bn] in Jan-June, the finance ministry said. The fiscal gap accounted for 1.06% of the full-year GDP projection – down from 1.16% of GDP measured in H1 last year.

Romania wants to narrow the deficit to 2.1% of GDP this year from 2.5% in 2012 and the ministry says that H1 budget execution is in line with the target. To achieve this, however, the government has to enforce new taxes that are expected to bring an additional 0.5%-of-GDP in revenue in 2013. Revenues, however, lag behind the target despite the robust GDP growth in Q1 and the likely better-than-expected H1 growth performance. The government plans RON 210bn [33.7% of GDP] in budget revenue this year – up 9% y/y.

The government prepares for a budget adjustment by the end of July. Even if the government adjusts the expected GDP growth from 1.6%, under the initial budget planning, to nearly 2% to reflect the better outlook, the budget revenue projection might be actually adjusted downward.

Revenues to the budget increased by 4.8% y/y to RON 97.5bn in H1, or 15.6% of the year’s GDP. They accounted for 92.7% of the plan, Ziarul Financiar daily announced. Officially, the government does not release intermediary [quarterly] budget revenue targets. The revenues thus fell RON 4bn [EUR 0.9bn, nearly 0.7% of year’s GDP] below plan.

The challenges for the expected budget adjustment are multiple: i. accommodating lower-than-expected revenues ii. accommodating the EUR 800mn financial corrections to be applied in relation to the irregular past use of EU funds and iii. finding supplementary RON 0.25bn [EUR 56mn, 0.04% of the year’s GDP] financing for the planned VAT rate cut for bread.

Public expenditures increased by 4.3% y/y to RON 104.2bn in H1, or 16.7% of the year’s planned GDP. The strongest contribution was made by the 18% y/y rise in the public payroll.