ROMANIA: SMALL FIRST QUARTER BUDGET SURPLUS MASKS LIKELY

UNCLAS BUCHAREST 000504 STATE FOR EUR/NCE - AJENSEN, EB/IFD TREASURY FOR LKOHLER USDOC FOR ITA BURGESS/KIMBALL/NAJDI SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EIND PGOV RO SUBJECT: ROMANIA: SMALL FIRST QUARTER BUDGET SURPLUS MASKS LIKELY DEFICIT LATER Sensitive But Unclassified; not for Internet distribution. ¶1. (SBU) Recently released data shows the Government of Romania (GOR) posted a small consolidated budget surplus of USD $32.3 million in the first quarter of 2008, or the equivalent of 0.02 percent of expected GDP. For this year, the GOR has already cut its deficit target by 0.4 percent to 2.3 percent of GDP. However, with Parliamentary elections looming in the fall, there is genuine skepticism on the part of the European Commission (EC) and the IMF that the GOR will be able to adhere to this target. The EC believes that the actual 2008 deficit will likely exceed 3 percent of GDP. ¶2. (U) In the first quarter 2008, the state budget deficit was up 2.8 percent from the same period in 2007. This deficit was offset by small surpluses on the local level, allowing the consolidated budget to remain in surplus. State budget revenues increased 78.5 percent against the first quarter of 2007 as a result of higher collections of profit, income, excise, and value-added taxes, all driven by higher economic growth and investments, rising incomes, and stronger retail sales, exports, and imports. Higher collections allowed state budget outlays to rise 51.6 percent against the first quarter of 2007. Overall, consolidated budget spending jumped 59.4 percent, with capital expenditures accounting for much of the increase. Current expenses, including personnel costs, were up 59.5 percent against the same period, 2007. Local government spending fell 11.7 percent from last year to USD $842.4 million, which offset higher central government spending to produce a small surplus overall. The state social security budget surplus was up 44.5 percent. Falling unemployment, new job creation, and higher wages all contributed to increased social security contributions. ¶3. (SBU) Comment. GOR budget revenues have shown strong growth through the first several months of this year, fed by Romania's impressive GDP performance. So far the GOR is doing a good job of keeping spending in check, particularly in light of repeated calls by the National Bank of Romania (BNR) and the IMF for fiscal discipline in the face of rising inflation. However, the budget and inflation outlook for later in the year is less encouraging. Following the pattern of recent years, and particularly election years like this one, the consolidated budget will likely spike into deficit territory by year's end as the GOR and localities boost spending on infrastructure and social programs. In addition, the GOR remains under considerable pressure to raise public sector wages in order to achieve pay parity with the private sector, where average salaries increased 19 percent over the last year. Outward migration has exacerbated shortages of skilled labor and bid up wages that the Government must pay to attract qualified personnel, especially in the health sector. End Comment. TAUBMAN