Tax amnesty for bad payers, deficit of almost 7%

The first month of autumn brought a series of economic and financial challenges for our country, especially in the context of a growing budget deficit, high inflation and volatility of energy prices. However, the Ciolacu government continued to take contradictory measures regarding the state budget. Given that the budget execution at 8 months showed a deficit of 4.57% of the Gross Domestic Product, the Government, although it adopted at the beginning of September a partial fiscal amnesty through which it hopes that by the end of the year it will attract to the state budget 9 .5 billion lei, he also made the first budget rectification which is positive, but which deepens the budget deficit which would be at the end of 2024 of 6.94% of GDP, i.e. 1.94% more than the 5% deficit provided for in the state budget law for the current year. Although Prime Minister Ciolacu stated that the majority of the budget deficit is caused by the expenses made with public investments, from the budget rectification and budget execution data at eight months we note that we have significant increases in personnel expenses, expenses with goods and services and expenses with assistance social.

In view of these situations, last month the representatives of the Government met with the business environment to put together a plan that would be presented during October to the European Commission to approve our re-entry into the budget deficit target of 3% in the next 7 years.

• Partial tax amnesty for delinquent debtors

On September 4, the Government approved, through an emergency ordinance, a partial tax amnesty that would benefit 330,000 companies and 848,000 natural persons, who will pay their outstanding outstanding debts to the state budget until November 25, 2024 on August 31, 2024. According to the amnesty, the respective taxpayers will benefit from the cancellation of the ancillary debts calculated for the payment obligations. Following the application of the partial amnesty, the Government hopes to collect in the first phase approximately 9.5 billion lei from the companies and individuals who benefit from this facility, given that the total recoverable arrears amount to 71.8 billion lei, of which 60 .1 billion lei are the main fiscal obligations.

The normative act also provides that companies that have respected the tax payment deadlines benefit from a bonus of 3% of the profit tax or the income tax of micro-enterprises. In the case of tax groups, the bonus is applied to the annual profit tax declared by the responsible legal entity. The amounts subject to the rebate are not refunded, but are used to offset other taxes and fees.

• Budget correction to the surplus, to the detriment of the budget deficit

In September 2024, the Government of Romania adopted the first budget amendment of the year. The correction was made through an Emergency Ordinance, to adjust budget revenues and expenditures, given the increase in the deficit and the need to finance essential areas such as health, energy and infrastructure.

According to official estimates, after the budget rectification, the budget deficit for 2024 will reach 6.94% of GDP, a significant increase from the initial target of 5%. This increase was driven by unexpected spending, particularly in the energy sector, and subsidies to cap energy prices, which increased pressure on the budget. According to the budget rectification, the Gross Domestic Product will be 1,768 billion lei, compared to 1,733 billion lei as provided for in the state budget law, and the 7.9 billion lei that would be collected from the implementation of the partial fiscal amnesty approved this month by the Ciolacu government. The budget correction foresees an increase of 8.8 billion lei in personnel expenses, 3 billion lei in interest expenses, 5.12 billion lei in social assistance expenses, but also a 1.8 billion lei decrease in the amount allocated investments.

The budget amendment allocated additional funds to essential ministries to manage crises and urgent needs in the economy. Among the ministries that experienced a budget increase for the current year are:

- The Ministry of Energy received an additional allocation of 1.28 billion lei to support measures to protect against the energy crisis and to finance green and sustainable energy projects. Also, part of these funds was directed to the closure of the coal mines in Valea Jiului, in order to comply with energy transition commitments.

- The Ministry of Health benefited from additional funds to cover expenses related to the purchase of medicines, equipment and for the modernization of hospital infrastructure. In total, 3.89 billion lei were additionally allocated for the health sector.

- The Ministry of Agriculture received 2 billion lei to compensate the losses of farmers affected by drought and other unfavorable climatic phenomena. These funds were crucial in supporting farmers who suffered significant losses due to extreme weather conditions.

- The Ministry of Transport received additional allocations of 5.48 billion lei for the financing of major infrastructure projects, especially for the construction of highways and the modernization of railways.

- The Ministry of Development, Public Works and Administration received another 9.7 billion lei. This budget is intended for the most part to continue supporting the investment projects from the national programs "Anghel Saligny", PNDL 1 and 2, as well as the programs of the National Investment Company, to which the related PNRR funded programs are added: Valul Renovării and urban mobility support programs.

- The Ministry of Investments and European Projects has an additional allocation of 3.3 billion lei for projects financed from the FEN (vouchers for disadvantaged people, educational support for the 2024-2025 school year, for disadvantaged children, teaching premium, etc.).

• Deficient budget execution at eight months

The budget correction was made in the conditions where, according to the data provided by the Ministry of Finance at the end of last month, the budget execution for the first eight months of 2024 revealed a significant difference between state revenues and expenditures, with the budget deficit reaching 4.57% of GDP , i.e. 80.87 billion lei. Comparatively, at the end of the first 8 months of 2023, the budget deficit was 2.63% of GDP, i.e. 42.19 billion lei.

Budget revenues were 375.76 billion lei, while budget expenses exceeded 456.63 billion lei, with a notable increase of 23.8% in personnel expenses - which reached the total value of 105.98 billion lei between January and August 2024, a 26.3% increase in spending on goods and services (total eight-month value of 60.87 billion lei), and a 13.4% increase in spending on social assistance (which totaled 146.95 billion lei).

Expenditure on projects financed from external non-reimbursable funds (including subsidies from the European Union related to agriculture) was 30.9 billion lei. Investment expenditures, which include capital expenditures, as well as those related to development programs financed from internal and external sources, amounted to 65.03 billion lei, an increase of 40.6% compared to the same period of the previous year, when they were worth 46.24 billion lei.

• Decreases in the HoReCa sector, growing trade deficit

According to a report presented last month by the Ministry of Finance, the national economy was characterized in the first semester of 2024 by moderate growth in the food and industrial sector, a decrease in activity in the HoReCa sector and a growing trade deficit, the Half-Year Report states drawn up by the Ministry of Finance. The cited document shows that, at the same time, inflation decreased significantly due to government measures, the retail sector registered robust growth, investments in agriculture and forestry had a positive evolution, and the use of European funds continued, albeit at a slower pace. slow compared to previous years.

From the data in the report, we note that the food industry in our country registered a significant increase of 7.4% in the first six months of 2024, an evolution also supported by the 15% increase in production in the chemical industry between January 1 and June 30. The increase in chemical production had a positive impact on other industrial branches, thus strengthening the performance of the food sector.

On the domestic market, sales of food products increased by 4%, which reflects moderate growth compared to the rest of the commercial activities in Romania. However, this growth was slower compared to the rest of the economic sectors, indicating a somewhat more moderate evolution of domestic demand in the food sector.

Another significant aspect of the economy in the first semester is the 1.6% decrease in the activity of hotels and restaurants (HoReCa), a setback that contributed to the 1.5% reduction in the total volume of turnover from services provided to the population. This decline can be associated with both internal and external economic factors, such as a reduction in the number of tourists or changes in post-pandemic consumption behavior.

One of the positive aspects of the economyin the first half of 2024 there was a downward trend in consumer prices throughout the production and distribution chain, with inflation recording an average rate of 6.2%, 6.6 percentage points less than in the first half of 2023. This disinflationary process was driven by government measures to cap trade markups on basic food products and electricity and natural gas prices. The drop in inflation was particularly felt at the level of food prices, which decelerated to a growth rate of 2.9%.

An economic sector that experienced an increase in activity in the first half of the current year is retail trade, excluding motor vehicles and motorcycles. According to the data from the cited report, this economic sector registered an increase in turnover of 8% between January 1 and May 31, 2024, compared to the same period of the previous year. In particular, food, beverage and tobacco sales increased by 3.5%, contributing to this robust growth in the retail sector.

• Auction for Energy Difference Contracts

The Ministry of Energy announced on September 9 the launch of the state aid scheme in the form of contracts for difference (CfD), intended for the production of electricity from renewable sources, namely onshore wind and solar photovoltaic energy. By the order signed by the Minister Sebastian Burduja, the rules of the bidding procedure for the first auction in this program were established.

The first tender under the CfD scheme will be completed by the end of this year and will support the development of 500MW photovoltaic projects and 1,000MW onshore wind projects. Investors will benefit from support in the form of a contract for difference, which will guarantee them a fixed electricity sale price for a period of 15 years. The price will be set following a competitive auction, with a maximum starting threshold of 78 euros/MWh for photovoltaic projects and 82 euros/MWh for onshore wind ones.

A second auction will take place next year and will cover a total capacity of 3,500 MW from onshore wind and photovoltaic projects.

At the end of last month, the Minister of Energy, Sebastian Burduja, announced the launch of the "Offshore Wind Roadmap for Romania" report, produced by the World Bank, a document that foresees projects of 19 billion euros until 2035 in offshore wind capacity in the Black Sea, the implementation operation of 7GW for the national energy system and the creation of up to 77,000 new jobs.

The report points to two scenarios. In the first, 150 wind turbines installed through 5 projects are targeted, until the year 2035. The value of the investment would amount to 9 billion euros, installed capacity of 3 GW, which will ensure 16% of the country's energy needs. In terms of supply chain and economic impact, Romania will have 28% local content and approximately 21,000 jobs will be created. In the second scenario, 360 turbines would be installed through 7 projects, until the year 2035. The investment value will be approximately 19 billion euros, installed capacity of 7 GW, which will provide 37% of the country's energy needs . In terms of supply chain and economic impact, Romania will have 38% local content and approximately 77,000 jobs will be created.

• BNR: 15.178 billion euros - the current account deficit of the balance of payments, for the first seven months of 2024

In September 2024, the monetary policy interest rate was 6.5% per year, as established by the Board of Directors of the National Bank of Romania in the August meeting.

At the end of last month, the BNR published the annual report on foreign direct investments in our country, from which it appears that they decreased last year to 6.748 billion euros, compared to 2022 when they stood at 10.039 billion euros. "The net flow of FDI in 2023 recorded the value of 6.748 billion euros, of which: 6.996 billion euros - equity participations (level resulting from summing up the contribution to the equity capital of FDI enterprises, in the amount of 2.070 billion euros, with the reinvested profit in FDI enterprises in the amount of 4.927 billion euros); -248 million euros - instruments of the nature of debt in the relationship with direct foreign investors and companies within their group, determined by the difference between debts (1.096 billion euros) and receivables (1.344 billion euros)", according to the BNR analysis.

The FDI balance on December 31, 2023 reached the level of 118.231 billion euros, of which: 84.759 billion euros - equity, including the reinvested profit (71.7% of the total FDI balance); 33.472 billion euros - debt instruments in the relationship with direct foreign investors and companies within their group (28.3%).

Realized FDI incomes of non-residents last year recorded the value of 11.865 billion euros, as follows: Income from equity investments was at the level of 10.764 billion euros, being determined as the difference between the after-tax profits attributable to foreign investors, in the amount of 14.354 billion euros from the total profits obtained by FDI enterprises and the losses attributable to them, in the amount of 3.590 billion euros, from the total losses recorded by FDI enterprises in the year 2023.

Also last month, the BNR announced that the current account deficit of the balance of payments reached, at the end of the first seven months of 2024, 15.178 billion euros, an increase of 33.99% compared to the deficit of 11.328 billion euros in the period similar to last year. In its structure, the balance of goods recorded a larger deficit by 2.531 billion euros, the balance of services recorded a smaller surplus by 1.303 billion euros, the balance of primary incomes recorded a larger deficit by 538 million euros, and the balance of secondary incomes a surplus higher by 522 million euros. In the first seven months of 2024, total external debt increased by euro10.247 billion to euro180.330 billion.

Regarding Romania's foreign exchange reserves, on September 30, 2024 they stood at the level of 65.778 billion euros, compared to 63.187 billion euros on 31 August 2024. During September, the following operations took place: Inflows of 6.050 billion euros, representing : modification of the minimum reserves in foreign currency constituted by credit institutions at the NBR; replenishment of the accounts of the Ministry of Finance (including the amounts resulting from the issuance of Eurobonds of the Ministry of Finance with a nominal value of 3 billion euros and in US dollars with a nominal value of approximately 1.89 billion euros) and others; Outflows of 3.459 billion euros, representing: the change in the minimum reserves in foreign currency constituted by credit institutions at the NBR; installments and interest payments on the public debt account denominated in foreign currency (approximately 685 million euros); payments from the account of the European Commission and others, according to data from the National Bank.

The level of the gold reserve remained stable at 103.6 tons. In the context of international price developments, its value was 7.855 billion euros.

Romania's international reserves (currency plus gold) on September 30, 2024 were 73.663 billion euros, compared to 70.775 billion euros on August 31, 2024.