According to the Fiscal Council’s annual report, fiscal consolidation is “vitally necessary and urgent” and delaying it by relying on favorable economic developments and the impact of inflation is not a viable option.

The report states that budget revenues are at an “unacceptably low” level in relation to Romania’s needs and that exceptions and loopholes in current legislation need to be eliminated. But, warns the institution under the leadership of Daniel Dayanu, the application of such measures may face opposition from some interest groups.

The document also talks about the deterioration of forecasts of the economic situation for this year, which is confirmed by already published data: the level of economic growth in the first 3 months was 2.4% on an annual basis (approximately half of the pace of the previous quarter – the 4th quarter of 2022, by 4 .7%), and the growth of GDP in the first quarter compared to the previous one (the last of 2022) was only 0.2% – which indicates quasi-stagnation of the economy.

Romania’s economy is particularly vulnerable to changes in financier attitudes, the report also notes. And this attitude largely depends on the activity of the public sector, the Fiscal Council draws attention.

What else does the document prove:

• Nominal GDP will not grow as fast in 2023, and inflation (which has the same effects as structural adjustment) will not help reduce the deficit as much,

• The method of budget administration – budget execution – after 6 months shows a relatively large deficit (according to the national methodology) in the amount of 2.3% of GDP, which raises the question of the materialization of a deficit larger than the forecast. And the gap between the deficit target and recent projections seems to show the implausibility of a deficit target in the absence of clear, firm, quickly adopted consolidation measures

• Reducing expenditures to the level of previous years is no longer possible, because they are under the pressure of inflation and internal indexation, under the pressure of the 2024 election year. Co-financing costs cannot be reduced either because we need to absorb the money from the PNRR

• The measures adopted so far (OG 34 of May 15, 2023) are insufficient to guarantee a fiscal adjustment trajectory this year and in the years to come.

• The low level of the share of tax revenues in GDP is insufficient to support development and ensure the provision of basic public goods.

• In addition, high inflation will inevitably lead to the erosion of purchasing power, which will have a negative impact on economic activity, will require an increase in budget expenditures, creating additional pressure on the budget.

• Romania is in a very difficult financial situation, which is characterized by an insufficient level of budget revenues and a high size of the structural and external deficit. In this climate of heightened uncertainty, there is a need for resource mobilization and allocation priorities, solidarity and responsibility.

• Inflation favorably supported budget implementation from 2022 and limited the share of public debt in GDP, but this effect is temporary. In the absence of a balanced fiscal policy, the impact of high inflation will be reversed and will have a negative impact on the budget.

We remind you that after analyzing the draft budget for 2023, based on a weighted approach, the Fiscal Council assessed that it is likely receiving less income with approximately 11.3 billion lei compared to the intended targets, and on the expenditure side, the CF determined additional appropriations are needed for a total amount of at least 9 billion lei.

See the full Fiscal Council report here