According to the analysis of the chief economist of Alpha Bank, Ella Cull, in the first quarter of 2023, compared to the first quarter of 2022, nine EU countries reduced their budget deficit, and two out of nine (Portugal and Ireland).

Croatia reached zero deficit while the remaining 6, including Romania, remained in deficit.

Romania’s deficit of 7.2% decreased from 8.1% and became the fifth largest deficit in the EU. During the same period, the budget deficit compared to GDP in the countries of the region increased: in Hungary by 7.8 percentage points, from 3.4% to 11.2%, in the Czech Republic by 1.4 percentage points, from 4, 5% to 5.9%, in Bulgaria by 1 from 1.2% to 2.2%.

In the first quarter of 2023, Poland moved to a budget deficit of 1.5% from a budget surplus of 0.3% in the first quarter of 2022.

Budget expenditures as a percentage of GDP decreased by 3.7 percentage points. compared to the corresponding period last year to 42.3% from 46%. The decrease was mainly due to a reduction in the share of employees, social benefits and capital transfers in GDP. With the exception of Bulgaria, in other countries of the region budget expenditures in relation to GDP increased. In Poland, the growth was the smallest at 1.1 percentage points. up to 40.1%, in Hungary the largest by 6.3 percentage points. to 57.8%, and in the Czech Republic there was an intermediate increase of 1.9 pp. to 46.5%. The increase in subsidies and social payments (except for Poland) in relation to GDP increased budget expenditures.

For a balanced deficit reduction, budget revenues relative to GDP should increase by the same percentage as budget expenditures decrease relative to GDP. But in Romania, budget revenues from GDP decreased by 2.9 percentage points – to 35.1% in the 1st quarter of 2023 from 38% in the 1st quarter of 2022.

The decrease occurred due to a reduction in the share of income taxes, taxes on production and imports, sales of goods and services in GDP. Fiscal revenues relative to GDP also decreased in the other countries of the region, with the exception of the Czech Republic, but this decrease was less than half of the reduction recorded by Romania (1.5 pp in the case of Bulgaria and Hungary and 0.7 pp . in the case of Poland).

As a result, budget revenues compared to GDP in Romania in the first quarter of 2023 were significantly lower than in the countries of the region (by 2.7 percentage points compared to Bulgaria, 3.5 percentage points compared to Poland, 5.5 percentage compared to the Czech Republic and 11.5 percentage points compared to Hungary).

The share of production and import taxes in GDP decreased in Romania and the Czech Republic. Only in Romania did the decline come entirely from value added tax revenues, which fell from 8.4% of GDP in Q1 2022 to 7.2% in Q1 2023.

The decrease in these revenues is not justified either by the evolution of consumption, which determines the tax base – the share of which in GDP increased to 85.5% in the 1st quarter of 2023 from 84.8% in the 1st quarter of 2022 – or by changes in the field of VAT that came into force on January 1 of 2023 (Decree 16/2022), which mainly increased the VAT rate (e.g. for restaurant services, public catering and hotel accommodation from 5% to 9% or for soft drinks containing added sugar from 9% to 19%).

Rather, the reason for the reduction in VAT revenues may be a lack of collection and/or an increase in tax evasion.

Romania needs fiscal consolidation. In addition to reducing expenses, it is necessary to increase budget revenues, mainly due to the elimination of deficiencies in VAT administration. The European Commission estimated that from 2016 to 2020, only 64.4% of VAT arrears were collected on average (“VAT gap in the EU, 2022”), which is significantly below the level achieved by the countries of the region. Fiscal revenues could be higher by 2.9% or 2.4% of GDP if VAT collection efficiency were at the average level from 2016 to 2020 for Bulgaria or other countries in the region, thus achieving a more balanced reduction in the budget deficit. in the 1st quarter of 2023.