January 31 (SeeNews) - Romania's president Klaus Iohannis said on Tuesday that a 5.2% economic growth rate projected in the 2017 budget draft is too optimistic.
"This budget, which the government has prepared and is now ready to send to parliament, I find it to be problematic. It targets a large increase in expenditure and, in specialists' opinion and in mine, it is too optimistic," Iohannis said in a press release following a meeting of the Supreme Council of National Defence (CSAT), which endorsed the budget blueprint for 2017.
Initially, there were some concerns that the budget would not ensure the allocation of at least 2% of gross domestic product (GDP) to defence spending to meet Romania's commitments as a member of NATO. This was a condition of CSAT for endorsing the budget, which will now have to be approved in parliament and then promulgated by Iohannis.
Romania's GDP is expected to grow to 815.1 billion lei ($193 billion/181 billion euro), according to the budget draft.
The 2017 budget draft forecasts deficit equivalent to 2.99% of GDP under the European System of Accounts (ESA) standards.
"It is an overvalued budget and there is no adequate explanation for this huge increase - we are talking of an increase of around 15% [in revenue]. Even if we consider that Romania's economy will grow, something that we all wish for, such a great increase is hard to achieve," the president added.
Revenues are projected at 254.7 billion lei, or 31.2% of GDP, and expenditures are forecast at 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 ESA standards. According to the 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.
Going forward, the finance ministry expects budget deficit to fall to 2.53% in 2019 and 2.02% in 2020.
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 4.3% year-on-year in the third quarter of 2016, slowing down from 6.0% annual growth in the second quarter, provisional figures from the country's statistical board INS showed. In the first nine months of 2016, the economy grew by 4.8%. Romania's national output expanded by a real 3.8% in 2015, compared with a revised growth rate of 3.0% in 2014.
On January 21, Fitch Ratings affirmed Romania's long-term foreign and local currency issuer default ratings (IDR) at 'BBB-', with stable outlooks. Fitch said that Romania's ratings are constrained by fiscal uncertainties that stem from continued pro-cyclical fiscal loosening.
At the beginning of January, the World Bank projected that Romania's economy will expand in 2017 and 2018 at 3.7% and 3.4%, respectively, and also warned on the possible negative effects of the fiscal loosening.
Earlier this month, president Iohannis signed into law a bill doing away with health and social insurance tax on all pensions and scrapping revenue tax on pensions under 2,000 lei. At the beginning of January, Iohannis also signed into law a bill eliminating 102 fees and charges, initiated by the governing Social Democrat Party (PSD). Also at the beginning of January, the government approved an emergency decree hiking the minimum wage by 16% to 1,450 lei starting February 1.
Romania also reduced its VAT rate from 20% to 19% as of January 1. This cut follows a reduction in VAT rate from 24% to 20% in 2016.
(1 euro =4.5038 lei)