Romania Faces the EU’s Widest Deficit After Budget Revision
(Bloomberg) -- Romania’s government raised its budget deficit target ahead of general and presidential elections this year in the latest challenge to the European Union’s fiscal rules.
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The cabinet of Prime Minister Marcel Ciolacu said on Monday the shortfall will rise to 6.9% of economic output this year from 5% planned previously as it faces higher spending on pensions, investment and defense.
The significant worsening of the country’s public finances comes as the ruling coalition is battling to stay in power for another term and has been facing protests over wages from civil servants and public sector workers.
The European Commission has repeatedly reprimanded the government in Bucharest for flouting the EU’s fiscal rules that call on member states to keep their deficits below 3% or to present plans of cuts to achieve that goal.
The latest budget revision brings the shortfall in line with the commission’s own forecasts from May, which showed Romania with the widest deficit among EU member states. Further fiscal loosening will also push the country’s public debt to 51.5% of economic output.
Ciolacu, who is running for president in the Nov. 24 election, has justified the increase of the deficit by the need to further boost investments to spur growth, after a sluggish rebound earlier in the year.
But the new target may still prove too ambitious, according to Daniel Daianu, the head of the Fiscal Council, an independent body of experts commissioned to review fiscal policy. The deficit is likely to reach 8% at the end of the year unless the government limits spending in the coming months, he said.
“We’ll need to see a very ample package of fiscal changes from next year to reverse this trend because at some point the markets may not fund you anymore,” Daianu said in a phone interview.
Romania has raised about $18 billion from the sale of bonds in euros and dollars this year, turning the Black Sea nation into the biggest issuer of debt on foreign markets in central and eastern Europe.
The country currently has the lowest investment grade rating from all three major rating companies.
Prime Minister Ciolacu insisted on Monday the deficit is sustainable and mainly the result of record levels of investment, which his country needs.
“We invest in roads, hospitals, schools and sewage systems,” he said before the meeting. “All countries in Europe have developed using similar methods.”
Romania is not alone to receive deficit scolding. The EU in June reprimanded seven other nations including France and Italy for running budget shortfalls above the 3% limit.
Subject to the bloc’s so-called Excessive Deficit Procedure, they’re required to take remedial action and can face fines for non-compliance.
Most of the other countries pledged to reduce their deficit gap sooner, but Romania asked the Commission to allow a seven-year period. However, Bucharest has yet to present a clear plan for reaching that objective.
--With assistance from Irina Vilcu.
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