Fiscal Council: Budget deficit, likely to exceed 7 pct of GDP, at risk of moving toward 8 pct

 The deficit is likely to exceed 7% of GDP, with a risk of moving toward 8% of GDP, taking into account the budget execution for the first six months of 2024 and other data, according to the annual report of the Fiscal Council (FC)."Budget execution in the first six months of 2024 showed a deficit of 3.6% of GDP, almost 1.3 pp higher than in the same period of the previous year, driven by the sharp increase in budget expenditure, which was partially offset by the higher-than-expected dynamics of budget revenues. The FC's assessment at the time of the opinion on the draft budget put the cash deficit for the current year at around 6.4% of GDP. Based on the first six months' budget budget execution and other data, the FC considers that the deficit is likely to exceed 7% of GDP this year, with a risk of moving toward 8% of GDP. This is also because the new pension law and wage increases in the public sector will generate additional costs in the second half of 2024, and the seasonality of budget execution is characterized by the concentration of some categories of expenditure in the last months of the year," the report says.The draft budget for 2024 envisaged a deficit target of 5% of GDP, according to the national methodology, and 4.9% of GDP, according to the ESA 2010 methodology, representing a decrease of 0.6 percentage points (pp) and 1.7 pp of GDP, respectively, compared to 2023."The planned decrease in the deficit was expected to be achieved mainly through an increase in the share of budgetary revenues in GDP under the impact of the projected macroeconomic framework, fiscal policy measures adopted at the end of 2023, hypothetical revenues stemming from the improvement in the efficiency of collection/digitalization of the National Tax Administration (estimated by the Ministry of Finance at 19 billion RON) and projections on the absorption of European funds," reads the cited source.On the other hand, the share of budgetary expenditures in GDP was planned to decline marginally, given that the increase in spending on projects financed by European funds, personnel, social assistance and other expenditures was counterbalanced by the decrease in subsidies, other transfers and spending on goods and services, the source said.Given a prudent assessment of revenue and expenditure projections, the FC has assessed, in its opinion on the 2024 draft budget, that it is consistent with a cash deficit of around 6.4% of GDP.Medium-term budgetary consolidation is expected to be achieved exclusively on the expenditure side, with the share of budgetary revenues in GDP showing a downward trend over the analyzed period.The FC assessed that, in the absence of sufficiently concrete and credible policies to support the achievement of medium-term fiscal consolidation on the revenue side, but also to increase the collection rate, the balance of risks is clearly tilted towards higher deficits than those projected in the fiscal-budgetary framework for the period 2025-2027.At the same time, the FC emphasized that macroeconomic adjustment and fiscal consolidation need a significant increase in tax revenues.The public debt to GDP ratio reached 51.6% of GDP at the end of March 2024, according to official data published by Eurostat, above the second alert threshold provided for by the Fiscal Responsibility Legal Framework (LRFB).According to the CF, the Structural Budget Plan that the Government will send to Brussels in September 2024 and which is mainly necessary due to the need for fiscal-budgetary consolidation would inherently include measures to limit public debt.In this context, the process of fiscal consolidation is urgent and inevitable. The adoption of the new EU economic governance framework in April 2024 will support the consolidation process, as Romania will propose a structural budget plan, including the reforms and investments undertaken, which will ensure that the budget deficit will fall below 3%.Thus, in the coming period, Romania will have to implement measures to reduce the structural deficit, aiming both to increase the share of tax revenue in GDP and to streamline budget spending.