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Cablegate: Romania Passes 2008 Budget with Voters in Mind

VZCZCXRO7494
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0009/01 0090706
ZNR UUUUU ZZH
P 090706Z JAN 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 7755
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BUCHAREST 000009

SIPDIS

STATE FOR EUR/NCE - AJENSEN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN PGOV SOCI RO
SUBJECT: ROMANIA PASSES 2008 BUDGET WITH VOTERS IN MIND

Sensitive But Unclassified - please handle accordingly. Not for
Internet distribution.

Summary
-------

1. (SBU) Clearly padded to reflect political calculations ahead of
local and national elections over the next 24 months, the Government
of Romania's 2008 budget includes sizable increases for education,
health care, social services, and retirement pensions. The
Parliament approved the state and social assistance budget laws just
before Christmas, and President Traian Basescu promulgated both laws
at the end of December. GDP growth, revenue, and inflation
projections underlying the budget appear too optimistic, however,
with a high probability the GOR will have to scale back spending
later in the year or run higher budget deficits to sustain funding
levels. End summary.

A Little Something for Everybody
--------------------------------

2. (U) Passed by Parliament December 20 and promulgated by the
President just before the New Year, Romania's 2008 state budget and
social assistance budget laws lay out robust spending plans
calculated to appeal to broad sectors of the populace. Consolidated
expenditures are programmed to rise to 42.3% of GDP, up from 38% in
2007, with revenues projected to reach the equivalent of 39.3% of
GDP, up from 35.1% in 2007. The GOR anticipates accessing EU
structural funds equivalent to 2.9% of GDP in 2008.

3. (U) Winners in the new budget include public sector employees,
educators, and pensioners, all of whom will see higher wages or
stipends. GOR personnel expenditures are projected to increase 5%
over 2007, with social assistance (including social security) up a
whopping 31% - including a 43% hike in pensions. Social programs
also include extension of a popular school meal program through
middle school grades, and a jump in the per-child "allowance" paid
directly to parents from the equivalent of USD $10.20 to $16.30 per
month. GOR capital spending is projected to rise 34%, with much of
the increase directed toward new or upgraded schools and health
facilities. Some of this will come at the expense of more
transportation infrastructure spending, which will inch up only
slightly over 2007 levels. Total government spending on goods and
services will increase by 19%, with interest payments on the public
debt rising 16% over last year.

4. (U) Measured in percentage of GDP, the education budget will top
6%, an historic high, while health care spending will rise to 4.5%,
up from 4.0 last year. The Ministry of Agriculture will get 2.7%,
essentially flat from 2007 (though this masks a planned USD $100
million transfer from the budget of the Ministry of Economy and
Finance to Agriculture for direct income support payments to
farmers). The national defense appropriation is 1.89% of GDP,
compared to 1.4% last year.

A Bit of Budgetary Hocus-Pocus?
-------------------------------

5. (U) According to the GOR, these planned, substantial spending
increases will be possible without any tax increases, all while
holding the budget deficit close to last year's levels as a measure
of GDP. In fact, the budget includes a three-stage, 6% total cut in
the payroll tax, mostly benefiting employers; the GOR also postponed
until at least 2009 a proposed new tax on agricultural production.
(The Government did manage to kill a rehashed opposition proposal to
cut the 19% VAT on basic foodstuffs.) GOR revenue estimates are
based on projected GDP growth of 6% and a targeted inflation rate of
4.5%.

6. (SBU) To offset the lower payroll tax, the GOR is forecasting
additional payroll tax receipts from 95,000 new entrants into the
labor force; a 12.3% estimated rise in the gross average salary;
bigger contributions from high-salary workers due to elimination of
deduction caps, with taxes now levied on employees' full salaries;
and inclusion of bonuses within the taxable base. Some of these
measures may well provide additional revenue, though the forecast
for new labor entrants is highly suspect given Romania's shortage of
skilled labor, which is only expected to worsen in the next year.
The GOR's projection of 6% GDP growth is a best-case scenario, and
the 4.5% inflation target looks rather artificial in light of the
fact that annualized inflation is currently running at nearly 7%.


If You Scratch My Back...
-------------------------

7. (SBU) Parliamentary debate on the budget was occasionally sharp,
with opposition MPs from the newly-established PDL leading the

BUCHAREST 00000009 002 OF 002


argument that the state budget was not realistic or sustainable.
Still, the state budget law passed by a comfortable 249 to 93
margin; the vote on last year's budget package was much tighter.
While PSD MPs also spoke against the state budget, they were
ultimately induced to vote in favor through inclusion of an extra
USD $205 million for distribution to local governments in counties
under PSD control. By supporting the final budget, the PSD could
also claim a share of the credit for the pension hike, an idea
championed by the party last summer. Despite PDL rhetoric about
realistic budgeting, no one opposed the social assistance budget
law, which contains some of the biggest spending increases. The
final vote there was 342 to 0, with two abstentions.


Comment
-------

8. (SBU) The GOR's 2008 budget laws, full of populist goodies, were
clearly drafted with voters' pocketbooks in mind - no surprise in
advance of successive elections over the next 24 months. It can be
argued that the budget merely reflects Romania's new realities: a
rapidly growing and modernizing economy that can afford to reward
its citizens more generously. The danger, of course, is that GOR
revenue projections to sustain all this new spending look highly,
some would even say wildly, optimistic. And with inflation running
well above Central Bank targets, led by continuing increases in food
and fuel costs, many Romanians (especially fixed-income retirees)
will find that even higher stipends and other handouts may not go
very far.

9. (SBU) If, as seems likely, revenue projections fall short, then
the GOR will face some difficult choices. If forced to cut back on
spending later in the year, transportation infrastructure is a
likely target. That would be unfortunate, since in the new budget
infrastructure investment is already being restrained to help pay
for social spending - and many analysts don't believe Romania will
be able to sustain the high growth rates necessary to converge with
the rest of the EU unless it commits higher levels of spending to
infrastructure. An unpleasant alternative would be to allow the
budget deficit to spike. That prospect is already having
consequences. The Central Bank cited the risk of higher deficits,
among others, when it announced last week it was raising interest
rates by another half percentage point. End comment.

Taplin

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