In Romania, we have “denial of reality”, they do not understand that a large-scale correction, even a gradual one (in a few years), from more than 6.5% to 3% of GDP, means a reduction in income.

And the correction cannot be made only in the expenditure part, given the very low level of fiscal and non-fiscal revenues; to think that an inflation tax adjustment can be achieved under these conditions is a fantasy. CF has repeatedly emphasized this.

If tax revenues were collected much better, this would be a boon for fiscal consolidation, but progress in this direction has so far been limited.

Cancellation of benefits and revision of the tax regime (on micro-enterprises and PFO, etc.) are part of the fight against tax evasion and optimization. From this point of view, it has yet to advance a bit, timidly – ​​probably also due to the opposition of interest groups.

Now we are paying for the nonsense of the distant and recent past, the lack of proper, reasonable budget programming.

There is a great opportunity for European funds that should not be missed. And it is good for the Government to do it in such a way as to ensure co-financing and the development of European resources at the highest possible level. European funds can mitigate the contractionary impact of the budget adjustment, help finance the external deficit (it is good that the current account deficit is likely to fall below 7% of GDP in 2023), stimulate reforms, significantly help infrastructure modernization, digitalization and the transition to a green economy .

The CF reiterates the importance of analyzing the effectiveness of public spending, so-called spending reviews, to promote overall fiscal consolidation. This year, such analyzes should be conducted on issues of health care and education (they are also provided for by the PNRO). CF believes that it is necessary to conduct an analysis of the effectiveness of the functioning of the state, central and local public administration. Cost reviews are part of a set of good practices promoted by the OECD

We need realistic budget construction

We need realistic budget constructions, the creation of fiscal space, because future shocks (related to climate change, energy transition, the need for defense in an increasingly complex, often hostile international environment) will put great pressure on the budget. It is worth repeating that the pension and salary reform created additional pressure on the state budget and, indirectly, on budget consolidation.

Budget adjustment towards a budget deficit of 3% of GDP cannot be achieved by 2025, according to the CF; the completion of the budget adjustment in 2026 is more likely. The CF understands that the measures taken so far are not sufficient to achieve a correction in this time horizon, except for much better collection of tax revenues.

Since the beginning of the year, the Government of Romania has adopted 42 GDs on the allocation of funds from the budget reserve fund

Until September 14, when the legislative framework for the functioning of the Federal Republic of Germany was changed, 12 GDs were issued for the amount of only 0.60 billion lei. Later, on the basis of the new legislative framework for the activities of the Federal Republic of Germany, 30 GDs were adopted from September 14 to October 27 in the amount of 6.15 billion lei. In the period 2007-2022, according to the data of the latest annual report of the CF, allocations from the Federal Republic of Germany ranged from a minimum of 0.53 billion lei in 2015 to 7.96 billion lei in 2020 (see Appendix 4). Also, unspent amounts of creditors are paid to the Federal Republic of Germany for redistribution. This creates the conditions for reaching a record value of allocations of the Federal Republic of Germany by the end of the year.

In the conditions of great risks arising from the legislative precedent and deviation from the most important fiscal and budgetary regulations, as well as based on considerations and data regarding the questionable effectiveness of the approach to reducing the deficit through the cost limitation method, questions arise regarding the legality of applying this budgetary procedure.

The use of FRG as a substitute for de facto budget adjustment sets a precedent fraught with serious risks, from lack of transparency in budget execution to discretionary use and increased recourse to fiscal derogations. It was possible to make actual adjustments to the budget, even if the situation is very difficult and urgent measures to limit expenditures are needed.

Furthermore, given the institutional-legislative framework and the fact that government regulations must be approved by Parliament, CF believes that it is possible that the actual amendment will be adopted by the end of 2023.

Fiscal rules in the EU and practices supported by the OECD promote this procedure (an emergency budget amendment without proper correction). so as not to repeat itselftransparency is one of the essential requirements for the development of state policies and, in particular, fiscal and budgetary policies.

The Fiscal Council (CF) issues this note based on how the government has decided to act to reduce public spending. An understandable approach to limiting expenditures, to more efficient use of state funds, taking into account the size of the budget deficit that will be formed in 2023.

According to estimates by the Fiscal Council, this deficit, which reached 3.55% in the first 9 months of the current year, will reach 6.5% of GDP (in monetary terms) in 2023 in the absence of corrective measures; we take into account additional costs related to wages, social assistance, interest, etc. compared to the projected and revenues, which are lower than in budget programming1. Since fiscal measures are unlikely to have a significant effect in the remaining period until 2023, only expenditure restraint could reduce the deficit further, bringing it below 6% of GDP under the cash methodology.

CF waited for the clarification of the budget and in September of this year requested data from the Ministry of Finance to develop its own opinion.

Now we are watching the adoption of a new ordinance – regarding the budget for 2023 – which, in fact, is a correction. Government emergency order (EOG) no. 90/2023, which concerns the limitation of public expenditure in the last 2 months of the year, expresses concern about the prospect of overcoming last year’s deficit (which was 5.7% in cash equivalent, respectively 6.3% in ESA equivalent) in conditions where there are government obligations commitment and objectives regarding the excessive deficit procedure.

The public motivation of GEO No. is surprising. 90/2023 in the sense of stopping excessive, uncontrolled expenses. We make this statement because the expenses of credit inspectors are limited by the available appropriations of the budget law, including the budget adjustment. Therefore, it would be possible to make a real correction of the budget

Regarding the set of fiscal measures recently promulgated in the form of Law no. 296/2023, however controversial it may be, is a step in the right direction to achieve a fair tax regime by eliminating benefits and loopholes, fighting tax evasion; this could bring additional tax revenues of 0.9-1.4% of GDP in 2024. But a stable budget deficit below 3% of GDP is still a long way off.

CF (…) advocates measures that respect fiscal rules, take into account transparency criteria and best practices. CF stands for realism and balance in the construction of the budget.

See the full Fiscal Council note here