Fiscal Council: Budget revision draft law is weakening previously announced budgetary consolidation

The draft budget amendment weakens the budgetary consolidation as it was announced for 2021, the Fiscal Council said on Thursday night, in a release.

"The large-scale revision of the budget revenues (increases of 17.6 billion lei) in the rectification draft has two main sources: the incorporation of the recovery of taxes postponed to payment by companies in the revenue forecast (not jointly taken into account as a result of a conservative approach of the Public Finance Ministry) and the favorable revision of the macroeconomic framework - forecasted economic increase of 7 pct from the initial forecast of 4.3 pct," the Fiscal Council said in its Opinion on the draft of the first amendment of the general consolidated budget for 2021.

The Fiscal Council deems plausible the updated forecast of budget revenues, less the amounts coming from the rental of frequency bands (2.5 billion lei, respectively 0.21 pct of GDP) on which it considers that there are relevant risks that these revenues will not be realized.

Under the conditions of the more favourable evolution of the economy and the higher amount of revenues from the recovery of deferred taxes, an optimal and achievable level of the budget deficit ratio should, in the Fiscal Council's view, have been significantly below 7 pct of GDP - around 6.5 pct of GDP. Such a level is not plausible to be reached, given the major slippage on the budget expenditure side.

"It is also to be considered the suitability of new investment expenditures from the public budget's own resources, under the conditions of a high budget deficit and the stringency of the budgetary strengthening in the following years. This budget amendment is unique in the history of the amendments evaluated by the Fiscal Council, from 2010 to the present, due to the magnitude of the positive rectification of budget revenues and expenditures (their increase being of approximately 4.8 pct compared to the previously proposed values). In this rectification, amounts higher than the increase in the scheduled revenues are allocated to the supplementing of the expenses," the Fiscal Council adds.

National and international experience shows that achieving a budgetary reinforcement and fiscal adjustment under the conditions of a set of contractionary policies (especially a restrictive monetary policy) is much more difficult and painful.

Covering deficits in flows through indebtedness can also be a risk generator for the sustainability of the external position of the Romanian economy. For these reasons, corroborated with the National Statistics and Prognosis Committee (CNSP)'s forecast of an external deficit in significant reduction - but without specifying the determining factors - we can conclude that the current information raises with stringency the problem of adjusting the imbalances of the Romanian economy.

Drawing financing from EU resources to replace as much as possible from the use of own budgetary resources would help to create fiscal space, the Fiscal Council says. Drawing European funds is a sine-qua-non condition of a sustainable fiscal-budgetary and economic policy, which would improve Romania's financial creditworthiness.

The budget deficit (cash, ESA, structural) should be around 3 pct of GDP in 2024, according to the correction programme assumed by the Government and agreed with the European Commission. In October this year, the Government is expected to send a set of measures to Brussels to flesh out the macroeconomic correction plan. It should be remembered that Romania is under the incidence of the excessive deficit procedure (EDP), the Fiscal Council stresses.