136661 1/9/2008 7:06 08BUCHAREST9 Embassy Bucharest UNCLASSIFIED//FOR OFFICIAL USE ONLY VZCZCXRO7494 PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG DE RUEHBM #0009/01 0090706 ZNR UUUUU ZZH P 090706Z JAN 08 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC PRIORITY 7755 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE RUEATRS/DEPT OF TREASURY WASHINGTON DC RUCPDOC/USDOC WASHDC UNCLAS SECTION 01 OF 02 BUCHAREST 000009
STATE FOR EUR/NCE - AJENSEN
E.O. 12958: N/A TAGS: ECON, ETRD, EFIN, PGOV, SOCI, RO SUBJECT: ROMANIA PASSES 2008 BUDGET WITH VOTERS IN MIND
Sensitive But Unclassified - please handle accordingly. Not for Internet distribution.
1. (SBU) Clearly padded to reflect political calculations ahead of local and national elections over the next 24 months, the Government of Romania's 2008 budget includes sizable increases for education, health care, social services, and retirement pensions. The Parliament approved the state and social assistance budget laws just before Christmas, and President Traian Basescu promulgated both laws at the end of December. GDP growth, revenue, and inflation projections underlying the budget appear too optimistic, however, with a high probability the GOR will have to scale back spending later in the year or run higher budget deficits to sustain funding levels. End summary.
A Little Something for Everybody
2. (U) Passed by Parliament December 20 and promulgated by the President just before the New Year, Romania's 2008 state budget and social assistance budget laws lay out robust spending plans calculated to appeal to broad sectors of the populace. Consolidated expenditures are programmed to rise to 42.3% of GDP, up from 38% in 2007, with revenues projected to reach the equivalent of 39.3% of GDP, up from 35.1% in 2007. The GOR anticipates accessing EU structural funds equivalent to 2.9% of GDP in 2008.
3. (U) Winners in the new budget include public sector employees, educators, and pensioners, all of whom will see higher wages or stipends. GOR personnel expenditures are projected to increase 5% over 2007, with social assistance (including social security) up a whopping 31% - including a 43% hike in pensions. Social programs also include extension of a popular school meal program through middle school grades, and a jump in the per-child "allowance" paid directly to parents from the equivalent of USD $10.20 to $16.30 per month. GOR capital spending is projected to rise 34%, with much of the increase directed toward new or upgraded schools and health facilities. Some of this will come at the expense of more transportation infrastructure spending, which will inch up only slightly over 2007 levels. Total government spending on goods and services will increase by 19%, with interest payments on the public debt rising 16% over last year.
4. (U) Measured in percentage of GDP, the education budget will top 6%, an historic high, while health care spending will rise to 4.5%, up from 4.0 last year. The Ministry of Agriculture will get 2.7%, essentially flat from 2007 (though this masks a planned USD $100 million transfer from the budget of the Ministry of Economy and Finance to Agriculture for direct income support payments to farmers). The national defense appropriation is 1.89% of GDP, compared to 1.4% last year.
A Bit of Budgetary Hocus-Pocus?
5. (U) According to the GOR, these planned, substantial spending increases will be possible without any tax increases, all while holding the budget deficit close to last year's levels as a measure of GDP. In fact, the budget includes a three-stage, 6% total cut in the payroll tax, mostly benefiting employers; the GOR also postponed until at least 2009 a proposed new tax on agricultural production. (The Government did manage to kill a rehashed opposition proposal to cut the 19% VAT on basic foodstuffs.) GOR revenue estimates are based on projected GDP growth of 6% and a targeted inflation rate of 4.5%.
6. (SBU) To offset the lower payroll tax, the GOR is forecasting additional payroll tax receipts from 95,000 new entrants into the labor force; a 12.3% estimated rise in the gross average salary; bigger contributions from high-salary workers due to elimination of deduction caps, with taxes now levied on employees' full salaries; and inclusion of bonuses within the taxable base. Some of these measures may well provide additional revenue, though the forecast for new labor entrants is highly suspect given Romania's shortage of skilled labor, which is only expected to worsen in the next year. The GOR's projection of 6% GDP growth is a best-case scenario, and the 4.5% inflation target looks rather artificial in light of the fact that annualized inflation is currently running at nearly 7%.
If You Scratch My Back...
7. (SBU) Parliamentary debate on the budget was occasionally sharp, with opposition MPs from the newly-established PDL leading the
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argument that the state budget was not realistic or sustainable. Still, the state budget law passed by a comfortable 249 to 93 margin; the vote on last year's budget package was much tighter. While PSD MPs also spoke against the state budget, they were ultimately induced to vote in favor through inclusion of an extra USD $205 million for distribution to local governments in counties under PSD control. By supporting the final budget, the PSD could also claim a share of the credit for the pension hike, an idea championed by the party last summer. Despite PDL rhetoric about realistic budgeting, no one opposed the social assistance budget law, which contains some of the biggest spending increases. The final vote there was 342 to 0, with two abstentions.
8. (SBU) The GOR's 2008 budget laws, full of populist goodies, were clearly drafted with voters' pocketbooks in mind - no surprise in advance of successive elections over the next 24 months. It can be argued that the budget merely reflects Romania's new realities: a rapidly growing and modernizing economy that can afford to reward its citizens more generously. The danger, of course, is that GOR revenue projections to sustain all this new spending look highly, some would even say wildly, optimistic. And with inflation running well above Central Bank targets, led by continuing increases in food and fuel costs, many Romanians (especially fixed-income retirees) will find that even higher stipends and other handouts may not go very far.
9. (SBU) If, as seems likely, revenue projections fall short, then the GOR will face some difficult choices. If forced to cut back on spending later in the year, transportation infrastructure is a likely target. That would be unfortunate, since in the new budget infrastructure investment is already being restrained to help pay for social spending - and many analysts don't believe Romania will be able to sustain the high growth rates necessary to converge with the rest of the EU unless it commits higher levels of spending to infrastructure. An unpleasant alternative would be to allow the budget deficit to spike. That prospect is already having consequences. The Central Bank cited the risk of higher deficits, among others, when it announced last week it was raising interest rates by another half percentage point. End comment.