AmCham Romania - Challenges in the 2017 State Budget Execution

Date: 03/02/2017

Following the release of the 2017 State Budget, AmCham Romania has raised concerns on the impact of short term, overly optimistic budget projections that can, in the long term, negatively impact the business community and the general population.
While AmCham acknowledges the parameters on which the 2017 State Budget is built upon - pursuing economic growth and increasing wealth - we believe that budgetary objectives must be based on current economic realities and potential challenges as they can impact the economic performance.

Within this context AmCham Romania has outline below the main challenges and potential roadblocks facing the 2017 State Budget.

1. An overly optimistic budget can harm the macroeconomic balance. The current Budget targets a 5,2% economic growth, considerably higher compared to a more moderate forecast by the European Commission, World Bank, International Monetary Fund and local banks that forecast GDP growth between 3,7% - 4,4%. Reduced collections recently reported for January 2017 and the increased forecasted spending only confirms such concerns.

2. The ratio between expenditures and investments, at the expense of the latter, does not support the objective of creating high value added services in the economy.
While on the short term, economic growth based on consumption will boost some industries, an accelerated consumption will lead to increased inflation, which in the midterm, will further hinder sustainable economic growth and reduce purchasing power. Sound economic growth requires the analysis of the interconnection between salaries increases and the performance and productivity increase, as well as improved public services and infrastructure.

3. An over-optimistic EU funds absorption forecast ignores Romania’s past underperformance.
Linking an important share of investments expenditures - RON 4, 5 billion from a total of RON 9, 9 billion – to EU financing may lead to a shortfall of the investments target due to a low EU funds absorption, which in its turn will hinder economic growth.

4. Insufficient allocations for pensions, social securities and interest rates burden the overall budget. The social security budget will be placed significantly under stress by the 10% increase of pension benefits. It is expected that the level of expenditures for interest rates will be influenced both by the nominal increase of the budgetary deficit and by an anticipated growth of the public debt given the global trends of increased credit costs.

5. Committing future expenses without a multi-annual budgeting framework leaves room for potential misuse of public funding. While multi-annual budgetary projections are necessary to support the financing of complex investment projects, AmCham recommends that the Romanian Government outlines in a manner that provides a clear plan of both committed public resources and expected revenues. Otherwise, risks remain that commitments will not produce any concrete effects due to the lack of sufficient revenues to cover them. Moreover, such an approach will continue Romania’s long, inefficient and costly tradition of initiating investments projects that have never been completed.

It is important to mention that, according to the Fiscal Council projections, should the above risks come about, the 2017 budget deficit could reach 4%, which is an added concern both in terms of the target reference provided by the Growth and Stability Pact, and in the context of the economic principles of fiscal policy management.

For the business community we represent, the budgetary framework should ensure stability and predictability, however, the challenges and potential shortfalls listed above undermine the sustainability of the 2017-2019 Fiscal and Budgetary Strategy.
We hereby reiterate the importance of avoiding any actions that will lead to renouncing investments, changing fiscal policies, increasing financing costs both for businesses and individuals, especially in the context of potential economic unrest.
AmCham Romania believes that the consultation process regarding the budgetary planning needs to consider the expert opinions formulated by relevant institutions that hold complementary expertize to the decision-makers, such as the Fiscal Council or the National Bank, which will ensure coherence, consistency and a balanced approach of the financial planning exercise.


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