BNR: Possible corrective fiscal measures to meet the 3 pc of GDP budget deficit target

During the monetary policy meeting of the National Bank of Romania (BNR) Board on 3 July 2017, several members referred to the set of measures that would likely accompany the implementation of the unified wage law, designed to alleviate its expansionary effects, while also mentioning the possible adoption of corrective fiscal measures in the context of the forthcoming budget revision, with a view to ensuring compliance of the 2017 fiscal deficit with the 3 percent-of-GDP reference value.

Some Board members remarked that, in the absence of compensation measures, keeping the budget deficit below 3 percent of GDP would pose greater problems in 2018, as a press release informs.

“Board members remarked, however, a significant increase in the uncertainties about the short- and medium-term outlook for the fiscal and income policy stance, likely to generate enhanced uncertainties and two-way risks to the latest medium-term inflation forecast. Those stemmed, on the one hand, from the recently promulgated unified wage law – the enforcement of which was, however, hard to predict, given its being conditional upon the fulfilment of certain requirements -, and, on the other hand, from the new measures and legislative initiatives announced in respect of taxation, of wages and pensions, as well as of the functioning framework for firms, with potential implications on the nature of fiscal policy and on the fiscal impulse, as well as on companies’ and households’ confidence and incomes, and therefore on the investment and consumption behaviour,” BNR’s minutes of the monetary policy meeting reads.

According to the release, the multitude of uncertainties, as well as the absence of insight on the concrete measures and the implementation calendar made it impossible as yet to assess the potential macroeconomic and structural effects.

Moreover, it was pointed out that the markedly lower-than-expected rate of absorption of EU structural and investment funds under the 2014-2020 financial framework would likely continue, at least in the near future.

Some members also mentioned the downside risks to the domestic inflation outlook induced by the recent slightly downward revision of medium-term inflation forecast for the euro area, as well as by the effects stemming from the globalisation of production chains worldwide. It was shown that, according to ECB assessments, the further slow dynamics of euro area inflation reflected the effects generated, inter alia, by global shocks, mainly by the oil price evolution, the changes on the labour market, also following structural reforms, as well as by the influence of previously low inflation on inflation expectations, including wage setting; the behaviour of large store chains must probably have played a significant part too.

Reference was also made to the uncertainties arising from Brexit talks and the economic policies pursued by the US Administration, likely to induce downside risks to economic growth in the euro area/EU and worldwide, and implicitly on the domestic front. Some Board members deemed that in the medium term there were no factors likely to cause shocks to consumer prices, especially ahead of an expected good agricultural year.

Board members also observed that upside risks to the BNR’s most recent medium-term forecast stemmed also from the upward revision of euro area and EU economic growth projections by central banks and international financial institutions. Adding to that was the recent relative balancing of risks to the economic growth outlook for the euro area, also in the context of the mitigation of some of the problems facing the banking system and of the political risks in the euro area, as well as amid the strengthening of global economic recovery and the revival of international trade.