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May 8, 2021

Fiscal Council: Lower revenues confirmed by budget adjustment

Although the budget adjustment announced by the Ponta Gov’t is a positive one, the trend of the last few days shows a decrease in revenues, Fiscal Council representatives claim. They also believe the new projections fail to show clearly how the holes in first quarter collections are to be covered or the future CAS cutbacks that will impact future budgets.
The plan for the first budget adjustment of the year was to be approved yesterday in a special session, PM Ponta announced.
“As far as budget revenues are concerned, the adjustment proposal includes an increase by RON 1.54 billion, but following the adjustment on the impact of the arrears chain extinguishment scheme relative to the general consolidated budget (with an impacting the VAT and social contributions) and the amendment brought to the accounting treatment of asset purchase operations from the state reserves (impacting capital revenues), which generates an artificial increase in revenues by RON 1.66 billion, the collection rate will seem slightly negatively adjusted, namely by RON 128 million,” the Fiscal Council notes in an opinion report on the budget adjustment.
In other words, this phenomenon can add pressure to the construction of budgets in years to come, in view of reaching deficit targets, particularly considering the disadvantageous impact discretionary measures – such as tax exemption for reinvested profits and cutbacks in employers’ CAS – are expected to have on budget collections.
Moreover, the six-month budget implementation and adjustment proposal offer very little reason for hope that the revenue losses incurred as a result of the above-mentioned legislative changes will be covered by improving the efficacy of collections.
Despite the massively underperforming absorption of non-reimbursable European funds whose beneficiary is the Romanian state – compared with the quarterly program, the revenue execution rate is 49 percent, whereas the expense rate is 51 percent – the adjustment proposal does not in any way change the initial projections, the press release issued by the Council shows.
If we do not take into account the impact of the scheme for the chain extinguishment of outstanding obligations on the newly introduced general consolidated budgets (RON 56 million), the stipulated social contribution estimates seem lower by RON 504 million than the initial budget, resulting the non-execution of RON 478 million in the first quarter program.
According to the cited source, the projections included in the budget draft are very unlikely to materialize. Even though this non-execution should decrease the deficit, given that if investment projects are not carried out both the reimbursement claims and the savings from co-financing and non-eligible expenditures will be smaller, an unsuccessful absorption of European funds is evidently undesirable, particularly when one takes into account that economic growth can have direct and adjacent effects and the complete un-engagement of these funds can pose major risks.
Furthermore, the Fiscal Council reiterates that the budget adjustment draft does not refer to the impact of the 5 percent decrease in employers’ CAS contributions applicable as of October 1, a measure which has been approved by the Parliament but has not been promulgated by the President. The estimated impact of the decrease on the general consolidated budget is RON 850 million. The Fiscal Council also calls attention to the fact that if the legislative proposal is applied on the initial deadline, it will not be covered by the current budget and in order to reach the target deficit subsequent budget expenditures will most likely have to be cut back. In addition, current budget revenue projections are generally realistic, the Council believes, but projections concerning revenues from European funds and the income tax should be read with caution. The Ministries of Health, Defense, Economy, Education, Transport, Labor, Culture, and Internal Affairs, including the Permanent Electoral Authority, will receive additional money according to the budget adjustment, whereas the Ministry of Finance and the Environment will receive fewer funds.

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