The Romanian government plans a new budget adjustment while the European Commission warns over the high budget deficit.
The government in Bucharest is working on its third budget adjustment this year, mainly intended to allocate more funds to healthcare in the context of the coronavirus pandemic. This new adjustment is needed, according to Finance Minister Florin Cîțu, to secure the funds for healthcare, social assistance and education until the end of the year. Funds will be further allocated for investment and for the payment of compensations to the farmers whose crops were affected by drought. The new budget adjustment is based on a deficit of 9.1% of the GDP, against the background of economic contraction triggered by the health crisis.
Instead of the original economic growth forecast of 4.2%, based on which the state budget was designed at the beginning of the year, Romania’s economy has shrunk by 8%, which mirrors in the deficit, a decrease generated by a drop in revenues and the payment in installments of taxes owed by companies from March to October, Minister Citu explained. He also said that the social insurance budget will be supplemented in order to cover the recalculation of pensions and the financing of the support measures for companies, in the context of the pandemic.
The National Commission for Strategy and Prognosis revised downwards the economic growth forecast, to a 4.2% drop in the GDP this year, while the inflation rate will reach 2.2% at year-end. In Brussels, the European Commission’s autumn economic forecast projects Romania’s deficit to exceed 10% of the GDP in 2020 and to further go up in the following years. The Commission asked for a thorough assessment of the economic situation in Romania, just as it did in the case of another 11 member states where major macroeconomic imbalances were signalled.
According to the European Commission, the deterioration of the economic outlook and the introduction of emergency measures to combat the pandemic and its economic consequences can only partially explain the projected rise in the deficit in Romania, because important underlying drivers of the fiscal situation that were already present before the pandemic struck in 2020, have not been modified. These include underfunded large pension increases, a higher child allowance, reductions in indirect taxes and cuts in social security contributions for some categories of workers.
The Commission also points out that the government’s attempts to limit the impact of some of these measures have been rejected by parliament. The Commission has reminded that the Excessive Deficit Procedure (EDP) was launched against Romania in April 2020, after in 2019 the country exceeded GDP deficit limit. The Commission believes that, in the light of the continued exceptional uncertainty created by the Covid-19 pandemic and its extraordinary macroeconomic and fiscal impact, no decision on further steps in the Romania' EDP can be taken. (Translated by Elena Enache)