Romania’s public deficit nears 3% of GDP in Jan-Jun

The general government deficit in Romania narrowed by 25% to RON 33.8 bln (EUR 6.86 bln) in January-June this year compared to RON 45.2 bln in the same period last year, the Ministry of Finance announced. The public deficit thus neared 3.0% of the year’s projected GDP, significantly below the 4.3% in January-June last year.

Out of the total H1 budget deficit, RON 13.3 bln (1.17% of GDP) was generated by Covid-related expenditures and supplementary public investments (aimed at mitigating the effects of the crisis as well), the government explained. In the same period last year, the government reported RON 23 bln (2.13% of GDP) Covid-related expenditures.

Corrected for these effects, the budget has barely decreased in YoY terms to just under 2% of GDP - but such an approximation would be too simplistic as it fails to address a multitude of other effects of the crisis.

For the whole year, the government initially set a 7.16%-of-GDP deficit target, which will be revised downward to a smaller gap as the economy is recovering faster than expected.

By 2024, Romania has to bring its public deficit under 3% of GDP. The European Commission expects a plan for this sooner than October 15.

The budget revenues increased in January-June by 20.6% YoY, driven by a stronger collection of VAT and excise duties, to RON 176.4 bln - or 15.4% of the year’s projected GDP, compared to 13.9% last year. Most of the revenues categories boasted robust annual growth rates.

The budget expenditures increased visibly slower, by 9.8% YoY to RON 210.2 mln, to account for 18.4% of the year’s GDP compared to 18.1% last year. The public payroll, one-quarter of the total budget, rose below average by only 4.5%, and the social security expenditures (one-third of the budget) rose nearly as fast as the average (+8.7% YoY).

The budget execution for the first half of the year shows certain improvements from the first quarter (Q1) to the second quarter and from last year to this year - but the big picture needs major adjustments for base other one-off effects.

Speaking of the deficit alone, it has contracted by 19% YoY in Q1 and faster - by 29% YoY - in Q2. Notably, the government allowed companies hit by the Covid crisis to defer their dues to the budget (profit tax, VAT, social security contributions) starting with the end of March 2020.

The cash revenues thus dropped last year below the revenues calculated on an accrual basis (by 1% of GDP under a rough estimate) and rose above ‘normal’ accrual basis in 2021 when the facility expired, and the companies started paying their dues gradually.

The budget revenues rose by 22.4% YoY in Q2 after 18.8% in Q1. In contrast, the expenditures decelerated/moderated from 11.2% YoY growth in Q1 to +8.5% YoY in Q2.