Lawmakers finally passed the 2010 budget on January 10 and have sent it to President Bãsescu. The budget cuts spending and will impose hardships that will continue through 2011, Finance Minister Sebastian Vladescu said. As agreed with the IMF, the budget foresees a deficit of 5.9% of GDP, with revenues of RON 166.7 billion (EUR 40.4 billion) and expenditures of RON 197.9 billion. The document envisages economic growth of 1.3% and an inflation rate of 3.7% for 2010. The National Bank of Romania (NBR) has lowered the key interest rate from 8% to 7.5% in hopes of spurring the domestic credit market and boosting investment.
The budget will also have to deal with tax cuts. Romania will abolish the minimum tax that all companies have to pay whether they are profitable or not, resulting in a loss of RON 1 billion in tax revenue. A proposal to lower VAT on building construction to 5% portends a similar revenue loss. Micro enterprises’ profits will continue to be taxed at 3%. In order to reduce expenditures, the government will only raise contributions to private pension funds by half a per cent instead of the legally mandated 1%.
Parliamentary committees have tried to loosen budgetary discipline, but so far the government has been able to thwart these efforts (although at one point, Finance Minister Vladescu had to threaten to resign before lawmakers gave up an attempt to raise pensions).
Analysis and Forecast: Decreasing Risk
The budget’s passage is a positive development that will probably clear the way for the disbursement of the next tranches of the IMF loan. Still, the government will face a lot of criticism about the spending plan’s content, and not only from the opposition. The IMF-mandated spending cuts mean the government will have to lay off approximately 100,000 state employees. The private sector will see a similar rise in joblessness in the coming months, fuelling an unemployment rate that hit a 6-year high of 7.8% in December. Government officials expect the jobless rate to ease back to 7.3% this year, but analysts are betting it will reach 10%. 2010 has already brought several strike initiatives, and labour-related conflicts are expected to become more frequent. It remains to be seen if the government’s commitment to fiscal discipline will waver in the face of social unrest.
There are also a number of risks to keeping the deficit target. The biggest risk is state revenues. Health Minister Attila Cseke has proposed imposing a “fast food tax” beginning in March 2010 to bring in RON 1 billion income. However, industry players called this wishful thinking: The Romanian fast food industry makes only RON 2 to 2.5 billion a year, making it impossible for the government to achieve its revenue goal, according to the Gandul daily newspaper. Also, the government’s expectations on consumption seem to contradict common sense. The budget sees unemployment falling 0.5%, which will boost domestic consumption 3% and raise tax receipts by 7% in comparison with 2009. However, preliminary data shows consumption fell by 10.7% in 2009 and is presumed to remain weak in 2010.
While the 2010 budget contains risks, its numbers are rooted in a more realistic assessment of economic trends than the figures in the original version of the 2009 budget. Had the government presented a spendthrift budget, it could have jeopardized the future of the IMF loan for an eye-blink’s worth of domestic popularity.