Optimistic budget for 2020

EMILIA OLESCU (Translated by Cosmin Ghidoveanu)
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Optimistic budget for 2020

Economic growth of 4.1%, budget deficit of 3.59%, average inflation rate of 3.1% - these are the main macro-economic indicators that the budget for next year was built around, according to the Report on the macroeconomic situation for the year 2020 and its projection for the years 2021-2023, posted on the website of the Ministry of Public Finance (MFP).

Some analysts say the projected budget for next year is rather optimistic.

Economist Aurelian Dochia thinks that the estimated revenues are aiming quite high, because a growth of 4.1% for 2020 seems, under the present circumstances, seems quite ambitious. Also, an inflation rate of 3.1% may be lower than what will be achieved, he says: "For the moment, there are quite a lot of inflationary pressures. I doubt that the Executive will be able to cut some of the expenses it intends to cut. Things do not go as easily as it is written on paper, and we have nothing to cut when it comes to investments. Under these conditions, the deficit target of 3.6% could be very small, if we think about the impact that next year's pension hikes will have".

Among other things, Aurelian Dochia is of the opinion that the government "has probably made some calculations of its own, because otherwise, assuming the responsibility for the budget is absolutely suicidal".

His statement comes in the context in which, on Monday evening, Prime Minister Luidovic Orban said that if the budget is delayed, then there is the option of assuming responsibility for it. The head of government insisted, quoted by Agerpres, that the Budget Law must be passed by the end of the year.

Ionuţ Dumitru: "The opening of the excessive deficit procedure by the EU is imminent"

In the opinion of Ionuţ Dumitru, the former president of the Fiscal Council, as well, the revenue part of the budget project seems a bit optimistic, given the macro projection that is more rosy than the analysts have calculated. "Even the references to the labor market seem to me optimistic, not unattainable, but optimistic", he added. "On the expenses side, what I consider the worst thing is the intention to replace the financing related to PNDL projects with European funds. Europeans, which, conceptually, is correct, but experience has shown us that we have not been able to or interested in attracting European funds".

In the opinion of Ionuţ Dumitru, the opening of the excessive deficit procedure by the European Union against our country is imminent: "It can happen anytime, especially since this year we have a massive increase, of over 4%, and next year's budget projects I foresee a deficit of over 3%".

The fiscal expert also pointed out that, in the draft budget for next year, the elimination of the excise duty on cigarettes does not appear to have been budgeted, which means an impact on the budget of about 3.5 billion lei.

"Next year will be very difficult, but from 2021 we should make efforts to bring the deficit below 3%," he concluded.

Codîrlaşu: "At worst, the EC can cut our European funds"

Most likely, for two or three years, there will be attempts to bring the budget deficit below 3%, says Adrian Codîrlaşu, the president of CFA Romania. "This year we will probably have a deficit of about 4.5%, a level that triggers the excessive deficit procedure of the EU. Steps must be taken to bring the at least below 3%".

"In this regard, we need an anti-cyclical fiscal policy, but it will be extremely difficult to achieve, after having a pro-cyclical policy for several years."

The first measures that should be adopted in the short term in an anti-cyclical policy would be to cut spending. In the long term, the revenues should be increased, but that is quite difficult to achieve, because it is necessary to computerize the ANAF, and the process will take at least a year, the CFA head explained.

According to him, after starting the excessive deficit procedure the first step we should take is cutting the deficit and providing a plan to the European Commission. Depending on how credible this plan will be, the EC may or may not take action against Romania. In the extreme case, it can go as far having European funds cut, Mr. Codîrlaşu warned.

Gelu Diaconu: "A budget with a focus on the elections, and optimistic when it comes to tax revenues"

As a general observation on the draft law of the budget for the year 2020, it is worth noting, in particular, the alignment of the programmed figures, both where revenues and expenses are concerned, to the reality of the evolution of economic indicators, says Gelu Diaconu, former president of the National Tax Administration Agency (ANAF).

The former head of the Tax Administration has told us: "This realignment is being done at the same time as taking fiscal adjustment measures, mainly by modifying the much maligned GEO 114/2018, as well as by assuming multi-annual corrections which, if they are complied with, will bring the ESA deficit from 3.58% of GDP in 2020 to just under 2% in 2023".

Gelu Diaconu comments: "However, the budget as a whole is still strained by the maintaining of the announced pension and wage hikes "inherited" from the previous government, as well as by the precaution of taking more consistent measures due to the two major elections coming next year: local and legislative elections.

In other words, a budget designed with the elections in mind, with optimism on the tax revenues segment (a 14.59% increase), as well as with an extra precaution of keeping wages and pension expenses at about two thirds of the total tax revenues, in a state like Romania, where public infrastructure is simply a disaster and where significant allocations for public investments from the state budget are needed."

However, Mr. Diaconu notes the decrease of almost 5% of the expenditure on goods and services, which will induce a welcome austerity in public institutions, as well as a remarkable increase in capital expenditures.

"However, this increase is solely due to commitment appropriations, a kind of bet "the two birds in the bush", which we hope to find in the budget execution in the form of an actual increase in public investments," he added. "In short, it is a positive for a government with a precarious parliamentary majority faced with elections next year.

The true necessary adjustments will surely be found in the draft budget for 2021".

Iohannis: "Next year's budget is good"

The budget for next year is a good one, President Iohannis said yesterday, agreeing with the Government's assumption of responsibility, which he views as feasible. Referring to a possible intention to challenge the budget law at the RCC, Klaus Iohannis expressed his hope that wisdom will prevail. Regarding the budgets of the secret services, in his opinion, "they are not opulent budgets", as they weren't increased significantly.

The President said, according to Agerpres: "Unfortunately, for reasons related to the failed PSD governments, the deficit failed to stay within the 3% range, but next year's budget predicts a reduction and then we will enter the deficit zone. Funds which in the previous budgets were allocated and disappeared quickly, are stipulated to be allocated for investments".

Regarding the reduction of the budget allocated to Healthcare, the president noted that "it is a budget made under very difficult conditions": "The government had to take into account many restrictions and the prime minister had many discussions with all the ministers. I am convinced that funding is set aside for all the necessary and committed projects".

Orban: "Our fundamental objective is for Romania to have a budget by December 31st"

Prime Minister Ludovic Orban said on Monday evening that there is 75% chance of the government assuming responsibility for the passing of the Budget Law. On December 17th, the prime minister said: "We had discussions with all our partners - with USR, UDMR, PMP, ALDE. We also talked with the leader of the minorities group to get an agreement on the draft budget. Obviously we have discussed the possibility of assuming responsibility, I am confident that if we make this decision they will understand the reason for it, because our fundamental objective is for Romania to have a budget by December 31st".

The prime minister said that the Government will "definitely" consider all budget amendments, regardless of which party or parliamentarian they come from. Prime Minister Ludovic Orban said on Monday evening that 75% of the budget will be taken on accountability. for the adoption of the Budget Law. Yesterday, the prime minister said: "We had discussions with all our partners - with USR, UDMR, PMP, ALDE. We also talked to the leader of the minority group to get an agreement on the draft budget. Obviously, we also discussed of the eventuality of employing the responsibility, I trust that if we make this decision they will understand the reason of our decision, because our fundamental objective is that Romania has a budget by December 31 ".

Orban said that the amount allocated to the Ministry of Health "satisfies the needs of the sector, in terms of budgetary resources".

Regarding the funds allocated to the Ministry of Education through the draft budget and the fact that they do not include the salary increases for teachers scheduled for September next year, the head of the Executive explained: "I would not say Education has a lower budget. The education budget must viewed as a whole, not only through the lens of the allocation that is made to the Ministry of Education. There are other allocations aimed at education, allocations to local authorities, some of these expenses go to schools, to the education system".

Georgescu, BNR: "The budget deficit reduction announced by the Government for next year - a good signal"

Reducing the budget deficit to 3.6% of GDP, announced by the Government for next year, is a good signal, which will be appreciated by the markets and the international institutions, according to the first deputy governor of BNR, Florin Georgescu, who adds that we will not see a downgrade of the sovereign rating of the country if the future fiscal policy is sustainable, based on concrete measures.

Mr. Georgescu said yesterday: "We believe that a gradual correction, but one to be implemented from 2020, would yield better long-term results than a sharp adjustment of macro balances with the stated aim of cutting the budget deficit within the shortest delay".

The NBR official also referred to the estimated budget deficit for the end of the year, of 4.4% of GDP (which is above the level of 3% of GDP established both by the Law of fiscal and budgetary responsibility and by the EU Stability and Growth Pact ), but also to the current account, which increased by 1.1 percentage points, to 5% of GDP in the third quarter. Florin Georgescu said: "Romania has the highest level of budget and current account deficits in the EU. Contrary to developments in Romania, other countries in the region have experienced a period of fiscal consolidation in the last three years, with Bulgaria and the Czech Republic having a budget surplus. In this context, it is important to reiterate that, at the national level, a balanced mix of macroeconomic policies is required, through corrections regarding fiscal-budgetary policy, in conjunction with the implementation of structural reforms that will stimulate long-term growth potential. "

For next year, investments are estimated at 4.5% of GDP

The main directions of action of the draft budget for the next year are investments in infrastructure and support of the business sector, reduction of the budget deficit over the reference period, measures to limit and improve spending and avoid wasting public money, wage-related measures, social measures to ensure social protection and social security for the elderly, pensioners and the most vulnerable and distressed categories.

For the next year, investments are estimated at 4.5% of the GDP, 6.3 billion lei higher than last year.

The quoted document shows that the projected revenues for 2020 are of 360.149 billion lei, with a share in GDP of 31.89%. The MFP report states: "Total budget revenues increased as a share of the GDP from 29.4% in 2017, being projected at 31.4% of GDP in 2019. This evolution was mainly determined by the reduction of the share of fiscal revenues, which has maintained its downward trend, but which has been offset by the increase in the share of social contributions of the amounts received from the EU and of non-tax revenues. In the medium term, revenues are expected to increase slightly to 31.9% the year 2020 and 32.2% in 2022-23, further supported by the increase of social security contributions in the GDP".

Expenditures are estimated at 400.694 billion lei, respectively 35.48% of GDP, and are estimated to reach 474.4 billion lei, respectively 34% of GDP, in 2023.

The budget deficit target is expected to reach 1.94% by 2023.

The current account deficit is forecast at 10.6 billion euros in 2020, decreasing in terms of GDP over 2019, respectively 4.5%, with a balance of goods deficit of 7.7% of the GDP.

The gross wage will be 5,429 lei in 2020, and the net one will be 3,324 lei. The unemployment rate is forecast to reach 3% next year, compared to 3.2% in 2019, and the number of unemployed persons to be 275,000.

The number of employees is expected to increase by 1.9%, while seeing the unemployment rate drop to 3% at the end of 2020, according to the quoted source.

The measures that were the basis of the budgetary construction for the 2020-2023 period were the elimination of the VAT split payment mechanism, in order to be compatible with the acquis communautaire in the field, as well as the fact that foreclosure of the amounts existing in the VAT account would be applied appropriately by lenders, within the limit of the total amount of the liabilities to the budget, as mentioned in the garnishment notification.

The revenues of the general centralized budget of the administrative-territorial units for 2020 are estimated at 82.3 billion lei, representing 7.3% of the gross domestic product, according to the Report on the macroeconomic situation for 2020 and its forecast for the years 2021-2023. The document shows that the total revenues of the local budgets are estimated at 62.874 billion lei, representing 5.6% of the gross domestic product, while the revenues of the other budgets at the level of the local public administration authorities account for 1.7% of the GDP.

The own revenues of local budgets (consisting of taxes, contributions, other payments, other revenues) are estimated at 13.13 billion lei and represent 20.9% of the total revenues of local budgets, an increase of 0.7 percentage points compared to the level estimated for 2019.

The level of income tax estimated to be collected in 2020 is 26.221 billion.

Increased budget allocations for nine ministries and smaller ones for seven others

Nine ministries will receive higher budget allocations next year compared to 2019, while seven will see smaller ones, according to the quoted document. The Ministry of Foreign Affairs has been allocated 1,046 billion lei for 2020, down 15%, the Ministry of Agriculture and Rural Development - 18.338 billion lei (-14.55%), the Ministry of Economy, Energy and Business Sector - 1.218 billion lei (-36.89%) and the Ministry of Public Finance - 5.304 billion lei (-18.53%).

Less money will also be received by the Ministry of Public Works, Development and Administration - 5.547 billion lei (-42.21%), the Ministry of Environment, Water and Forests - 1.192 billion lei (-60.47%) and the Ministry of Health - 11.488 billion lei (-22.83%).

In contrast, the budgetary credits for the Ministry of Internal Affairs will be increased by 13.16%, to 20.192 billion lei, those of the Ministry of National Defense by 16.15%, to 23.736 billion lei, from the Ministry of Culture by 9.14%, to 943,639 million lei, and those of the Ministry of Education and Research by 2.54%, to 32,839 billion lei.

The Ministry of Public Finance will receive 27,264 billion lei for general purpose actions (+12.75%), the Ministry of European Funds will have budget allocations of 2,094 billion lei (+62.01%), the Ministry of Justice - 4,904 billion lei (+4.74%) %), The Ministry of Labor and Social Protection - 41.911 billion lei (+32.74%), the Ministry of Youth and Sport - 569.107 (+0.77%) and the Ministry of Transports - 11.808 billion lei (+3.28%).

The project also stipulates increases of the budget allocations for the Presidential Administration, by 4.42%, to 67.836 million lei, the Chamber of Deputies, by 6.13%, to 470.915 million lei, the Senate, by 1.66%, to 215.69 million lei, and the General Secretariat of the Government, by 5.49%, at 1.913 billion lei.

The secret services will also receive additional money, with the exception of the Foreign Intelligence Service, which will see 3.12% cut from its budget, down to 323.7 million lei. The Protection and Security Service will be allocated of 275.175 million lei (+19.08%), the Special Telecommunications Service - 630.379 million lei (+6.01%) and the Romanian Intelligence Service will receive of 2.684 billion lei (+10,80%).

The Permanent Electoral Authority will have budgetary appropriations of 272.639 million lei, down 29.86% compared to 2019.

The gross median wage used in drawing up the state social security budget for 2020 is 5,429 lei.

For 2020, out of the total budget revenues estimated at 87.489 billion lei, 86.9% will be collected from social security contributions, 0.2% from non-tax revenues and 12.9% from subsidies from the state budget (11.309 billion lei).

Of the total budget revenues, 87.327 billion lei are allocated to the public pension system (99.8%) and 162.337 million lei related to the system of occupational accidents and illness insurance (0.2%).

The total revenues of the state social insurance budget for 2020 are reduced by the amount of 9.378 billion lei, pertaining to the 2nd Pension Pillar.

The total expenditures of the state social security budget for 2020 have been estimated at 87.465 billion lei, of which 87.327 billion lei for the public pension system (99.8%) and 137.86 million lei for the work related accident and occupational disease insurance system (0.2%).

Out of the total expenditures pertaining to the public pension system, 98.9% will be allocated for social assistance and 1.1% for the administration of the public pension system (personnel expenses, goods and services, interest due to the state treasury, other transfers, projects financed from non-reimbursable external funds, other expenses and non-financial assets).

The funds intended for the payment of pensions from the public pension system for 2020 amount to 84.832 billion lei, respectively 7.5% of GDP. When establishing the necessary funds for the payment of pensions, a median monthly pension of 1,515 lei was considered, the source mentioned. This stresses that Romania's debt is below the threshold of 60% of GDP and complies with the European rule, with a downward trend for its weight in the GDP over the 2015-2018 period.

The MFP report highlights that the measures underlying the budgetary construction for 2020 and the outlook for 2021-2022, as well as the downward evolution of the medium-term budget deficit, indicate the clear tendency to phase out the pro-cyclical fiscal policy, with 2020 being the first step to return the budget deficit target below 3% of the GDP provided for in the Maastricht Treaty.

The European Commission released on December 17th the "Report on the alert mechanism", a mechanism for detecting macroeconomic imbalances, in which it recommends that 13 Member States, including our country, be the subject of a "thorough assessment" in 2020, so that the gravity of any macroeconomic imbalances can be identified and evaluated.

The Member States that should be subject to such an in-depth review are Bulgaria, Croatia, Cyprus, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Romania, Spain and Sweden.

In the case of Romania, in February 2019, the Commission concluded that the country is experiencing macroeconomic imbalances, which mainly concern the risk of loss of competitiveness in terms of costs, a continuous deterioration of the external position and risks to financial stability. In the revised scorecard, two indicators are above the threshold: the net international investment position (NIIP) and the rising unit cost of labor.

According to the EU Executive, the increase in the unit cost of labor has accelerated significantly in 2018, as a result of strong wage increases in the public sector. "The past suggests that an increase in wages in the public sector is likely to break into the private sector, which could trigger losses of competitiveness in terms of costs," according to the EC report, quoted by Agerpres.

"The business sector is affected by frequent and unpredictable legislative changes, often adopted without impact studies or consultations with the parties involved. The government debt as a percentage of GDP is relatively low, but it no longer follows a downward trend ... The risks to the financial stability deriving from the previous legislation seem to have diminished, even if the political and legislative instability remains a source of concern", the Commission says.

Overall, the report of the European Executive highlights issues related to the strong increase in the unit cost of labor and the deterioration of the external position. "As a result, the Commission considers it appropriate, also taking into account the identification of imbalances in February, to further examine the persistence or reduction of imbalances," says the European Commission.

Member States must continue to address the macroeconomic imbalances they face in order to prepare for the long-term challenges and potential future shocks.

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