Romania’s finance ministry has confirmed that the general government budget deficit rose by 70% y/y to RON29bn (€5.8bn) in the first two months of 2024. This is 1.67% of the year’s projected GDP up from 1.07% of GDP in the same period last year.

This is one-third of the full-year deficit target. Capital expenditure notably increased to nearly 0.7% of GDP in the two months this year, compared to 0.16% of GDP in the same period last year (and 2.43% of GDP in full 2023) while the projects financed from external sources (grants or loans) also leapt up from 0.4% to 0.6% of GDP.

Overall, however, this explains only half of the 1 percentage point (pp) rise in the public spending to GDP ratio, from 5.7% to 6.7% of GDP, meaning that current expenditure also increased significantly – which doesn’t bode well for the year’s fiscal outlook. Personnel spending rose by nearly 20% y/y while the spending for goods and services surged by 25.5% y/y.

The budget revenues to GDP ratio also increased, but slower: from 4.6% to 5.0% of GDP. Tax revenues edged up modestly from 2.3% to 2.4% of GDP.

The government in Bucharest drew up the 2024 budget with a deficit of RON86.6bn – just under 5% of the projected GDP, down from 5.7% of GDP in 2023. But the European Commission warned recently that unless further corrective measures are taken the gap rather head towards 7% of GDP, a forecast backed by the Fiscal Council as well.

Prime Minister Marcel Ciolacu argued that the 0.6 pp rise in the deficit-to-GDP ratio was entirely caused by higher defence spending, indirectly admitting that part of the military spending was committed in 2023 but deferred to 2024 to keep last year’s deficit within a decent limit. This was indirectly confirmed by Nato calculating Romania’s military spending at 1.6% of GDP in 2023, compared to the 2% of GDP (or more) claimed by Romanian authorities.

Detailed capital expenditure data published by the finance ministry indicate that part of the increase in the public deficit this year (January-February) may have indeed been caused by deferred defence spending – but the local government authorities and possibly the public road management company CNAIR have also deferred spending from 2023 to 2024.

Thus, the capital expenditure from the central government increased from RON100mn in January-February, 2023 to RON6.2bn in the same period this year. This may include the higher military spending cited by PM Ciloacu – RON6bn meaning €1.2bn or 0.35% of GDP. However, the local governments’ expenditure in the first two months of this year also increased significantly, from RON1.45bn in January-February 2023 to RON4.1bn revealing possible similar deferred spending in the amount of some RON2.5bn or nearly 0.15% of GDP. Overall, the capital expenditure to GDP ratio increased by roughly 0.5pp.

Notably, the volume of projects financed from external funds (loans and grants) also increased, roughly from 0.4% of GDP in the first two months last year to 0.6% of GDP this year. However, it cannot be said exactly how much of these funds were used for capital expenditure (as opposed to current expenditure).

As a technical note, the Romanian government includes all the projects financed from external funds (grants or loans, irrespective of the scheme – the multiannual financial framework, the Resilience Facility or others) as current expenditure. Separately, capital expenditure is assumed to be financed only from the national budget.