April 8 (SeeNews) - The World Bank revised Romania's economic growth forecast down to 3.7% this year and 4.0% in 2017, from an earlier estimate of 3.9% and 4.1%, respectively.
"Growth is expected to remain above potential in 2016 and 2017, supported by the expansionary fiscal policy and improvements in the labour market," the World Bank said in its latest report issued on Thursday.
However, following the tax cuts and public sector wage increases, the budget deficit will widen significantly in 2016 and 2017, according to the World Bank.
"In line with the 2016 budget and the Medium Term Fiscal Framework, the consolidated budget deficit is projected to widen towards 3% of GDP in both 2016 and 2017," the international lender noted.
Also, inflation is expected to stay in negative territory until June 2016, when the effect of the VAT cut for food fades out, and it is likely it will gradually increase towards 1.4% at end 2016, in line with central bank's projections.
According to the financial institution, one of the main local risk factors for Romania's economy growth in 2016 and 2017 is the revision of the unitary public wage legislation, currently underway, which may increase spending pressures and amplify the risk of reentering into the excessive deficit procedure.
In the absence of tax policy changes, which seem unlikely in an election year, the government will need to rely on the containment of current spending, cuts in capital spending and improvements in tax efficiency to avoid reentering the excessive deficit procedure and stay within the deficit 3% boundary of the EU Growth and Stability Pact, the World Bank concluded.