Romania’s public deficit widens in H1 despite full-year fiscal consolidation target

Instead of compressing, Romania’s public deficit expanded by 0.7% of GDP in H1 (to 2.3% of GDP), compromising the 4.4%-of-GDP full-year target and forcing corrective measures of a magnitude of at least 1.4% of GDP in H2 assuming 5%-of-GDP full-year fiscal gap.

Romania’s public gap surged by 85% y/y to RON 14.5 billion (EUR 2.9 bln or 0.9% of the full year’s GDP) in Q2 exclusively due to excessive expenditures: 9% of the full year’s GDP, up from 8.5% in the same period last year. In Q1, the fiscal slippage was the effect of a combination of revenues and spending.

But expenditures accelerated, growing by +18.8% y/y in Q2 and +16.5% y/y in H1 to 17.6% of the entire year’s GDP in the first half of the year, 0.6pp more compared to the same period last year.

Revenues improved slightly to 8.1% of GDP in Q2 this year from 8% of GDP last year, but overall they are still only 15.3% of GDP in H1, compared to 15.4% in 2022.

Notably, Romania’s budget balance has deteriorated in each of the first two quarters of the year (by a total of 0.7% of GDP in H1), while it is supposed to consolidate to 4.4% of GDP in the whole year from 5.7% in 2022. The corrective measures should thus amount to 2% of GDP (EUR 6 bln) in H2 for meeting the 4.4%-of-GDP target, or 1.4% of GDP (EUR 4.3 bln) if the target is lifted to 5% of GDP as recently signalled by the ruling coalition.

Total budget revenues in Romania amounted to RON 243 bln in the first six months of this year, up 12% y/y. This was a 1.2% y/y contraction in real terms (deflated by CPI).

Direct taxes made a 0.7pp positive contribution, and the transfers from the EU budget made another 1.5pp contribution to the overall real dynamics of revenues in H1 9-1.2% y/y). But all the other elements made negative contributions, including VAT (-1.2pp) and excise duties (-0.75pp).

The expenditures of the general government budget amounted to RON 280 bln, up by 16.5% y/y - or a 2.8% y/y advance in real terms. The 2.8% increase in expenditures was the result of more funds earmarked from the budget to EU-funded projects (+1.6pp), more capital expenditures (+0.7pp), more subsidies (+0.9pp supposedly covered by the solidarity contribution and the special energy taxes) and more costly interest on the public debt (+0.4pp).

On the upside, the public payroll’s impact on the budget revenues’ real dynamics (+2.8% y/y) in H1 was negative, namely -1.1pp.

(Photo source: Alexandru Marinescu/Dreamstime.com)