Having summarised the state budget revenue and expenditure (BS), let us see how they integrate into the consolidated general budget (BGC), of which they represent about a half and where they add to the amounts from the local budgets, the social security budget, the insurance budget for unemployment, the national health insurance fund, etc.
Minority revenue, majority spending
Official data show that the state budget revenues represent a minority share of the consolidated budget (46%), while the expenditures account for a majority share (56%). As a result of this method to organize the state financing, the state budget deficit is two-thirds (66%) higher than the deficit of the general consolidated budget (BGC) and close to 5% of the estimated GDP of 815.2 billion lei.
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- 2017 budget State budget Consolidated general budget BS/BGC
- Revenue
- Expenditure
- Deficit
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Basically, the state would cover certain expenditure not from the amounts obtained from the income tax, property tax, VAT or excise duties (own state sources, all of them), but by forcing surpluses to other budgets that are part of the BGC. And that is about 16 billion lei (or 2% of GDP) surpluses of other budgets, allegedly not needing that money.
In the previous years, this arrangement that places the state deficit well above the deficit of the consolidated general budget has been criticized and the recommendation was to align them, at about equal values. That is, if the state assumes a relatively high deficit, at least it should not draw funds from elsewhere. It should assume by a transparent taxation, either direct or indirect, the financing of its obligations.
Besides this approach, the state budget revenues, as relatively low compared to the European practice as they are, are also based on the financing from the EU Cohesion fund (19.8 billion lei or EUR 4.44 billion calculated at the average exchange rate for 2017, estimated at 4.46 lei / euro) and the European agricultural fund (5.3 billion lei – about EUR 1.2 billion).
In other words, about 25 billion lei, or 3% of GDP will depend on the amounts received from the European Union. Namely, 90% of the total BGC revenue expected to be 31.25% of GDP would come from the domestic sources and almost 10% from external sources. It means that we must be extremely careful with the absorption of the European funds, on which the target of keeping the BGC deficit below 3% of GDP depends.
If we do not that, Romania’s rating that has just exceeded the investment grade threshold is likely to go back to the non-investment grade, with the specific consequences for the amounts that might arrive to finance the current account deficit and the cost of foreign debt.
Beware of deflator!
We should pay attention that we have referred so far only to the numerator of the fraction that represents the deficit of the consolidated general budget in 2017. Establishing a planned minus of – 2.96% in terms of cash and -2.99% by the international ESA standard also depends on a less known indicator, the so-called deflator, which allows translating the GDP growth from nominal terms (current prices) to real terms (base period prices).
Specifically, the GDP planned for 2017 is 7.5% higher in nominal terms and achieving the real growth of 5.2% depends on keeping the deflator (let us call it inflation in the whole of the domestic economy, which means something different than the consumer price index – IPC) at 2.16%.
That seemed plausible at the time of drafting the government program and the budget for the current year. Only that, meanwhile, an alarming signal emerged. The index of industrial production prices has advanced in only one month, December 2016, by 0.9%. Even though the annual average inflation has been estimated at 1.4% (which would mean that prices will remain in 2017 lower than in 2014 – really?) the IPC is not the deflator used for calculating the GDP and implicitly the BGC deficit.
Altogether, achieving the objectives of the budget for the current year asks for a favourable alignment of all the elements of the domestic economy and for no external pressure to exist (the dependence on the single market cannot be ignored, as three-quarters of our foreign trade exchanges are with the EU countries). God help us!
