Government Deficit Increases in the First Half of the Year
The budget deficit for the first six months is around 3.6% of the GDP, as announced today by Prime Minister Marcel Ciolacu, confirming the data released by Profit.ro at the beginning of July. The Prime Minister tried to justify the level of deficit through investments, including co-financing for projects with EU funds.
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Significance of the Deficit
The level of deficit for the first half of the year is quite high, making it unlikely to meet the target of 5% of the GDP for the entire year, as assumed in the budget construction. The summer period is usually good for the state budget, with June and July historically having revenues at ANAF above the monthly average. July, for example, is the month with the highest revenues for the state.
The Impact of State-Owned Company Dividend Revenues on the Budget
One common practice in budgeting is the reliance on dividends from state-owned companies as a source of revenue. This can significantly impact the government’s financial situation, as these dividends can fluctuate based on the performance of the companies.
Another budgeting practice that has been observed is the surge in government spending in the last two months of the year. This can be a result of various factors, such as the need to meet budget targets or to utilize remaining funds before the end of the fiscal year.
Challenges in Deficit Management
It is worth noting that the deficit measured in cash terms, which is the method used by the government, has been inflated in the early months of this year due to delayed payments from the previous year. While these payment delays may impact the cash deficit, they do not affect the ESA deficit, which is reported to the European Commission.
Prime Minister Marcel Ciolacu has expressed the government’s commitment to signing an agreement with the future European Commission to reduce the budget deficit over a period of 7 years, with an annual decrease of 0.74%.
“From my point of view, this is the most crucial period for Romania until we finalize the current financial exercise and the PNRR. In other words, I believe that so far, around 2.65 out of 3… and 3 and 6 I think, we are dealing with the deficit,” said Prime Minister Ciolacu.
Investments in Energy and Climate
During a business forum organized as part of the Partnership for Transatlantic Cooperation in Energy and Climate (P-TECC) meeting, Prime Minister Marcel Ciolacu announced that over 11 billion euros have been invested directly in various projects. This significant amount of investment is expected to have a positive impact on the economy and the environment.
Reasons for Increased Deficit
Prime Minister justified the high level of deficit in the first six months of the year, compared to the 5% of GDP target set by the budget law, by pointing out the significant spending on investments. According to sources cited by Profit.ro, the budget deficit reached 3.61% of GDP for the first half of the year 2024, showing a slight increase of 0.21 percentage points in June. The government’s focus on investments is seen as a key factor contributing to the deficit increase.
Improving Budget Situation in June 2024
The budget situation in the first six months of the year is not very encouraging for the target deficit assumed for the entire year 2024, which is only 5% of GDP (87 billion lei). However, better control during the summer could help the Government avoid more pessimistic scenarios. With a deficit of only 0.21 percentage points, June is the month with the best budget situation in 2024.
In the first six months of 2023, the deficit was 2.34% of GDP, 37.21 billion lei. The execution of the consolidated general budget in the first five months of 2024 ended with a deficit of 60.10 billion lei, or 3.40% of GDP, compared to a deficit of 36.91 billion lei, or 2.30% of GDP, in the first five months of 2023, announced the Ministry of Finance.
June was also a good budget month last year, with the deficit increasing by only 0.02 percentage points in June 2023, from 2.32% of GDP at the end of May to 2.34% at the end of June. Generally, June is a month with higher revenues and lower expenses, which contributes to a better budget situation.
Government Deficit in Romania
In the first half of the year, the Romanian government faced budget deficits higher than the monthly average. The deficit was 0.45% of the GDP in January, 1.22% in February, 0.39% in March, 1.18% in April, 0.16% in May, and 0.21% in June.
The deficit in May was artificially reduced due to the government’s decision to make advanced pension payments in April amounting to 9.33 billion lei (0.53% of the GDP). This decision increased the deficit in April, but artificially lowered the deficit in May. If pension payments had been made on time, the deficit in April would have been 0.65% and in May 0.69%.
It is important to note that the deficit data mentioned above are in cash terms, while the European Commission uses the ESA standard for estimates. The ESA deficit is relevant for the excessive deficit procedure and includes certain obligations.
The Impact of Budget Deficits on Romania’s Financial Stability
In recent years, Romania has faced challenges in managing its budget deficits. The government has announced a cash deficit of 5.7% for the previous year, while the ESA deficit was reported at 6.6% by the Commission. The European Commission estimates a budget deficit (ESA) of 6.9% for the year 2024, which is crucial as Romania will need to start reducing its budget deficit under the new EU financial framework.
The new European framework for correcting budget deficits introduced in 2024 includes new rules on the stability of member states’ public finances. This will require Romania to take measures to address its deficit and ensure financial stability in line with EU regulations.
Additionally, the Ministry of Finance is requesting additional funding from the government for salaries, waste-related penalties imposed by the EU, and the payment of certain contracts. These financial challenges highlight the importance of addressing budget deficits and ensuring fiscal responsibility in Romania’s financial management.
EU Plans Fiscal Stability Measures
The European Union is planning to enter into bilateral negotiations with its member states to establish a fiscal plan with a minimum horizon of 4 years. This plan may be extended up to 7 years, with Romania likely to fall into this category, and it aims to encourage investments and commitments to reform. Current references regarding the stability of public finances will remain unchanged: a maximum deficit level of 3% of GDP and a maximum debt level of 60% of GDP.
One of the new features is a minimum adjustment of the budget deficit by 0.5 percentage points per year, if a country exceeds the 3% threshold of GDP. The new framework also includes a stronger role for independent fiscal institutions (such as Romania’s Fiscal Council), as well as provisions for better management of state-owned companies.