Fiscal Council: "The fiscal-budgetary consolidation process is stringent and inevitable"

The escalation of the budget deficit indicates structural problems, which can only be remedied through urgent fiscal reforms that lead to budgetary consolidation, the Fiscal Council states in the report for the year 2023, published yesterday, a document that raises a new alarm signal regarding the serious deterioration of the situation fiscal-budgetary of our country.

The Fiscal Council specifies: "The budget execution for the first six months of 2024 seems to confirm the CF assessment from the time of the opinion on the draft budget, which placed the cash deficit for the current year at around 6.4% of GDP, significantly above the target assumed by 5% of GDP. Moreover, in the absence of fiscal-budgetary consolidation measures, the deficit will probably exceed 7% of GDP, with the risk of moving towards 8% of GDP. This evolution of the deficit would be generated by the fact that the new pension law and salary increases granted in the public sector will generate additional costs in the second half of 2024, and the seasonality of the budget execution is characterized by the concentration of some categories of expenses in the last months of the year . It seems unlikely that, in the context of the very turbulent political year, measures will be adopted to decisively correct the budgetary slippage. Thus, although Romania is in the excessive deficit procedure, it is very possible that 2024 will be the second consecutive year in which it deviates from the deficit adjustment trajectory established by the European institutions. Consequently, the fiscal-budgetary consolidation process is stringent and inevitable. With the adoption of the new EU economic governance framework, in April 2024, given that Romania has a budget deficit above 3% of GDP, the EC will transmit the reference trajectory for net spending to the national authorities. Based on this, Romania will propose a budget-structural plan of measures that will also include the reforms and investments undertaken, with an emphasis on highlighting the impact on budget revenues and expenses, which will ensure the reduction of the budget deficit below 3%. Thus, in the next period, Romania will have to adopt viable measures to reduce the structural deficit, aiming both at increasing the share of tax revenues in GDP, and at streamlining budget expenditures".

The cited report mentions that the first part of 2024 recorded a number of measures with a negative effect on budget execution, such as discretionary wage increases in the public sector. "Thus, in March, the basic salaries of health personnel, of personnel within the Ministry of Health's own apparatus, but also of personnel in the field of social assistance were increased by 20%, implying a budget impact of about 1.5 billion lei. In the same month, salaries were increased by up to 30% for the personnel of the defense, public order and national security institutions, and other advantages were also granted (doubling of the delegation/posting allowance, cash compensation for vacation leave, etc. ), with a budget impact estimated at around 1.2 billion lei for 2024. In May, measures were adopted to increase basic salaries by 10% for several public sectors, with a budget impact estimated at around 1, 1 billion lei, the compensation of the negative budgetary effect to be achieved through institutional reorganizations, the increase in the employment rate and the reduction of some expenses with goods and services", assert the members of the Fiscal Council.

They remind that in March the Government adopted GEO no. 31/2024 regarding the regulation of some fiscal budgetary measures and for the modification and completion of some normative acts, ordinance by which some measures related to public expenses, included in Law no. 296/2023 regarding some fiscal and budgetary measures to ensure the financial sustainability of Romania in the long term, with a negative budgetary impact of around 400 million lei. The Fiscal Council considers that another factor that increased the pressure on the budget execution in the current year was determined by the budget arrears of about 9 billion lei, created by postponing some payments to the end of 2023, most likely as a consequence of the adoption of the limitation measures of public spending in October last year.

Under these conditions, the quoted document states that the budget execution for the first six months of 2024 recorded a high cash deficit of 3.6% of GDP (almost 1.3 percentage points higher than the same period of the previous year), against the background of the sharp increase in budget expenditures. Thus, although budget revenues exceeded expectations (+13.5% compared to the similar period of 2023, the increase foreseen in the budget for 2024 compared to the execution of the previous year being 12.4%), the growth rate of budget expenditures was much more (+21.2%, the increase foreseen in the 2024 budget compared to the previous year's execution being only 10%).

The Fiscal Council specifies: "In addition, it should be noted that, in the second part of the year, the dynamics of personnel expenses will be higher because some salary increases for the public sector were planned to be granted in two installments (in the first half, respectively , in the second half of the year), an acceleration of social assistance expenses is also expected from September 2024, following the application of the new pension law. Also, with the increase in the minimum wage, the authorities decided to increase the amount for which no income tax is due and which is not included in the monthly basis for calculating mandatory social contributions, from 200 to 300 lei, a measure that implies an impact negative budget of about 300 million lei on budget revenues in the second half of the year".

In light of the above situation, the CF report notes that the unfavorable dynamics of budget execution in the first part of 2024 is also reflected in the increase in the share of public debt in GDP. Thus, in the first part of 2024, the official data published by Eurostat indicate a share of public debt of 51.6% of GDP at the end of March 2024, and the data of the Ministry of Finance, available at the level of April 2024, indicate a share of the debt of 52.1% of GDP, both values exceeding the ceiling of 50% provided by the LRFB.

"In this situation, where the share of public debt in GDP falls within the range of 50%-55%, according to art. 13, para. (2) of the LRFB, the Government must present and apply a program to reduce the share of public debt in GDP, approved by normative act at law level. It is expected that the budgetary-structural plan, which will be sent by the Government in September 2024 and which starts mainly from the urgent need for fiscal-budgetary consolidation, will inherently contain measures to limit the public debt", the cited document also states .

The Fiscal Council presents several essential lines of action. The first refers to the need to significantly improve the collection of tax revenues, given that our country is currently facing a phenomenon of institutionalized tax evasion, which undermines the state's ability to finance essential expenses and invest in infrastructure and public services. The digitization of ANAF is seen as a crucial step, but insufficient if it is not accompanied by stricter measures against tax optimization and evasion of the tax system. The second direction of action refers to the efficiency of budget expenditures, followed by an adjustment of the thresholds for micro-enterprises and VAT. Reducing the eligibility threshold for micro-enterprises, to align with that of VAT, could significantly reduce evasion and contribute to better tax collection, say the members of the Fiscal Council.