Romania’s public deficit (chart) deepened by 77% y/y to RON36.9bn (€7.4bn) in January-May, forcing the government to take corrective measures if it wants to avoid a major fiscal slippage that wouldn’t bode well for the ongoing excessive deficit procedure or even for the country’s sovereign rating.

The government is targeting a 4.4%-of-GDP deficit this year, while the gap already reached the equivalent of 2.32% of GDP in the first five months of the year – 0.84 percentage points (pp) more compared to the same period last year.

Last year, the deficit nearly quadrupled from the end of May to the end of December, as expenditures are seasonally larger during the summer and in December.

This pattern will not necessarily be the same this year, but there are no visible grounds to conclude more favourable developments in the second part of this year. Risks are balanced, as the solidarity contribution payment is expected in June but the co-financing from the national budget for EU-funded projects should naturally accelerate.

However, unless corrective measures with a sizeable impact on the budget are enforced, the full-year deficit may exceed even the Fiscal Council’s 5.7%-of-GDP projection.

In the first five months of the year, budget revenues increased by 10.4% y/y to RON197.5bn but tax revenues advanced by only 7.8% y/y to RON99.7bn. Net VAT collections rose by 6.3% y/y – roughly half the average inflation, despite the positive advance of the retail volume. But the subdued economic activity dragged down overall VAT collection, the finance ministry explained. Income taxes rose by 24% y/y to RON17.6bn driven by a higher dividend tax rate (8% versus 5%). Disbursements from the EU budget surged by 33% y/y to RON16.1bn.

Budget expenditures increased by 17.3% y/y to RON234.5bn. The volume of (mostly energy) subsidies surged by 84% y/y to RON8.1bn. Co-financing of EU-funded projects generated 35% higher public expenditures of RON18.2bn in January-May. Public capital expenditures also rose by 29% y/y to RON10.5bn.