Romania’s government has endorsed in first reading the budget planning for next year, PM Victor Ponta told a press conference on Nov 14. The draft was completed during the visit of an IMF expert team in Bucharest, which lasted from the end of October until November 5.

Main provisions of  the 2014 budget had already leaked in the media earlier this week. While revenues are expected to remain at a modest level of 32.9% of GDP [marginally up from 32.8% expected for 2013], the cash deficit is seen shrinking to 2.2% of GDP from 2.5% this year.

The budget planning for 2014 is indeed particularly conservative and includes certain clauses on disbursement of funding that allow for further adjustments on the expenditure side in case revenues fail to meet the target. The rise in revenues is projected at 5.2% -- which is seen as realistic under the general consensus. Half of the rise in payroll is going to be released at mid-2014 only if the budget collection is in line with projections at that time.

The main criticism against the government's budget planning is the resort to supplementary taxes, or tax rate hikes, as a substitute to better tax collection. Instead of improving the VAT collection rate from some 50%, the government increased the excise tax on car fuel – one of the goods with very low elasticity to price. Instead of fighting tax evasion, the government preferred to allow local administrations raise the property tax rates to whatever level necessary in order to balance their budgets.

Budget revenues are only 32.9% of GDP in Romania against the EU average of 46%, PM Ponta stressed, inferring that the tax burden in Romania would be the lowest in Europe. However, we believe that he is wrong to suggest this because the tax evasion is among the highest in Europe - while the tax burden is the heaviest for those who voluntarily observe the taxation regime. (Low tax revenues as % of GDP are a result of high tax evasion and not necessarily of low statutory tax rates.)

And indeed, the World Economic Forum in its Global Competitiveness Report 2013-2014 reveals that Romania ranks worst [of all criteria investigated] in terms of effects of taxation on incentives to work [146th place of 148 total, with 2.1points of 7].  Other weaknesses include i. favouritism in decisions of government officials [137th place with 2.2 points], ii. effects of taxation on incentives to invest [136th place with 2.6points] and iii. wastefulness of government resources [134th place with 2.2 points].

Romania's fiscal revenue last year was only 28.1% of GDP because tax evasion accounted for as much as 13.8% of GDP, the Fiscal Council pointed out in its Annual Report for 2012 published online. Out of the total tax evasion, low VAT collection accounts for 60% and the social security contributions account for another large portion of 24%. The tax collection agency collected only 57% of the VAT owed by companies and 65% of the social security contributions in 2012, the report shows.

BUDGET PLANNING MAIN SPECIFICATIONS

The cash deficit of the budget is planned to narrow from 2.5% of GDP this year to 2.2% in 2014. The government expects GDP to reach RON 658.6bn (EUR 148bn) in 2014 – up from RON 626.2bn in 2013 – driven by 2.2% real GDP growth rate. The exchange rate would remain steady from this year at RON 4.45 against the euro. End-year headline inflation is projected at 3% for next year – up from 1.8% projected by the central bank for the end of 2013.

Budget revenues would increase by 5.2% y/y to RON 216.8bn in 2014, thus remaining at a modest 32.9% of GDP ratio. Besides the conservative projection, the government considers freezing 10% of the ministries’ budgets until the second budget adjustment scheduled for the autumn [Oct-Nov]. The move would be aimed at avoiding problems caused by actual revenues falling significantly below the targets during the year.

Budget expenditures would increase by only 4.3% y/y under the budget planning, at a slower rate then revenues, to RON 231.3bn [35.1% of GDP].