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_ Fiscal Council cautions cash budget deficit is likely to hit around 7 pct of GDP
Fiscal Council cautions cash budget deficit is likely to hit around 7 pct of GDP
The Fiscal Council considers that Romania's cash budget deficit is likely to be around 7% of GDP, compared to 5.84% of GDP in the revised budget projection, as this negative balance takes into account revenues from overtaxing of over 12.8 billion RON and total expenses with energy suppliers of approximately 7.4 billion RON.
"The postponement of certain payments for the year 2023 increases the difference between the cash deficit and the ESA deficit in 2022," the Fiscal Council emphasizes in its Opinion on the budget revision bill included on the agenda of the government's Thursday meeting.
According to the Fiscal Council, the draft budget revision provides for a substantial nominal increase, unprecedented in the history of revisions assessed by the Council since 2010 in both revenues (+31.7 billion RON, representing +7.2%), and total budget expenditures (+34.9 billion RON, representing +6.8%). The general consolidated budget deficit is 3.2 billion RON above the initial target, but expressed as a percentage of GDP, the projected deficit is still 5.84%, as in the initial budget construction, against the background of the increase of the nominal GDP projection by 55.2 billion RON, Agerpres.
The Fiscal Council cautions that a revenue gap of approximately 9 billion RON is likely compared to the targets assumed in the budget revision bill, representing approximately 0.66% of GDP. On the expenditure side, the institution identified a shortage of 6.2 billion RON, that is 0.45% of GDP.
"If the impact of the expenditures with the energy compensation scheme is undersized, which is quite likely, the deficit would inevitably increase considerably. And unfavorable price developments on the markets will put additional pressure on the budget. This undersizing of the expenditure with the energy offsetting scheme creates a major risk for the budget and fiscal consolidation," warns the Fiscal Council.
According to the cited source, the European resources from the National Recovery and Resilience Plan and the Multiannual Financial Framework represent the only counter-cyclical force that can counteract the contractionary effects of fiscal consolidation. The absorption in a proportion as large as possible of these financial resources, both non-reimbursable and reimbursable, is vital for Romania, considering the state of the public budget and the vulnerabilities of the external balance, as well as the extremely unfavorable international environment.
"This year's budget execution takes place under extremely unfavorable conditions in the European economy, with major implications for the Romanian economy. This is about the energy crisis, the disruption of production and supply chains, the quasi-generalized high inflation, the exacerbated effects of climate change, the pandemic and, last but not least, the war in Ukraine. These events and phenomena form a combination of adverse shocks that put an extraordinary pressure on the economies of the EU member states, on public budgets, and severely affect people's livelihoods. The change in the relative price of energy has distributional consequences between and within economies, triggering a major increase in the cost of living," the Fiscal Council states in its Opinion.
The document notes that inflation, which has risen to unprecedented levels, drastically amputates the purchasing power and the citizens' savings reserves. Inflation is forecast to stay high in 2023 too.
Under these circumstances, the analysts point out that a particular vulnerability of Romania's is the external balance, where the current account deficit will exceed 7% of GDP this year (it was 7% was in 2021), and the coverage through non-debt generating flows will be probably under 50%. Also, Romania is in an excessive deficit procedure since the beginning of 2020.
"Romania's fiscal revenues (including contributions) are among the lowest in the EU - about 27% of GDP against the EU average of about 41% of GDP. Its fiscal revenues must increase substantially, a leitmotif of Fiscal Council documents in recent years. The very low level of fiscal/budgetary revenues is unacceptable in relation to Romania's current and future needs. And it is hard to imagine that we could achieve fiscal consolidation only through inflation. At the same time, there is need for a more prudent use of public money, a restructuring of the administrative apparatus, an increase in the efficiency of budget spending," the Fiscal Council said.
The latest forecast by the National Strategy and Forecast Commission - from July 2022 - compared to the previous ones, especially the one from November 15, 2021, that underpins the 2022 budget, envisages a real economic growth of 3.5%, just slightly lower in comparison with the 4.6% provided for by the draft budget.
"Looking at this economic picture, there are signs that the dynamics of the economy will be slower in the second part of the year, compared to the first part. The macroeconomic evolution depends on our capacity to keep the fiscal adjustment commitments agreed upon with the European Commission, which guarantee a calendar of reforms, including a fiscal/collection schedule and a substantial volume of financing, under particularly favorable conditions, both through the multiannual European budget framework and through the NRRP," the cited document states.
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