The unbelievable drop in government expenditures after 2015

Judging by the official estimates the fiscal consolidation is on track on the following years. This should be good news as it is happening while the government lowered social contribution tax, VAT for food (24% to 9%) and is expected to lower VAT for all goods (24% to 19%).

The critics say that such fiscal measures are not sustainable and will lead to higher deficits in the future. IMF and EC are some of those critics.

I do believe that those measures are the right ones for the Romanian economy. However, there is the risk, as in 2007-2008, that the positive effects will be canceled by reckless fiscal expenditures policy. Furthermore, there are some signs that the government is skewing estimates in its favor. Especially for 2016.

In the 2014-2017 Convergence Report the government estimated that expenditures will remain around 35% of GDP for the period while revenues will increase towards 34% of GDP. In this way, at least on paper the fiscal consolidation will continue.

However, in the 2015-2018 Convergence Report, few months later, the government changes future paths for both revenues and expenditures. They both fall by similar percentages so the fiscal consolidation remains intact. However, there is something weird about this new estimate. The revenues part seems more credible considering lower VAT and CAS rates. But, the expenditures numbers seem a little far fetched. The new estimates show expenditure as percent of GDP falling in 2016 from 35.2% to 33.8%. As there are almost no changes to nominal GDP growth numbers this could mean that expenditures will actually have to fall or at least remain at the 2015 level. Such a scenarios is 99% pure fantasy if we look at the behavior of the current government and considering that 2016 is an important election year.

And it will not be a first. In 2008, in order to keep the estimated deficit below 3% the government estimated revenues close to 39% of GDP. This allowed the government to increase expenditures throughout 2008 and to fend off its critics. In the end the revenues ended up at 32.8% while expenditures at 38.4%. It was the 2007-2008 expenditure policy that unbalanced the budget and not the fiscal relaxation of 2005.

There you have it.This is my big question mark for 2016. We are once again facing a similar risks as in 2008. Only that this time the government is underestimating future government expenditures to maintain a low deficit (according to targets). If the government is as disciplined as it says in the report than fiscal relaxation is credible and will help the economy in the long run. Otherwise 2016 will show a deficit close to 3% (ESA 2010). My view is that the government will not be as disciplined as it says.

fisc20142018.001

Source: Ministry of Finance, expenditure/revenues as % of GDP.

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