Faster-than-expected economic recovery in Romania eases fiscal tensions

Faster-than-expected economic recovery in Romania eases fiscal tensions
By Iulian Ernst in Bucharest May 28, 2021

Romania’s general government budget deficit was RON20.7bn (€4.22bn) in January-April, 23% smaller compared to the same period of 2020.

As a share of the full-year projected GDP, the public deficit reached 1.8% in the first four months this year, down from over 2.5% in the same period last year.

The faster than expected economic recovery this year will ease the massive budgetary tensions and allows the government more freedom in terms of debt management, expenditure allocation and perhaps slightly steeper fiscal consolidation.

The government targets a 7%-of-GDP budget deficit this year, down from 9.8% of GDP in 2020. By 2024, it has to bring the deficit under 3% of GDP, though.

in January-April this year one-off expenditures related to the crisis were RON8.1bn (0.7% of GDP). Specifically, these extraordinary expenditures included RON3.2bn supplementary investments (compared to the same period last year) while the COVID-19-related expenditures were RON4.9bn.

Under these circumstances, the full-year target remains feasible, and this is not surprising, since the government drafted the budget under more pessimistic assumptions compared to the outlook that improved significantly more recently.

The budget planning for this year includes austerity measures, such as freezing the wages in the public sector and all the social benefits, decided at a time when the year’s 4.3% GDP growth was not expected to offset the economic decline from 2020. The International Monetary Fund has since revised its forecast to +6%.

Under the new circumstances, the budget revision in July might bring significant changes: either a tighter deficit target or more public investments (depending on the administrative capacity).

In January-April, the revenues to the general government budget increased by 20.6% y/y to RON118.bln (€24.2bn). Compared to the annual GDP, they expanded from 9.3% last year to 10.4% in 2021.

In April alone, the budget revenues surged by 25.6% y/y to RON32.6bn.

Direct comparisons with past years are, however, complicated by the large volume of tax payments deferred by companies starting March 2020. Thus, the property tax collection nearly doubled this year (+97% y/y to RON4.5bn). Even more difficult is running a direct comparison in the case of the VAT. The authorities stated that the tax refunds in January-April this year remained at the same level as last year - meaning that the robust +41.3% y/y (+RON6.6bn) increase in the net VAT collections was generated by supplementary (gross) VAT payment.

However, part of this was VAT deferred from last year (which, inherently, weakened the comparison base), therefore the (41.3%) advance is not necessarily impressive.

In the meantime, the general government expenditures increased by roughly 11% in January-April (to RON139.1bn or €28.4bn).