241997 12/30/2009 5:50 09BUCHAREST868 Embassy Bucharest UNCLASSIFIED//FOR OFFICIAL USE ONLY VZCZCXRO7693 OO RUEHIK DE RUEHBM #0868/01 3640550 ZNR UUUUU ZZH O 300550Z DEC 09 FM AMEMBASSY BUCHAREST TO RUEHC/SECSTATE WASHDC IMMEDIATE 0209 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE RUEATRS/DEPT OF TREASURY WASHDC RUCPDOC/USDOC WASHINGTON DC UNCLAS SECTION 01 OF 02 BUCHAREST 000868
STATE FOR EUR/NCE - ASCHEIBE, EB/IFD STATE PASS USTR - LISA ERRION TREASURY FOR BAKER USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL STATE PASS USAID SENSITIVE SIPDIS
E.O. 12958: N/A TAGS: ECON, ETRD, EIND, EFIN, RO SUBJECT: GOR APPROVES 2010 BUDGET DRAFT, EASY PARLIAMENT VOTE EXPECTED
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1. (SBU) On December 23, the new Boc Cabinet approved the 2010 draft budget for submission to Parliament for debate and approval. Parliament, under the new ruling coalition of PD-L, UDMR, other ethnic minorities, and a recently formed group of "independents", will likely pass the proposal in January with only minor amendments. The government based the 2010 budget plan on the following assumptions: 1.3% economic growth, 3.7% inflation, 4.25 RON/Euro average forex rate, and a consolidated budget deficit at 5.9% of the GDP.
2. (SBU) The government plan incorporates a series of extremely ambitious expectations. Consolidated budget revenues have been programmed to reach 168.8 billion RON or 31.3% of the GDP. This represents an 8.7% increase over anticipated revenues for 2009-an extremely bold target, considering the negative economic growth trend this year. Profit tax collection has been programmed to increase 5.2% against 2009 expectations, which is again inconsistent with the current economy's harsh reality. The budget reflects a 4.1% increase in income revenues notwithstanding higher unemployment and public sector income constraints. VAT revenues are programmed to remain the largest single source of income, growing 5.1% despite the retail sector's obvious cool off. The proposed budget assumes that excise taxes will rise 17.9%, a slightly more realistic growth rate in light of the EC harmonization process. Finally, payroll tax revenues are calculated to increase 3.7%. The GOR budget does not include any change to basic VAT, flat, or payroll tax rates in 2010. In fact, the Boc cabinet has proposed a social security tax holiday as an incentive for employers to hire the jobless. The details, including start date and duration, have yet to be determined.
3. (SBU) Consolidated budget expenditures have been projected at 200.75 billion RON (37.2% of the GDP), up 4.6% from the revised 2009 budget. Programmed expenditures for goods and services in 2010 are down 2.1% from the 2009 revised program, while interest expenditures are set to jump 43.6% due to higher and more expensive public debt costs. Personnel expenditures are expected to drop 1.6% in 2010, a minimal decrease considering the hype generated by the government's focus on public sector labor costs. The GOR has promised to freeze government employees' real wages; specifically, it intends to limit any wage increase to cover inflation and, in the cases of state-owned companies, to grant wage hikes only for companies that posted profits in 2009. Additionally, significant employment benefits will be eliminated in 2010. The GOR will stop giving employees tax-deductible lunch and holiday tickets. Lunch tickets account for about USD 180 million, out of approximately USD 214 million for all tickets in the public sector. The abolition of the government employees' holiday tickets comes less than 12 months after the same Prime Minister and tourism minister launched the program for the first time. The 2010 budget also stipulates that funds allocated for co-financing post-accession external grants can no longer be transferred between ministries or other public authorities. Finally, any salary increases awarded in courts will not be paid during the first half of 2010.
4. (SBU) The ministries receiving the highest allocation of funds in the proposed 2010 budget are: Ministry of Labor with 4.4% of the GDP (compared to 2.8% in 2009); Ministry of Education, which will take over the Ministry of Youth and Sports, with 2.7% of the GDP, up from 2.1% in 2009; Ministry of Transportation with 2% of the GDP against 1.8% in 2009; Ministry of Interior and Public Administration with 1.96% of the GDP, compared to 1.7% in 2009; and Ministry of Agriculture with 1.7% of the GDP against 1.5% in 2009. The Ministry of National Defense's budget will hold steady at 1.3% of the GDP and the Ministry of Health will see a modest increase from .7% of the GDP in 2009 to 0.76% in 2010. Many government entities will see dramatic increases over 2009. Among the most significant are: the Government General Secretariat (up 103.7% from 2009), which will be assuming responsibility for religious organizations previously under the jurisdiction of the Ministry of Culture; Constitutional Court (up 59% from 2009), Special Telecommunications Service (up 39.8%), Ministry of Economy (up 38.7%), Ministry of Justice (up 31.6%), General Prosecutor's Office (up 30.8%), Ministry of Foreign Affairs (up 15.2%), Ministry of Communications (up 8.5%), Supreme Court (up 8.3%), Ministry of Labor (up 5.2%), and the Presidency (up 4.6%). Among the most draconian budget cuts compared to the 2009 budget are those for: Ministry of Culture (down 31.1%), Ministry of Environment (down 27.3%), Ministry of Finance (down 24.1%), Chamber of Deputies (down 16.5%), Senate (down 10.7%), and Audit Court (down 6%).
5. (SBU) COMMENT. The proposed 2010 budget legislative package lacks major structural changes. The program is built on optimistic assumptions, leaving a lax fiscal deficit largely untouched. This seems to be a paradox, given the generous, flexible IMF-led
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financial package from the IFOs and the close supervision of the IMF technical missions over the 2009 budget adjustments and 2010 planning. The Parliament may pass minor amendments in January, but the GOR's budget draft will likely pass largely intact, due to the ruling coalition's desire to draw as much as possible from the IMF loan as quickly as possible. For 2010, the two critical factors to watch will be: how much of the IFOs' installments will be channeled toward the economy versus public sector wages and social assistance; and how will Romania's central bank maintain its independence, faced with increasing pressures to relax key interest rates and the perpetual necessity to defend price stability.