Romania’s public deficit doubles y/y to 0.5% of GDP

Romania’s public deficit doubles y/y to 0.5% of GDP

The general government budget deficit in Romania has more than doubled to RON 8 billion (0.5% of GDP) in January 2024, from RON 3.7 billion (0.3% of GDP) in the same period last year, according to sources familiar with the data contacted by Profit.ro.

However, the gap was partly due to RON 3 billion bn of defense spending related to procurement contracts that are becoming more significant as the country carries out more military spending in the context of the war in Ukraine, the sources commented.

The sources also said the volume of budget revenues increased by 20% y/y while the public expenditures rose by 28% y/y.

It is premature to say whether the 5%-of-GDP budget deficit targets set by the government for 2024 look more or less realistic in the context of the budget execution in January. The target was slightly unrealistic since it was drafted at the end of last year, to start with.

The budget execution in January doesn’t add more clarity in itself, as opposed to the government’s promises for higher wages in several budgetary sectors. Separately, the government expects great improvement in tax collections once several digital instruments are deployed – but the consensus expectations are more moderate on this.

The 5% deficit target thus looks unrealistic, but not necessarily because of the budget execution in January.

Regarding the nature of the “bullet” military spending in January, it is more likely that such “bullets” will continue throughout the whole year, making them more of a quasi-permanent expenditure.

Adrian Codirlașu, vice-president of CFA Romania Association, quoted by Economica.net, argues that a deficit of 0.5% in January could bring the budget deficit to 6% in 2024 – meaning that the government should find supplementary budget revenues starting with 2025.

This, however, is not new, and the main reason that will force the government to boost the budget revenues in 2025 is the Pension Law that comes into force in September this year – not necessarily the budget deficit in January 2024.

Codirlașu believes that the government will first hike the VAT rate in 2025 since the rate in Romania (19%) is currently among the lowest in Europe.

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