However, analysts recommend the renegotiation of the budget deficit target for 2012, currently set at 3% of the gross domestic product. An increase of just 2% of the GDP, compared with the initial estimate of 3.5%-4%, may lead to a deficit rise of 0.8% of GDP.
Gherghina, who is in charge with the budget project, says a draft has already been prepared and will be adjusted once the IMF and the European Commission representatives arrive in Bucharest this month.
“We’ll go over the budget draft again when the IMF and European Commission come. Let’s see the European Commission’s economic growth forecast first. There will be spending and revenue adjustments,” Gheorghina says.
He adds that revenue will probably go down as a result of the lower economic growth. Spending will be adjusted, too. The matter “is to be discussed,” Gherghina adds.
Ideas such as taxation of pensions to generate additional revenue for the budget have resurfaced on the political scene. An increase in the public sector wages may be put on hold, too, but there is also the election year to consider.
Traditionally, the handiest tool used to curb spending is cutting investments. The authorities are pressured by the IMF to do more about fighting tax evasion to boost revenue.
Gherghina thinks the revised budget draft could be ready while the IMF and European Commission representatives are in Bucharest. The legal deadline for sending the budget draft to the Parliament, October 15, will therefore not be met, but this will not be the first time that happens.
As for renegotiating the 2012 budget deficit target set at 3% of GDP, Gherghina says, “anything can be renegotiated, but exceeding the target is not currently considered”.
The IMF will halve Romania’s economic growth forecast for 2012 to about 2% and warned that attaining the budget deficit target would be difficult and would require faster progress in boosting the European fund absorption rate and the state-owned enterprise reform.
The impact of the economic growth adjustment over the budget is significant and the situation is compounded by the inclusion in the budget of the loss-making state-owned enterprises. International economic turmoil further complicates things.
Ionut Dumitru, chairman of the Fiscal Council, recommends caution when building the 2012 budget, as additional fiscal consolidation steps are required. He says that with the adjustment of the economic growth estimate from 4% to 2% the budget deficit will go up by 0.8% of GDP.
He believes that tax collection has to improve and that “it makes no sense to think about cutting taxes.”
As for spending, Dumitru thinks social expenses such as wage and pension raises can be avoided, considering the high deficit of the pension budget.
The Fiscal Council chairman says that “it wouldn’t be a tragedy” if the Romanian authorities tried to negotiate a higher budget deficit for 2012, given the deterioration of the macroeconomic conditions.
Lucian Anghel, BCR’s chief economist says that the 3% of GDP deficit target could be renegotiated. “We probably need to look at how realistic the deficit target is, given the new macroeconomic conditions compared with those taken into account in the beginning (of the program),” he says, adding “I wouldn’t see the IMF opposing a deficit other than 3% if we can convince them we have infrastructure projects. But that particular spending increase has to be explained.”
Anghel also said that 2012 was an election year and international institutions tend to become more skeptical in such situations.
BCR’s chief economist believes sacrificing investments again to meet the budget deficit target would be a mistake.
In Anghel’s opinion, Romania would probably have to speed up privatization. He does not expect new measures involving the flat tax or the VAT to boost budget revenue, but sees a higher contribution to the budget of excise duties, partly because of the higher exchange rate. Certain local taxes may be raised, too, such as the property tax.
Dan Bucsa, chief economist of UniCredit Tiriac, believes there is growth potential for revenue, mainly by improving collection. “The ratio between indirect tax collection (mainly VAT, excise duties) and the value of commercial transactions shows that tax evasion is still very high. I believe any increase in taxes is harmful to the economy, as long as the economic growth is weak and the danger of developed countries relapsing into recession is increasingly greater.”
Talking about budget spending, Bucsa believes goods and service expenses could be cut.