Massive Public Deficit in Romania: Runs 1.6% of GDP in January-February, Swelling Due to Persistent Payroll Expenses and Rising Interest Payments
Moving the Budget Needle: Breaking Down Romania's Early 2025 Spending
Budget data for the initial two months of 2025, as released by Romania's Finance Ministry, offers an intriguing glimpse into the nation's financial juggling act. Unveiling three vital issues, it seems our grinning cat is climbing the economical escalator, albeit with a few glitches along the way.
First and foremost, the 1.6%-of-GDP public deficit - pre-announced - is just the tip of the iceberg. Hidden beneath this proverbial surface lie escalating payroll growth rates, elevated interest on public debt, and circuitous EU funds absorption - all potentially the Big Powers guiding our economic trajectory.
Romania objectives a more manageable 7.0%-of-GDP deficit this fiscal year, a decline from the 8.65%-of-GDP difference in 2024. However, even a 7.5%-of-GDP-deficit could thwart significant deterioration in investors' confidence.
Revenues inched up by a modest 3.5% year-over-year to RON 87.7 billion (4.7% of the year's projected GDP, down from 4.9% in January-February 2024). The revenue growth, however, was restrained by an enormous 46% plunge in EU budget transfers, amounting to RON 4.4 billion. The rest of the revenue ellipse glittered with an 8.7% y/y increase, racing to RON 85.3 billion, making up 4.5% of the year's GDP, ascending from 4.4% the preceding year. The revenue climb was propelled by direct taxes, primarily income and profit taxes, while indirect taxes like VAT and excises lagged behind.
Budget expenditures slid forward by a more sinister 3.7% y/y to RON 119.9 billion, accounted for 6.3% of the year's projected GDP, down from 6.5% in January-February 2024. When the EU spend is excluded from the picture, expenditures leaped up by 7.0% y/y, reaching RON 114.0 billion. It's noteworthy that our financial minister is left with a public deficit without the EU's help of RON 28.8 billion, an increase of 2.2% y/y or 1.5% of the year's projected GDP (a 1.6% rise in the previous year).
Interestingly, investments and EU-funds supported spending shrank by 30% y/y while non-capex spending surged by 11.6% y/y, setting a disquieting pace at RON 104.3 billion. The wage bill danced a 16% y/y rise following the wage hikes that were enacted throughout 2024, but since the hikes ceased from November-December, lower wage escalations should commence throughout the rest of the year.
The last Bozo on the block, interest payments on public debt, registered a staggering 50% y/y escalation, amounting to RON 10 billion (EUR 2 billion), reading to 8.4% of the government's total expenditures in January-February. These rates have opportunistically surged from 5.8% in January-February 2024.
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- The likelihood of GDP stability in Romania might be compromised due to the substantial hikes in interest payments on public debt.
- The Finance Ministry's data suggests that Romania's business environment could experience instability if the public deficit remains at 7.5% of GDP, despite the country's aim to reduce it.
- Despite revenue growth and a decrease in the overall budget deficit, Romania's stability could be jeopardized by rising expenditures, particularly non-capex spending and elevated interest on public debt.
