IMF mission estimates 3.7pc of GDP budget deficit in 2017, warns there’s no more room for tax cuts

IMF mission estimates 3.7pc of GDP budget deficit in 2017, warns there’s no more room for tax cuts


The International Monetary Fund (IMF) estimates a budget deficit of 3.7% of the PDG this year and of 3.9% of GDP in 2018, the head of the IMF mission for Romania, Reza Baqir, said on Friday during a press conference.

“For this year we estimate that, unless other measures than the one included in the budget are made, the projected deficit will reach 3.7% of GDP. If policies don’t change we anticipate problems for next year. We estimate that the budget deficit will reach 3.9% of GDP next year,” Baqir said.

He added that the outlook could be changed during the discussions on the budget for 2018, based on the policies included in the budget for 2017 such as increasing the pension point this year.

Over medium term, the IMF representative said that, in order to have a comfortable position, a 1.5% of GDP deficit would be enough to see a downward trend of the public debt. A deficit of 2.3% of GDP in 2017 and of 2% of GDP in 2018 would support this purpose.

The Finance Ministry said, in early March, Romania will meet the budget deficit below 3% of GDP.

Other topics:

The budget structure is rigid due to the consecutive tax cuts and to consecutive pension and wage increases in the public system, to the detriment of public investments;

It’s simple to cut taxes, it’s hard to increase them back if needed. It’s simple to increase wages and pensions, it’s very hard to cut them if needed;

Three consecutive tax cuts and wage increases in the public system above the productivity level;

The reorientation of consumer policies towards investments is needed in order to achieve sustainable growth;

Support for the anti-corruption fight is necessary, it leads to lower fiscal evasion, it encourages investments. Romania is an example in the fight against corruption, however there is a risk to lose the progress made;

The inequalities of wages in public system should be solved, cautiously.

Wage increases should not distort the labour market and the private sector;

If all measures announced before the elections are implemented, the impact until 2020 would lead to additional costs of 5.5% of GDP;

The developments in privatisation and reform of state companies has stalled;

Fiscal easing and wage increases have weakened the budget’s capacity to face coming shocks;

There is no more room for tax cuts, if stability and economic convergence are envisaged;

Romania’s public debt, of about 40% of GDP, is not large, is not small. The idea is to conduct quality public policies to adjust it sustainable.

The European Commission wants credible assurances from Grindeanu cabinet that the budget deficit target will not be exceeded. The request came in late February from the European Commissioner for Economic and Financial Affairs, Pierre Moscovici, in the context that the EC believes Romania will not meet the budget deficit of 3% of the GDP. According to the latest EC estimates, the deficit will reach 3.6% in 2017 and could reach 3.9% in 2018.

Pierre Moscovici said in Brussels:  “I inform you I have sent a letter to the Romanian authorities in order to stress the risk to exceed the deficit limit this year and next year. Our estimates show that Romania’s budget deficit will reach 3.6% of GDP this year, if no changes in (economic) polices take place and 3.9% of GDP in 2018. These developments are generated by a combination of tax cuts and wages and pensions increases. We have urged the Romanian authorities to announce in due time and in a credible way, before our spring outlook, the needed measures to ensure the meeting with the budget pact,” Moscovici said./IBNA