The first package of budgetary measures legislated in July will have an impact of 3% of GDP on the next year’s general government’s budget, bringing it down to 6% of GDP, prime minister’s adviser Ionut Dumitru, Raiffeisen Bank chief economist and former Fiscal Council head, told Digi24. His statements come in the context of the government seeking to draft the 2025 budget revision this week, in agreement with the EC, whose representatives prime minister Ilie Bolojan is meeting in Brussels on September 22.
Romania’s 7-year fiscal consolidation plan envisages a 7% of GDP public deficit in 2025, followed by 6.4% of GDP in 2026. The trajectory, defined in ESA terms, starts, however, from an estimate of 7.9% of GDP gap in 2024, while semi-final data show 9.3% of GDP gap (1.4 percentage points wider).
“From a tax perspective, the first package […] is probably enough for the moment, because it should bring a significant impact of over 3% of GDP for 2026. In theory, this should be enough to bring the deficit to about 6% of GDP next year,” argued Dumitru.
In the same interview, the prime minister’s adviser toned down expectations for the budgetary impact of the second package of reforms.
“The following packages are intended to address issues of structural reforms; they do not necessarily bring a major budgetary impact,” he said.
The Fiscal Council, in its opinion on the first package of budgetary measures, estimates a budgetary impact of 0.6% of GDP for 2025 and 3.35% of GDP for 2026. Based on this, the Council estimated a gap of “under 8% of GDP” this year and “in line with the [6.4%] target” next year.
The rating agencies and the International Monetary Fund (IMF) voiced expectations for a gap of under 6.4% of GDP next year, but abstained from speaking of this year’s gap. This is probably because it recently surfaced that the current government inherited a large amount of dues that prevent it from bringing the gap below 8% of GDP this year.
The new unofficial target of 8.5% of GDP is some 1.5pp above the 7% figure under the 7-year consolidation plan – but it is assumed that the overshoot was caused by non-recurrent expenditures.
The first package primarily includes freezing the public sector wages and pensions through 2026 and higher VAT rates plus higher excise taxes. The higher-than-expected inflation triggered by the VAT rate hike and electricity price liberalisation should, in principle, ease the fiscal consolidation at the cost of even tougher social costs.
As the social costs are high, independent analysts have warned on implementation risks. This is precisely why the second package of measures should have generated a supplementary fiscal space that the government could use to ease the pressure. Possibly, the prime minister’s advisor is toning down expectations precisely in order to keep this reserve out of the official projections.
iulian@romania-insider.com
(Photo source: Alexandru Marinescu/Dreamstime.com)
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