The Government to be careful with expenditures in 2008

Prime Minister Calin Popescu Tariceanu said that the Government will carry out a prudent wage policy with no “electoral charity,” that will not affect inflation. Also, expenditures will be reduced for some main loan coordinators. The budget deficit target is 2.8 percent of GDP in 2008. The Ministry of Economy proposed reducing budget expenditures by RON 1 billion (€27 million) to avoid an excessive deficit. The top threshold imposed by convergence criteria to the euro is 3 percent.

Isarescu said that more caution is necessary in terms of budget policy, referring not only to the size of the budget deficit, but also to a correlation between wage growth and labor productivity. There is significant danger of a price-salary spiral.

The lack of correlation between wage growth (over 20 percent in 2007) and labor productivity has impacted negatively on the exchange rate, increasing inflationary pressures. The short-term inflation perspective is worse due to increased macroeconomic risks, mainly in terms of growth of income and a rise in public expenditure during the election campaign.

The inflation target for 2008 is 3.8 (+/- 1) percent, but inflationary pressures could bring it to 8 percent in the first quarter, according to analysts.