Romanian Fiscal Council implies Govt. could have reduced fiscal gap more

In its November 26 opinion on the second budget revision, the Fiscal Council didn't repeat the warning about possible slippage above the deficit target (7.13% of GDP) but implied that the Government could have used windfall revenues to compress the deficit more.

It also stressed that such an economic comeback as seen this year would not repeat in the coming years when the Executive will face multiple challenges in its attempt to cut the deficit.

At the end of August, when the Government operated the first budget revision based on 7% GDP growth projections (compared to 4% projected initially), the Council warned the Executive that assumed unchanged policies, the gap would be 0.5%-of-GDP higher. Separately, it criticised the Government for not having used the robust revenues for taking a headstart and beginning the fiscal consolidation earlier than planned.

Under the second budget revision now, the Government hiked the deficit target in nominal terms by RON 1.1 bln (EUR 220 mln) while keeping the deficit-to-GDP ratio at 7.13%. Such a policy is "sub-optimal," particularly since part of the supplementary revenues are one-off in nature, or cyclical, while part of the supplementary expenditures is permanent in nature, the Fiscal Council commented.

While the deficit-to-GDP ratio indeed plunged from 9.8% last year to 7.1% in 2021, such a performance is a challenging target for at least two reasons: this year's performance was largely due to the tax dues deferred from 2020 to 2021 (this may explain a 2pp drop in the deficit-to-GDP ratio) and the economic growth will slow down in 2022 and the years to come.

Furthermore, the senior ruling Social Democratic Party has announced a rather ambitious social benefits package estimated to cost the budget 1% of GDP.

Romania should bring its fiscal gap down to under 3% of GDP by 2024. The European Commission projects the deficit would remain at 6.3% of GDP in 2023 (under ESA - consistent with an 8.0%-of-GDP deficit in 2021).

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