Romania Watch: Fiscal consolidation process on the right track

The public budget deficit* amounted to RON 33.8 bn in the first half of the year, respectively 3.0% of the official GDP projection for the entire year 2021. However, we expect the government to revise upwards the nominal GDP projection for 2021, which implies a lower deficit level in H1 than the currently reported 3.0% of annual GDP.

According to our in-house seasonally adjusted data, the public budget deficit reached RON 6.7 bn in June. This level was close to those recorded in the previous months, except for January when the public deficit was quite large. The public budget deficit in Q1 came in at 7.9% of nominal GDP for this period, but it improved visibly in Q2 according to our current estimates, decreasing to 6.3% of the nominal GDP estimated by us for this quarter.

The narrowing of the public deficit in Q2 from Q1 was sustained by the strong performance of public revenues and by very tight control over public expenses. Thus, according to our assessment, public revenues collected from the domestic economy showed a rapid upward growth trend during H1, increasing by 5.1% in Q2 from Q1 when they had advanced by 7.7% from Q4 2020. After the very high level recorded in January, public expenses stood at much lower levels during February-June, their evolution from this period highlighting a tendency of stabilisation. So, their GDP share decreased in Q2 from Q1. On the positive side, public investment expenses recorded elevated levels during January-June, being higher by 32.4% as compared to the similar period from 2020.

We expect public revenues to further expand in the second half of the year amid a sustained economic growth. We also expect the growth pace of public expenditure to remain limited as pensions and salaries from the public sector will remain “frozen” until the end of the year at their level from December 2020. Also, public spending related to governmental support schemes for labour market should decrease in the second half of the year as they come to an end.

According to our in-house seasonally adjusted data, the public budget deficit totalled RON 41 bn in the first 6 months of the year, representing 7.1% of the nominal GDP estimated by us for this period. Also, this amount is almost half of the official public deficit target set for 2021, respectively RON 80 bn. The first public budget revision is due to take place in the second half of August. Then, we expect the government to maintain unchanged the public budget deficit target in nominal terms, i.e. RON 80 bn. However, as the government will revise upwards its forecast on nominal GDP in 2021, this will result in a lower level of the deficit target when reported to GDP (existing target is 7.2% of GDP). Our current scenario places the public budget deficit at 6.8% of GDP in 2021 (in cash terms, national methodology). A lower level should not be fully excluded provided that the tight control over public expenses from H1 will remain in place also in H2 and no adverse pandemic shocks will materialise.

* all figures included in this short note refer to the public budget execution stated in cash terms (national methodology), being different from those stated in ESA 2010 terms (European methodology)