BCR sees a budget gap of 6.5% of GDP for end-2010

Banca Comerciala Romana (BCR) said the budget gap is likely to overshoot the inflation target of 5.9% agreed with the International Monetary Fund and European Commission, and come in at 6.5% of gross domestic product at the end of 2010.

The budget gap will reach 6.5% of GDP at the end of 2010, from 7.4% of GDP in 2009, following to come down to 5.5% in 2011, the bank said in its quarterly macroeconomic report “Romania – between optimism and pessimism”.

The Government and International Monetary Fund and European Commission agreed on a budget gap target of 5.9% of GDP for this year, under the €20 bln aid deal.

“The success of the ambitious fiscal consolidation program is very important in ensuring macro stability in the country in the coming years. The implementation of the single wage plan in the public sector and the new pension law is very important in the public expenses restructuring process”, BCR said in the report.

The public debt is expected to climb to 34.6% of GDP this year and to 37.6% in 2011, from 30.1% in 2009.

However, BCR stressed that “if a new pension law was enacted that ‘protects’ more than state can afford, Romanian taxpayers would have to be accurately and transparently informed on the compromise the country will have to make – faster growth of public sector pensions over investments in key areas, such as health, which has been an underfinanced sector over the past few years, or infrastructure”.

Should the final form of the public sector reform laws leave room for a faster growth in public sector pensions and wages, the government will be forced to raise indirect taxes (excises, VAT) or direct taxes (flat income tax) earlier than planned, “which could spill over to inflation and buying power”, BCR said.

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