Budget correction will not narrow budget deficit

Vosganian said a few days ago, that the budget correction expected on Wednesday, 27 June, will bring about a drop in the budget deficit to 2.6 percent of GDP from 2.8 percent. According to Vosganian, the correction will be a positive one, indicated by an increase in revenue, especially from income tax and that of small enterprises.

Still, various institutions analyzing Romania's evolution and country specialists disagree with Vosganian's estimates. A few months ago, the International Monetary Fund (IMF) forecast a budget deficit of 3.7 percent of GDP. Moreover, the European Commission increased its estimates on Romania's budget deficit to 3.2 percent of GDP for both 2007 and 2008, based on a more relaxed fiscal policy.

"The budget for 2007 indicates a procyclic expansion. For the 2007-2008 period revenues from direct taxes are estimated to increase, as a ratio of GDP, due to favorable macroeconomic conditions and continuous efforts to expand the tax base and improve tax collection," indicates the spring prognosis of the European Commission. 

Not even Romanian analysts believe that a budget correction will lead to a lower deficit. "Considering initial conditions alone we had a 3.2 percent budget deficit, but meanwhile all government ordinances as of the beginning of 2007 represent an additional budgetary burden of 3.4 percent of GDP. Let us add the documents approved by Parliament to the above. A 0.3-0.4 percent reduction as indicated by Minister Vosganian is not enough. Furthermore, the plan Vosganian proposed to reduce the budget deficit is absurd," said Liviu Voinea, Executive Director of the Group of Applied Economics (GEA). Vosganian is planning to boost budgetary revenue by increasing revenues from income tax. If this rises, then revenue from value added tax (VAT) and excise tax will also increase.

Liviu Voinea estimates that the budget deficit could reach 5 percent of GDP. "By virtue of charitable contributions made by the Government and Parliament of some 3.4 and 1 percent, respectively, and the current deficit, the budget deficit could rise to some 7 percent.

Budgetary spending must be reduced. I do not believe institutions such as the Romanian Intelligence Service [SRI] or the National House for Health Insurance need the large sums being allocated to them," Voinea added.           

"An increase in budget revenues of up to 35 percent in 2007 from 30 percent in 2006 is practically impossible, especially since the government did not meet its goals for collecting revenues in the first quarter of 2007. The only way for it not to exceed the three percent of GDP threshold is by cutting expenses at the next budget correction," said Ionut Dumitru, Chief of Macroeconomic Research Department at Raiffeisen Bank.