High budget deficit puts pressure on Bucharest government

The Romanian government is under increasing pressure to reign in its soaring budget deficit, risking punitive measures by the European Commission if the budget deficit is not brought back under control before the end of the year.

Romania is currently the only EU country in the so-called excessive deficit procedure, which requires the country to put in place a set of corrective measures and policies.

The European Commission, which visited Bucharest last week, has made it clear that the budget deficit in 2023 has kept widening, contrary to the government’s plan, and the approaching election year could push Romania even deeper into deficit. as revenues have been overestimated and expenditures underestimated.

The country’s budget deficit rose significantly in the first five months of this year. While total revenues increased by 10.4%, expenditure rose by a whopping  17.3%.

This year’s budget foresees a deficit of 4.4% of GDP but it could exceed 6% of GDP unless a number of measures are taken urgently. This would mark a worsening from the level of 5.7% of GDP recorded in 2022, the chief economist of the National Bank of Romania (NBR), Valentin Lazea, wrote in an article published on the “Opinii BNR” blog.

In his opinion, if no measures are taken in 2023 or 2024, Romania will become “the next candidate for assistance from the International Monetary Fund, and risk a possible suspension of funds from the European Commission”.

Sources at the National Bank of Romania (NBR) told EURACTIV that even more serious than the suspension of funds is the risk that Romania could be downgraded by rating agencies to  „Junk” status.

The same source in the NBR also said that the rating agencies are keeping Romania in „investment grade” for the time being because they believe that the Romanian government can stick to the budget and will be able to keep getting attract money from European funds.

Last week, two high-ranking officials from the European Commission came to Bucharest. Together with the technical teams, they discussed with the government led by Socialist Prime Minister Marcel Ciolacu the issues related to budgetary sustainability and National Recovery and Resilience Plan (NRRP).

The Romanian economic press wrote that the Commission wanted to make sure the government in Bucharest understood the link between the budgetary imbalance and the possible blocking of European funds.

Specifically, the Commission wants Romania to put in place a plan to return to the maximum deficit target of 3% of GDP.

“It was an extremely tough discussion with Celine Gauer [from the Commission] and the government. She was drastic and radical in her approach at the beginning and asked for tax increases so that Romania does not lose European money and meets the 4.4% deficit target,” government sources were quoted as saying by Libertatea newspaper.

The sources also clarified that both sides “seemed willing to make concessions”.

Finance Minister Marcel Boloș told Libertatea on Monday that it is “out of the question” for Romania to have a budget deficit above 5%, unless it wants its European funds to be suspended.

Romania has had an excessive budget deficit since 2019, when it stood at 4% of GDP.

Romania was already at risk of austerity measures in 2020 but got off the hook temporarily as the EU suspended the fiscal rules in the wake of the coronavirus pandemic, which allowed member states to increase spending above 3% of GDP.

Two years ago, in 2021, the EU Council adopted a recommendation under the excessive deficit procedure for Romania to “put an end to the excessive deficit situation by 2024 at the latest”. If the breach of the rules persists, the EU can block cohesion funds and impose financial penalties of up to 0.2% of GDP.

Informal agreement reached?

Government sources told EURACTIV following the Commission visit that the government has reached an informal agreement so that the EU executive does not suspend funding even if the Romanian state fails to meet the targets previously set in the excessive deficit procedure in both 2023 and 2024.

The same government sources stated, however, that the derogation was obtained on condition that the government adopts a reform package in line with the Commission’s country recommendations.

The European Commission declined to comment on the informal agreement.

A Commission spokesperson told EURACTIV that the Commission had constant constructive exchanges with all member states, including Romania, on the implementation of their recovery and resilience plans.

“Discussions with the Romanian authorities focused on the implementation of the recovery plan,” the spokesperson said, adding that “there were also constructive exchanges with the authorities to put Romania’s public finances on a sustainable trajectory”.

[Edited by János Allenbach-Ammann/Zoran Radosavljevic]

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