Rectification inflating budget deficit

George Marinescu and Mihai Gongoroi (Translated by Cosmin Ghidoveanu)
English Section / 17 august 2020

Rectification inflating budget deficit

The hike of pensions and child allowances, the millstones around the neck the public budget amendment

The draft budget revision published at the end of last week sparked a series of pro and con opinions, especially in view of the increase of public expenditures by 18.2 billion lei, due to the pension point hike by 14% and the increase of allowances for children. Concerning the hike of the pension point, prime-minister Ludovic Orban said, in Friday's government meeting, when the budget revision was passed, that the 14% percentage could not be applied to small pensions alone, because this would have led to the appearance of iniquities and the contribution principle would have been violated, which would have been a reason to challenge the emergency ordinance in the Constitutional Court.

Concerning the budget rectification, several economic analysts and parliamentarians think that the hike of the pension point and the allocation of children, as well as the hike of budget expenses are the main causes of the budget deficit increase to 8.6% (90.9 billion lei) and they show that they will all have negative effects in the future as well, because in order to keep them in place the Government will need to borrow.

The rectification stipulates the hike of the pension point by 14% starting on September 1st, 2020, from 1265 lei to 1442 lei. On the same date the minimum pension will be raised from 704 lei to 800 lei. The raise is smaller than the figure stipulated in the pension law - 40%, a hike which specialists consider unsustainable even without the economic crisis caused by Covid.

The hike of the pensions will involve a budgetary effort of 8.75 billion lei in 2020, approximately 0.8% of the GDP. Given this year's economic contraction, it is more than certain that the payment of the raised pensions will be mostly done via loans.

According to the budget rectification passed by the Orban government, the deficit of the general consolidated budget, calculated according to the national methodology (cash) thus increases by 17.56 billion lei to 73.4 billion lei (6.7% of the GDP) to 91.0 billion lei, representing 8.6% of the GDP.

On top of that, there is the debt that was already issued in 2020 of over 48 billion lei (46.7 billion lei in the initial budget), which results in a need for financing of approximately 139 billion lei.

Compared to the initial programming, in the beginning of the year, the revenues of the state budget decreased 31 billion lei, approximately 3% of the GDP, (compared to the previous rectification the revenues increase by 573 million lei) an evolution which is based on an economic contraction of 3.8% of the GDP, double in size compared to the unrealistic estimate from the previous rectification. Thus, the nominal value of the GDP estimated for the current year is 1058.0 billion lei, compared to 1082.1 billion lei in the first budget rectification. The budget expenses however, will be increased by approximately 2% of the GDP, i.e. 18.14 billion lei.

The reserve fund of the government will be increased by 2 billion lei, personnel expenses will increase 1.02 billion lei, expenses with goods and services will increase by 325.9 million lei, interest expenses will increase by 1.69 billion lei, subsidies will increase by 50.3 million lei, transfers between units of of the public administration will increase by 1.65 billion lei, welfare expenses will increase by 1.9 billion lei, money for projects financed via post-accession 2014-2020 grants will increase by 8.24 billion lei, other expenditures will increase by 1.02 billion lei, capital expenditures will increase by 485.5 million lei, and loans granted will increase by 4.67 billion lei.

Staff expenses of the budget - for the payment of salaries borne by the budget, including for example the salaries of clerical staff (employees of the Romanian Orthodox Church, for example) - expressed as a percentage of gross domestic product, stand at 10.6% in 2020, the highest level since the global financial crisis, above the warning level.

"For the year 2020, the nominal cap on personnel expenses from the consolidated general budget is 111811.6 million lei, for the state budget it is 58336.4 million lei and for the centralized general budget of the territorial administrative units it is 33899.5 million lei", the act states.

The public debt cap, according to the European Union methodology for the end of 2020, has been set via the rectification at 44% of the GDP, slightly below the first warning cap in the law on fiscal responsibility, of 45% of GDP.

The cap concerning the issuing of guarantees by the Government, through the Ministry of Public Finance, and by the territorial units for the year 2020 is 32 billion lei.

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