The analysis of the budget implementation after 10 months already offers a pretty good perspective on the next year, as well as on the constraints in drawing up the next budget for Romania. State budget imbalances put additional pressure on inflation and interest rates, being pro-cyclical in the context of the complex crisis we are currently experiencing.

The dangers and risks are high and growing, requiring a very thoughtful and cautious approach from the authorities. Next year’s budget must be balanced and based on the most realistic assumptions about economic growth and the drivers that stimulate it (private consumption, public consumption).

We did not manage to significantly reduce the budget deficit, despite additional revenues to the state budget

First of all, it must be said that we did not manage to significantly reduce the budget deficit, despite additional revenues to the state budget: the deficit for 9 months is -3.04% of GDP against -3.75% of GDP in 2021 (9 months) .

Although the reduction in the deficit seems significant (19%, about 1/5 of last year’s deficit), it comes against the backdrop of general receipts, which increased by 22.6%, and tax revenues, which increased by 24.8%. This means that overhead costs have increased and total costs have increased close to revenue by 18.6%.

Unfortunately, a number of costs that have less to do with Romania’s development or reforms continue to rise: social assistance costs increased by 18% compared to 2021 (they account for about 1/3 of total costs), personnel costs also increased by 5 .5% (they account for about 1/4 of total expenses), interest expenses also increased by 63%. The interest costs in the state budget almost equaled the capital costs and almost 2/3 of the costs of co-financing projects with European grant funding.

Despite the increase in revenues to the state budget, there are a number of vulnerabilities that are difficult to overcome in future budget planning. The increase in revenues is mostly due to inflation and to a lesser extent due to improved tax collection by the authorities.

Inflation is useful for the state in terms of revenues, but since expenses are paid at inflated prices, the “positive” effect expected by the Government will not be very large

This is a large nominal increase, but the real one is much smaller. Inflation is good for the state from the revenue side, but since expenses are paid at inflated prices, the “positive” effect expected by the Government will not be very large. It is also a major explanation for why spending has also grown at the same rate and why the deficit adjustment is well below expectations.

In fact, in the long run, the rather shaky calculation on which the government was based will be even worse, as inflation will hit mainly the poor, who will have to be supported by additional welfare measures, and will hit consumption (the main engine of growth). ) and in the private sector (the supply of goods and services is important for the fight against inflation, as well as for government revenues). We are already observing a slowdown in industrial production, a slowdown in consumption under the pressure of inflation.

On the other hand, we observe an increase in dependence on non-tax revenues of the state budget. Tax revenues are almost at the same level as last year (percentage growth in total revenues from 49.9% to 50.8%, just 0.9%), while non-tax revenues increased in total revenues from 7.8 % to 9.6%. %, an increase compared to 2021 – 50%, double tax revenues. This shows that, in fact, the main driver of the increase in revenues to the state budget is not tax, but non-tax revenues.

The budget prospects for next year are not optimistic at all

This includes to a large extent the revenues that the government collects from state-owned companies. This shows what we have observed for quite some time: taking advantage of the dominant position of its companies in the market (especially gas and energy companies), the state uses a pricing policy that is the equivalent of extensive and progressive taxation and which complements the tax. incomes to an increasing extent. Avoiding a direct and significant increase in taxes (which has an electoral cost), the state indirectly taxes the population through these state-owned companies.

The state continues to rely on the same large budget payers. A very small number of industries (energy, tobacco industry, retail trade, etc.) significantly supply the state budget with significant amounts, for which the state makes no effort to collect. Fiscal revenues to the budget largely depend on 3 main sources: VAT (20.8%, the share in total revenues decreased, the amount collected increased by 22.1%), excise taxes (8% of total revenues, the share in total revenues decreased, the amount collected increased by 1.9%) and other taxes and fees on goods and services (34.2% of total revenues, the share increased, the amount collected also increased significantly by 26.3%).

The lack of fiscal space is obvious and calls into question the consistency of the co-financing of projects from non-returnable funds and the reforms behind them

Revenues from excise duties amounted to 29.61 billion lei (January-October), registering a growth of 3.5% (year/year). This means almost 30-40% of the state pension budget in Romania. According to the structure, revenues from excise taxes on energy products recorded a 3.0% (y/y) growth rate – thanks to both an increase in fuel consumption compared to the corresponding period last year, and a 3.6% increase in the excise duty from January 1, 2022. Revenues from excise taxes on tobacco products increased by 3.4%, due to the increase in the level of excise duty on cigarettes – by 5.5% from August 1, 2022 (594.97 lei/1000 cigarettes, nominally 563.97 lei/1000 cigarettes from 1 April 2021).

To sum up, the budget prospects for the next year are not at all optimistic and do not indicate the possibility of a radical change of logic and fiscal approach in Romania. The lack of fiscal space is obvious and calls into question the coherence of the co-financing of projects from non-returnable funds and the reforms behind them. The government has increased taxes (excise duties, property taxes, taxes on the SME sector), which will put even more pressure on production and make it harder to fight inflation.

In addition, an inflation-wage spiral is about to begin, the tone of which is set by an increase in the minimum wage, which in this inflationary context will be seen even more as a tax and a disincentive to production. With rising interest rates, rising fixed costs (government spending on pensions), and an economy slowing on the consumption and production side, the vulnerability of the future budget will be even greater.

The number one priority in next year’s budget should be the budget deficit, improving taxation and continuing the fight against illegal trade that is not taxed. Otherwise, we bear the burden of inflation along the way. More time than others, at higher levels than others.