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Cablegate: Romania: Small First Quarter Budget Surplus Masks Likely

VZCZCXRO3047
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0504 1711042
ZNR UUUUU ZZH
R 191042Z JUN 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC 8415
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

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

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