Romania Outlook | Pre-election public spending bonanza
CEE Macro Outlook , 12. Sep.
The government pursued an agenda of raising public sector incomes in a heavy election year. Public sector wages increased by nearly 20%, while public pensions were hiked at almost double that pace. Consequently, the budget deficit topped 4.0% of GDP after seven months and the government updated its financing plans, corresponding to a budget deficit of 6.9% of GDP vs. 5.0% in the initial plans. With structural issues unaddressed, the boom in domestic consumption was almost entirely offset by a negative contribution from net exports to economic growth. State infrastructure investments, mostly funded by EU money, are well underway and should start to pay dividends in the years to come.
European and local elections are held mid-year and opinion polls suggest a continuity of the grand coalition after the general elections due on December 1. The new government is expected to adopt measures to rein in fiscal slippage. The size of the fiscal adjustment depends on the starting point with the budget deficit for 2024, which is likely to end the year at around 7% of GDP. The speed of the fiscal consolidation is subject to negotiations with the European Commission, as the government should meet the milestones under the Recovery and Resilience Facility to tap the much-needed funds. The structure of the fiscal corrective measures is likely to be mainly from the revenues side, given the rigid structure of the government spending. Empirically, fiscal adjustment on the revenue side is less growth-negative than on the expenditure side, though it is likely to be inflationary in the short run.
European and local elections are held mid-year and opinion polls suggest a continuity of the grand coalition after the general elections due on December 1. The new government is expected to adopt measures to rein in fiscal slippage. The size of the fiscal adjustment depends on the starting point with the budget deficit for 2024, which is likely to end the year at around 7% of GDP. The speed of the fiscal consolidation is subject to negotiations with the European Commission, as the government should meet the milestones under the Recovery and Resilience Facility to tap the much-needed funds. The structure of the fiscal corrective measures is likely to be mainly from the revenues side, given the rigid structure of the government spending. Empirically, fiscal adjustment on the revenue side is less growth-negative than on the expenditure side, though it is likely to be inflationary in the short run.