The budget might also be under additional pressure from the reimbursement of the social security contributions illegally collected from retired people, wage raises or a cut of the social security contributions for employers/employees in the absence of a significant improvement in budget revenue collection and in the efficiency of public spending.
Romania undertook to attain a very ambitious budget deficit target of 1.9%, as suggested by President Traian Basescu, although even the International Monetary Fund itself had its reservations about such an effort. The government could eventually back down, as analysts are already very skeptical about the target being possible to attain, chiefly because the government, instead of taking money from the EU, is spending a lot of it to compensate for the payments delayed or suspended by Brussels.
Finance Ministry calculated that a 16% raise of public sector salaries in June would translate into a 2 billion lei budget impact, while a 5% cut of the social security contributions would be a RON2.3 billion budget effort. As for the reimbursement of the illegally withheld social security contributions from retired people, a further RON650 million would be needed for those contributions collected this year.
The deficit rose to RON2.7 billion after two months or 0.44% of the GDP, comparable to the year-ago period. However, 2011’s budget deficit stood at 4.1% of GDP, which is double this year’s target.
“At first, the budget deficit of the first two months, which is equal to the deficit in the same time last year, might suggest this year’s deficit would be closer to last year’s 4.1% of GDP, than this year’s 1.9%. Still, the figures at the beginning of this year may have been influenced by the bad weather conditions, the way other macroeconomic indicators were,” said Vlad Muscalu, ING Bank analyst.
He believes the government may miss this year’s budget target because of electoral actions and forecasts a deficit of 2.6% of GDP.
RBS Bank, too, expects the deficit to reach 2.7% of GDP using the cash basis, as the Finance Ministry does in its monthly public reports.
“The 1.9% of GDP budget deficit target is much too ambitious for a country like Romania, considering the budget execution in the first two months of the year. I think the target will not be reached and the consolidated budget deficit will be somewhere in the neighborhood of 2.5% of GDP, so that Romania could stay within the 3% of GDP under ESA 95 standards required by the EU,” Melania Hancila, chief economist of Volksbank said.
After having gone down in January, the public debt resumed its rise in February, when it surged by RON2.3 billion, compared with the first month of the year.
The Finance Ministry’s thirst for cash led to it borrowing about RON30 billion via leu-denominated government paper alone in the first two months of the year, double the amount of the issues falling due at this time.
(English version by Loredana Fratila-Cristescu)