The government approved the budget rectification: deficit of 6.94% of GDP and economic growth of 2.8%

• Marcel Ciolacu: "84% of the deficit goes to the investment area" • The Fiscal Council: "Undersized expenses, overestimated revenues, cash budget deficit of 8% at the end of 2024" • With an additional allocation of 5.48 billion lei, the Ministry Transport is the big winner of the budget correction

Yesterday, the government approved the first budget rectification of this year, a rectification that Prime Minister Marcel Ciolacu considers a positive one, because the Ministry of Finance recorded an increase in budget revenues for the first eight months of the current year, despite the increase in the budget deficit compared to the same period of in 2023, revenues that would be transformed into additional resources for the state's large investment projects. The budget correction foresees a deficit of 6.94% of the Gross Domestic Product, 1.94% higher than the one approved by the state budget law for the year 2024. Furthermore, the economic growth forecast for the end of the year has been revised down, to 2.8%, against the forecast of 3.4% from the state budget law for 2024.

Marcel Ciolacu declared: "84% of the deficit goes to the investment area. We are the first European state in terms of the ratio between the deficit and the volume of investments. Obviously, at this record level of investments, the budget deficit also increases to 6.9% of the Gross Domestic Product. However, it is a sustainable deficit, taking into account that 8.5 lei out of 10 spent go to highways, hospitals, schools and gas networks, water and other objectives of local interest. Basically, what we are doing in this rectification is to apply the model of strong European states. Germany, Italy, France or Spain did so, developed like this and are currently the economic engines of Europe! We are doing the same now, because Romania has reached the political maturity to take such decisions. I am not at all afraid of this new scope that we are taking, especially taking into account development, because, I repeat, we are sustainable - we do not allocate the money only for consumption, but we still come with a serious investment plan. This money goes back into the economy and multiplies. For every 1 euro invested, 6 or 8 euros are returned to the state. For example, Mr. Minister Sorin Grindeanu receives the money and makes payments to companies, the companies finish highways that Romanians have been waiting for for 30 years. And these companies pay thousands of employees and give orders to other hundreds and thousands of suppliers with tens of thousands of employees. This means that, in a few months, from fees, taxes and all this circulation, the money returns to the state budget with a surplus. Moreover, new investments are coming in the whole line of infrastructure development. That is why, from my point of view, we must go forward with great courage. And, personally, I have no time for philosophers who, as prime ministers, had a 9.2% deficit, and investments were only 1.7% of GDP, and the Ministry of Finance's buffer was 1 billion euros . In fact, they only consumed, and did not build anything."

We mention that this is the first time that the Ciolacu government approves the budget rectification by emergency ordinance. During 2023 and in the first part of 2024, under the reason of keeping budget expenses under control, at the proposal of the Ministry of Finance, the Ciolacu Cabinet approved corrections through government decisions, from the Reserve Fund, a method that was harshly criticized by the Council Fiscal who qualified these corrections as discretionary and non-transparent.

• The Fiscal Council: "Undersized expenses and overestimated revenues in the budget rectification"

The budgetary correction approved by the Government is criticized by the Fiscal Council, which in the Opinion issued yesterday claims that the Executive has undersized the budget expenditures and overestimated the revenues.

The quoted source says: "The budget rectification project provides for a large nominal increase, both of budget revenues and budget expenses. The estimated level of the budget deficit is 6.94%, about 1.94 percentage points higher than the target in the draft budget. On the revenue side, the rectification project maintains the projection of 10.5 billion lei from digitization, which is equivalent to an oversizing of budget revenues by 0.6% of GDP. In addition, there is a degree of uncertainty regarding the impact of the tax amnesty, of 7.9 billion lei, equivalent to about 0.45% of GDP. The analysis of budget expenditure categories indicates a possible under-dimensioning for expenditure represented by goods and services (about 0.2% of GDP) and subsidies (about 0.3% of GDP). Additionally, there are risks regarding the social assistance aggregate, given the uncertainties regarding the impact of the recalculation of pensions in the public system".

Based on the new data, the Fiscal Council assesses that the budget cash deficit will be around 8% of GDP at the end of 2024, in line with the analysis in its annual report.

"Considering the Government's negotiations with the European Commission regarding Romania's structural budget plan, in the context of the new economic governance framework in the European Union, it is not excluded that some expenses will be reduced more and we will record a significant deficit below 8% of GDP. On the other hand, an underestimation of the risks generated by rapidly growing expenses can lead to a significant deficit above 8% of GDP", states the Fiscal Council Opinion.

The cited document also shows that "the statement that the deficits (ed. - twins) are explained by investments and that they would be sustainable is risky; the effects of investments depend on the composition, on the extent to which the production of exportable goods develops and what can replace imports (so-called tradables); in addition, a large part of the European resources can be seen in the public budget both on the expenditure side and on the income side".

The members of the Fiscal Council claim that a 7-year budgetary-structural plan makes sense, given the size of the deficit and the impact of structural reforms, but they draw attention to the budgetary correction, showing that it cannot be achieved overwhelmingly through spending cuts, as a significant increase in budget (tax) revenues, including through changes in the tax regime, drastically reducing the gap in VAT collection, expanding the tax base, combating tax evasion and tax optimization.

The Fiscal Council also states that recent macroeconomic data show a deceleration of the national economy and that, under these conditions, the macroeconomic scenario on which the budget rectification is based could be burdened by the risk of an overestimation of real growth dynamics.

• The Ministry of Transport, the big winner of the budget rectification

According to the budget rectification project debated and approved by the Government, 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 winner of the budget correction is the Ministry of Transport, whose budget was supplemented by 5.48 billion lei, followed by the Ministry of Education, which received an additional 4.6 billion lei, the Ministry of Health (+3.89 billion lei), the Ministry of the Interior ( +3.67 billion lei), the Ministry of European Investments and Projects (+3.34 billion lei), the Ministry of Agriculture and Rural Development (+2 billion lei), the Ministry of Labor (+1.6 billion lei) and the Ministry of Energy (+1 .28 billion lei). The Ministry of Justice, the High Court of Cassation and Justice, the State Secretariat for Cults, the National Sanitary Veterinary and Food Safety Authority, the Public Ministry, the Ministry of Foreign Affairs, the Foreign Intelligence Service, the Romanian Intelligence Service, the Protection and Security, Romanian Television Society.

The Ministry of Finance received an additional 14.1 billion lei for rectification, of which 3 billion lei for interest payments and 11 billion lei for supporting projects with European funds.

The losers of the budget rectification, which were elected with a reduced initial allocation, are: the General Secretariat of the Government (-176.3 million lei), the Ministry of Economy, Entrepreneurship and Tourism (-120 million lei), the Senate of Romania (-67.8 million lei ), the Special Telecommunications Service (-58.3 million lei), the Ministry of Development, Public Works and Administration (-54.6 million lei), the Chamber of Deputies (-51.9 million lei)

The Permanent Electoral Authority (-42.9 million lei), the Court of Accounts (-25.6 million lei) and the Ministry of Family, Youth and Equal Opportunities (-19 million lei).