President Iohannis promulgates the State Budget Law for 2018. Long list of vulnerabilities noticed

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President of Romania, Klaus Iohannis, has promulgated the State Budget Law and the State Social Security Budget Law on Wednesday, a presidency release informs.

President Klaus Iohannis draws attention to the vulnerabilities of the budget for 2018 and to the challenges of the current fiscal-budgetary framework, given that Romania needs a credible and balanced budget that consistently pursues to continue the core macroeconomic stability, predictability and fiscal-budgetary sustainability.

Main observations:

  • It is essential that the fiscal-budgetary policies re-enter a path of responsibility and prudence, and that the political and governmental decision-makers do not repeat the mistakes or fell into exuberant temptations, such as the ones before the economic crisis, so that the Romania’s welfare is not affected over medium and long term. Romania should avoid the trap of unsustainable economic growth, based mainly on consumption, budget deficits and public debt;
  • As procedural element, the budget construction ignores the recommendations made by the European Commission in the context of the significant deviation procedure of the budget deficit. According to these recommendations, the national budget was due to return to fiscal consolidation, with annual budget deficit adjustments of 0.5% of GDP;
  • The President of Romania is concerned about the fact that, although we have record growth rates, there are difficulties and some uncertainties in ensuring that the budget deficit falls within the 3% of GDP target. At the same time, our country records the largest deviation of structural deficit among all the countries of the European Union;
  • This dynamics demonstrates that, in the coming years, Romania needs to make serious efforts to get back on the path of fiscal-budgetary discipline. The budget for 2018 ignores the need for such a change in direction, assumed in principle by the Government through the fiscal-budgetary strategy for 2018-2020;
  • The budget for 2018 is built, as in 2017, on a budget deficit target close to the 3% of GDP threshold, according to the Stability and Growth Pact. However, the cyclically-adjusted budget deficit will deepen in 2018, indicating that Romania is not yet approaching, but is moving away from the medium-term budgetary objective;
  • The analysis of the draft budget for 2018 highlighted vulnerabilities in budget construction on both the revenues side and the expenditures side;
  • Regarding budget revenues – specialized analyses show that the projection of an increase in VAT receipts of 16% is far too optimistic, at least on two considerations. On the one hand, the tax experience in 2017 showed that despite the economic growth above the initial expectation, which reached 7% in the first nine months of the year – largely based on consumption – the tax revenues, including the VAT revenues, are even lower than estimated by the Budget Law for 2017. At the same time, economic forecasts indicate slowdown in economic growth, including in consumption, in 2018. On the other hand, the construction of the budget lacks credible estimates and calculations of the impact of some measures taken, such as the introduction of split VAT, a measure which, although currently much attenuated as compared to the original version, is estimated to bring almost double the expected revenues against the first variant;
  • President Klaus Iohannis believes that Government’s priority must be to significantly improve the collection of tax revenues. This is the main direction through which the sustainability of the wages and pensions of Romanians can be sustained, so that the public finances and the welfare of citizens are not affected over the medium and long term. It should also be considered that Romania has currently one of the lowest levels of tax revenue collection in the European Union, the release also reads;
  • On budget expenditures – the importance of supporting investments is underlined. President Klaus Iohannis warns that it is not enough that the budget only provides for investment allocations on paper, but the investments must also be made in accordance to budget programming within a prioritization framework tailored to target the key investment objectives, particularly infrastructure;
  • Although European funds are estimated well above the level of 2017, the national budgetary provisions (capital expenditures) are still some of the lowest, as share of the GDP. For example, 2017 and 2018 have the lowest share of GDP in terms of capital expenditures (2.2% and 2.3%) in the past 10 years;
  • In this respect, the President of Romania draws attention to the importance of investments, both quantitatively and qualitatively, to strengthen healthy economic growth in 2018 and in the following years. The Government must be aware that the continuous cuts in investments factor are likely to undermine Romania’s development potential. It is essential for European funds to be fully exploited, especially in relation to the investment projects in infrastructure;
  • These vulnerabilities are all the more worrying in the increasingly sensitive macroeconomic context expected in 2018, which no longer enjoys the same financial stability as in recent years, and this is also the consequence of pro-cyclical fiscal and budgetary policies focused mainly on short-term, based on the growing demand for consumer goods;
  • Thus, the rise in inflationary pressures in the economy at an inflation rate above 3% per annum, coupled with higher credit rates by increasing the interest rates and with the depreciation of the national currency, has the effect of cutting the population’s purchasing power and creates additional economic vulnerabilities, which call for responsible approaches and realistic assessments, both in budget substantiation and in implementation, and at the level of economic policies in general;
  • At the same time, in the context of extensive tax changes – constantly challenged in recent months by the social partners – it is important that fiscal-budgetary approaches in 2018 restore the economic predictability needed for investors and the business environment so that confidence in the Romanian economy returns to positive trend;
  • The budget for 2018 is based on a series of tax changes, adopted at the end of 2017, in the attempt made by the PSD-ALDE coalition to meet the governing programme: the unification of the social contributions system at the employee level, but also an important cut of the income tax from 16% to 10%, a measure of fiscal easing by which Romanians anticipate income increases, in a climate of stability and predictability;
  • President Klaus Iohannis believes that the current ruling coalition PSD-ALDE has the obligation to meet the expectations of Romanians, that our country has a credible and sustainable budget that does not affect the economic stability and the living standard promised to the citizens, the Presidency release concludes.

 

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