Government Budget Deficit Increases in First Half of the Year
The government has recorded a budget deficit of 3.6% of GDP, 63.67 billion lei, for the first six months of this year, compared to 2.32% of GDP, 37.21 billion lei, in the first six months of 2023. Profit.ro announced the deficit for the first half of the year at the beginning of July, and recently Prime Minister Marcel Ciolacu confirmed the data.
Events
On July 30th – Profit News TV Marathon: Artificial Intelligence in the Economy. Partners: Garanti BBVA, Gomag. The target for the whole year is 5% of GDP, around 87 billion lei.
In June, the deficit increased by only 3.56 billion lei, 0.2% of GDP, a relatively slow pace compared to the first months of the year. State finances are usually much more stable in the summer months. Although relatively low at only 0.2% of GDP in June, the deficit is significantly higher than in June last year, when it was only 0.02% of GDP.
Luxury Tax: A Necessary Evil?
When it comes to luxury items, such as a car worth 100,000 euros, the tax imposed on such goods seems insignificant compared to the price of a full tank of gas. But who should be responsible for paying this tax and how should it be calculated?
Government Finances in 2024
It is important to note that the deficit in cash terms, which is used by the Government, has increased significantly in the first months of this year due to delayed payments from the end of the previous year. These delayed payments may mask the cash deficit, but they do not affect the ESA deficit, which is reported by the European Commission.
Revenues: Total revenues amounted to 275.5 billion lei in the first half of 2024, showing a 13.5% increase year-on-year. This growth was supported by current revenue collections – contributions, VAT, payroll tax, profit tax, and non-tax revenues.
Revenue from payroll and income tax totaled 24.92 billion lei, with a positive growth rate of 20.4% year-on-year. Payroll tax revenues increased by 20.3%, surpassing the growth of the fund.
Evolution of Tax Revenues in the Economy
In the past year, there has been a significant increase in tax revenues, particularly in the category of salaries, which saw a 17.5% growth. This increase can be attributed to changes in regulations regarding tax incentives for employees in the construction, agricultural, food industry, and computer programming sectors. Additionally, the minimum wage has also been raised, contributing to this growth.
The Threat of Wealthy Entrepreneurs Leaving the UK
Recently, there has been a proposal to modernize the tax system in the UK, which has caused concern among wealthy entrepreneurs. Some of them have even threatened to leave the country if these changes are implemented. This could have a significant impact on the economy and the overall business environment.
Positive Trends in Pension Income Tax
On a more positive note, there has been a 58.2% increase in tax revenues from pension income, as well as a 13% increase in revenues from the unified declaration. However, there are still challenges with regards to dividend tax revenues, which remain in negative territory with an 11.5% decrease, largely due to high base effects from January 2023.
Analysis of Contributions and Taxes in 2022
During the year 2022, contributions and taxes collected based on interim financial statements amounted to 92.75 billion lei, with a 5% tax rate applied. Contributions for social insurance recorded a 20.8% increase year-on-year, surpassing the growth in the wages fund in the economy. The positive evolution of these receipts was influenced by changes in regulations regarding tax benefits for employees in the construction, agriculture, food industry, and computer programming sectors, as well as the payment of health insurance contributions for meal vouchers and holiday vouchers (Law no. 296/2023). Additionally, the increase in the minimum wage guaranteed by law (Government Decision no. 900/2023) and the increase in the minimum wage for the construction, agriculture, and food industry sectors (Government Emergency Ordinance no. 93/2023) had a positive impact. However, there was a negative effect due to the refund of health insurance contributions withheld from pension incomes (with a budgetary impact of -0.14 billion lei).
Revenue from Corporate Tax
In the first half of 2023, revenue from corporate tax totaled 15.54 billion lei, marking a 22% increase year-over-year. This growth was driven by higher income from corporate tax, including the minimum tax on turnover for economic agents and profit tax from commercial banks. However, it was slightly offset by the redirection of a portion of corporate tax for sponsorship and/or patronage activities, as per Law no. 322/2021 (-0.4 billion lei).
Net VAT Revenue
Net VAT revenue reached 57.1 billion lei, up by 17.3% year-over-year. Additionally, the value of VAT refunds increased by 3.9% compared to the same period last year (14.96 billion lei in Jan-Jun 2024, compared to 14.4 billion lei in Jan-Jun 2023). The growth in VAT revenue was supported by the fiscal changes introduced by Law no. 296/2023, such as the increase in the VAT rate for food products.
Government Incentives for Sustainable Living
There are several government incentives available for promoting sustainable living and environmental protection. These incentives include subsidies for the installation of solar panels, thermal solar panels, heat pumps, and other high-efficiency heating systems. In addition, there are subsidies for the delivery and installation of these systems, as well as for the use of public transportation for tourism purposes.
Resignation of AMEPIP Leaders
The heads of AMEPIP, the agency responsible for monitoring state-owned companies, have resigned due to the failure to meet a milestone in the National Recovery and Resilience Plan (PNRR). The government has issued a statement confirming the resignations.
Revenue from Excise Duties Increases
Revenue from excise duties totaled 19.63 billion lei, showing an increase of 10.8%. This growth was driven by higher revenues from excise duties on energy products (+20.2%), attributed to increased fuel consumption. On the other hand, the decline in excise duties on tobacco products has slowed down (-1.8%), thanks to a significant positive trend in collections during the May-June period. Monthly revenue from excise duties has shown a positive trend overall.
Increased volatility in excise duties
Excise duties revenues are generally more volatile, influenced by the fiscal warehousing policy of taxable products. Non-tax revenues amounted to 26.64 billion lei, showing a 19.5% increase year-on-year, supported by dividend earnings.
Decrease in EU reimbursements
The amounts reimbursed by the European Union for payments made and donations totaled 19.15 billion lei, a decrease of 11.7% year-on-year.
Expenses
Expenses of the consolidated general budget amounting to 339.17 billion lei increased by 21.2% in nominal terms compared to the same period of the previous year. Expressed as a percentage of GDP, expenses in the first six months of 2024 showed a 1.8 percentage points increase compared to the same period in 2023, from 17.4% of GDP to 19.2% of GDP.
Personnel expenses amounted to 77.65 billion lei, representing a 23.1% increase compared to the same period of the previous year.
Public Expenditure Report for 2023
According to the latest report, the proportion of personnel expenses in the GDP has reached 4.4%, which is 0.5 percentage points higher than the previous year, due to salary increases granted in 2023.
Expenses on goods and services have totaled 45.07 billion lei, showing a significant increase of 24.9% compared to the same period last year. Local budgets have also seen a growth of 17.8% compared to the previous year, along with the National Health Insurance Fund budget, which has increased by 27% to cover medications with and without personal contribution, as well as drugs used in national health programs.
Interest expenses have reached 17.61 billion lei, marking an increase of 1.66 billion lei compared to the same period last year.
Increased Social Assistance Spending in 2024
Social assistance expenditures reached 109.76 billion lei in 2024, marking a 12.3% increase compared to the same period last year. The rise in social assistance spending was primarily driven by the 13.8% increase in the pension point starting from January 1, 2024, raising the minimum pension from 1,125 lei to 1,281 lei, in accordance with Law no. 360/2023 of November 29, 2023 regarding the public pension system.
Additionally, social assistance expenditures were also influenced by state budget payments to offset electricity and natural gas bills, totaling 1.93 billion lei in the first six months of 2024. Subsidies amounted to 9.06 billion lei, with a significant portion allocated to transportation subsidies and support for producers.
Analysis of Government Spending in Romania
The Ministry of Finance in Romania has recently released a report detailing the government’s spending for the past fiscal year. One of the largest expenses was subsidies for agricultural producers, totaling 935.41 million lei, which represented 10.32% of total subsidies.
Other significant expenses included 8.66 billion lei for scholarships for students, support for religious institutions, civil compensations, and payments issued by the National Authority for Property Restitution according to specific laws.
Additionally, the report highlighted that 24.48 billion lei were allocated for projects funded by non-repayable external funds, including subsidies from the European Union for agriculture.
Investment expenses, covering capital expenditures and development programs, were also a substantial part of the government’s budget. The Ministry of Finance will further analyze the accuracy of VAT returns to ensure compliance and may extend the period without penalties if significant errors are identified.
Increase in Investment in the Romanian Economy
Investments in the Romanian economy have seen a significant increase, reaching a total of 46.27 billion lei. This represents a 41% growth compared to the same period last year, when investments were valued at 32.8 billion lei.
This boost in investment is a positive sign for the country’s economy, indicating growing confidence from both domestic and foreign investors. The increase in investments will likely lead to job creation, economic growth, and overall prosperity for Romania.