Romania’s 2.3%-of-GDP May public deficit keeps full-year 7% target feasible

Romania’s 2.3%-of-GDP May public deficit keeps full-year 7% target feasible
By Iulian Ernst in Bucharest June 28, 2021

The deficit of Romania’s general government increased by nearly RON5.5bn (€1.1bn) in May to RON26.2bn, or 2.3% of the full-year projected GDP, in the first five months of the year.

The deficit-to-GDP ratio leapt by 0.5pp in May alone, but the year-to-date figure remains in line with the government's consolidation plans that received unexpectedly strong support from the fast economic recovery.  

The government’s official deficit target for this year is 7.16% of GDP, to be revised down to 7% or lower in August, following the stronger than expected economic recovery.

Compared to the same period (January-May) of 2020, the public deficit has narrowed by roughly one third — but the annual comparison needs special adjustments since some tax payments were suspended (not waived) starting at the end of March last year, and the payments were resumed in January 2021 when the deferred taxes started being paid as well.

The 0.7pp deficit deterioration in the first five months of the year, compared to 2019, is in line with the 7%-of-GDP target this year, but there is no guarantee that the revenues will perform in the rest of the year as well as they did in January-May. Compared to 2019 (the y/y comparison might be misleading), the public deficit in the first five months of this year increased by 40%, while the deficit-to-GDP ratio deteriorated by 0.7pp (to 2.3%). In full-year 2019, the public deficit hit 4.6% of GDP — 2.4pp lower compared to the expected target for 2021. 

By 2024, Romania must bring the deficit below 3% of GDP, under the excessive deficit procedure. Before October 15, the government must come up with a more detailed fiscal consolidation plan, the European Commission said this June.

In the short term, the deferred payments from 2020 to 2021 and the lockdown-opening cycle altered the seasonal pattern of both budget revenues and expenditures sides, complicating the government’s mission of beginning the consolidation process.

Overall, 2021 figures point to an improvement in the budget even after the necessary adjustments for the transfer of some 1% of GDP revenues from 2020 to the first part of 2021. But strengthening the revenues side remains a major concern to be addressed by the government given the low starting level of under 30% of GDP before the crisis.

Budget revenues in January-May increased by 23.2% y/y (to RON147.4bn) after the 3.4% y/y contraction seen in the same period last year, resulting in a 19.1% advance compared to 2019, or 9.2% annual growth. The tax revenues increased even faster, by 29.5% y/y after the 8.0% y/y contraction seen in January-May last year, resulting in 9.5% average annual growth compared to 2019.

The revenues-to-GDP ratio improved from 11.7% in the first five months of 2019 to 12.9% in the same period this year after dropping to 11.3% in the first five months of 2020. Tax revenues to GDP ratio gained 0.6pp as well over the past two years, to 6.6% of GDP in January-May 2021.

VAT revenues (net terms) rose by 47% y/y to 2.6% of full-year projected GDP, up from 2.3% in the same period of 2019 (and 1.9% in January-May 2020).

The government’s expenditures increased by 9.5% y/y to RON173.5bn in January-May this year, on top of the 14.4% y/y advance in the first five months last year. The expenditures to GDP ratio hit 15.2% of the full year’s projected GDP, up from 13.1% in the first five months of 2019 and 15.0% in the same period of 2020. The public payroll to GDP ratio eased slightly to 4.1% in five months this year from 4.2% in the same period of 2020 as a result of higher nominal GDP, while in absolute values the overall personnel expenditures rose by just over 5% y/y. Social assistance expenditures keep growing by all metrics, to 5.5% of GDP this year from 5.4% last year and 4.4% in 2019.