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Romania's govt walking thin line with 2017 budget commitments - KPMG

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Romania's government is walking on a thin line by trying to achieve the 5.2% economic growth envisaged in the 2017 state budget, the local unit of international consultancy KPMG Romania said, quoted by seenews.com.

KPMG  notes that Romania's 2017 state budget is built on both sound economic forecasts and on less stable elements such as the EU funds component or consumption.

"This has the potential to raise concerns with respect to the solidity of the premises upon which projections were made," the consultancy said in a report published on its website on Friday.

The rate of the general consolidated budget revenue growth is significantly exceeded by the projected average growth rate of  revenues provided by funds received from the European Union of 47.06%, KPMG said. This projection appears to be extremely optimistic and its credibility may be in doubt, given the average annual rate of absorbing European funds during the period 2013-2016, which was significantly lower than projected, it added.

Even though the government will take a series of budgetary measures in order to boost consumption, long-term economic growth based only on consumption does not create the premises for sustainable and durable economic development, because this type of economic growth can only last as long as consumption continues, KPMG commented.

Also, if on the one hand, some sectors of the economy will be supported by fiscal incentives such as tax exemption for reinvested profit, for entrepreneurs which carry out business innovation and the reduction of the tax rate from 3% to 1% for microenterprises, on the other hand, labour costs will increase, the analysts said.

Labour costs will increase due to the minimum gross salary hike of 16% to 1,450 lei ($342/ 321 euro) per month and by the recent 15% and 20% hikes in the health and education sectors and public administration, respectively. 

However, KPMG added, the budget is a planning exercise, and plans may be revisited. "With economic growth usually being the main objective of each administration, we trust that the Government will promote and implement tailored, sustainable fiscal tools, as well
as deploy balanced economic policies, in order to mitigate recurrent risks, such as the rise of the budget deficit," it said. "The real challenge and also an aspect to monitor in the up-coming months, is that the outcomes are not achieved at the expense of two core components of any sound economy, i.e. the business environment and the society in general."

The budget bill, approved by the parliament earlier this month and endorsed by president Klaus Iohannis despite his reservations is built on projections of 5.2% economic growth and deficit equivalent to 2.99% of gross domestic product (GDP).

Consolidated revenues are projected at 254.7 billion lei, or 31.2% of GDP, and expenditures are expected to reach 278.8 billion lei, or 34.2% of GDP. The resulting deficit of 24.1 billion lei is equivalent to 2.96% of GDP in cash terms and 2.99% of GDP under the the European System of Accounts (ESA) standards. According to the EU's Maastricht treaty signed in 1992, the ratio of the annual general government deficit relative to GDP at market prices must not exceed 3% at the end of the preceding fiscal year.

Romania's consolidated budget showed a deficit equivalent to 2.41% of the projected GDP last year, compared to 10.3 billion lei shortfall, or 1.47% of GDP in 2015, according to finance ministry data.

Romania's economy expanded by 4.8% year-on-year in 2016 compared to a revised 3.9% growth in the previous year, flash data from the country's statistical board, INS data showed.

In mid February, the European Commission raised its forecast for Romania’s economic expansion in 2017 to a real 4.4% from 3.9% projected in November, as growth of private consumption and investments is expected to gain speed.

At the beginning of January, the World Bank forecast that Romania's economy will expand in 2017 and 2018 at 3.7% and 3.4%, respectively, and also warned of the possible negative effects of fiscal loosening.

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