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Cablegate: Romania: Revised Budget Faces Political Hurdles

VZCZCXRO4573
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHBM #0622 2570543
ZNR UUUUU ZZH
P 140543Z SEP 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9890
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

UNCLAS BUCHAREST 000622

SIPDIS

STATE FOR EUR/CE ASCHEIBE

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN PGOV IMF RO
SUBJECT: ROMANIA: REVISED BUDGET FACES POLITICAL HURDLES

REF: A) BUCHAREST 563 B) BUCHAREST 573

Sensitive but Unclassified; not for Internet distribution.

1. (SBU) Summary. Following revisions to Romania's accord with the
IMF (ref A), the Government of Romania (GOR) has formally approved
changes to its budget to reflect new fiscal realities. This second
budget "rectification" of the year allows the projected 2009 deficit
to surge from 4.6 to 7.3 percent of GDP. Despite the higher
deficit, the GOR will still have to slash expenditures to adjust to
the grim reality of declining tax revenues caused by sharply
negative economic growth. Most ministries will see their budgets
cut, with personnel expenditures to be reduced by 15.5 percent
between September and November, largely through the use of mandatory
furloughs (ref B). The jury is still out as to whether or not
enough political will exists to carry out the public sector reforms
mandated by the IMF. End summary.

2. (SBU) On August 29 the Cabinet of Prime Minister Emil Boc
approved the second budget rectification of the year, following the
outlines of the IMF staff agreement (ref A). The deteriorating
fiscal outlook has forced the projected 2009 budget deficit up to a
whopping 7.3 percent of GDP. While much of the blame is
attributable to the depth of the recession, which has surprised most
analysts including the IMF, GOR budget decisions taken in 2008 are
also driving the deficit. At the same time that tax revenues for
January-August 2009 fell by 6.9 percent of GDP, compared with the
same period in 2008, public sector wage and pension increases along
with other commitments made in 2008 actually pushed spending up by
7.4 percent in the same period.

3. (SBU) In full crisis mode, the GOR has started slashing budgets
across the board, with most ministries forced to accept reductions
of up to 14 percent from the previous allocations made in April.
Immediate cuts are expected to total approximately 1.4 billion RON
(470 million USD). Certain key programs escaped the fiscal scalpel,
however, with the Ministries of Economy, Interior, and Justice all
receiving minor increases. According to Ministry of Finance (MoF)
Director for Macroeconomic Analysis and Financial Policies Dorin
Mantescu, the budget rectification includes a 0.2 percent-of-GDP
increase in capital expenditures (chiefly infrastructure
investments), to be offset by personnel cuts. Bonuses for public
sector workers are on the chopping block, and formerly independent
and self-financing state institutions are being forced to return all
income to the state treasury.

4. (SBU) Most controversial among the announced measures are
mandatory ten-day furloughs and long-term wage freezes for some
categories of public workers. Ministers have been directed to
achieve a 15.5 percent reduction in personnel expenditures in the
next three months, infuriating public sector unions. Hoping to set
a good example of shared sacrifice, Cabinet members have agreed to
cut their own salaries by 20 percent through the end of the year.
Tough talk from the unions, however, jeopardizes the other IMF
priority, passing a unitary salary law that sets transparent wage
rates across the government. After 12 drafts, the GOR and unions
are still far from a common position on this legislation despite the
GOR's pledge to "assume responsibility" for the bill in Parliament
on September 15. If the GOR goes ahead, unions are threatening a
general strike for October 5.

5. (SBU) Additional major staff cuts are expected in local
governments, though likely not until after the presidential
elections. Mantescu of MOF hopes that layoffs will target surplus
municipal employees rather than the short-staffed public education
and health systems. Pension reform is also on the agenda, although
political consensus on how best to accomplish it is still absent.
One logical step would be to eliminate the special status of
military and intelligence services personnel, who are eligible to
collect state pensions but currently pay no social security
contributions. Resistance to such reforms from the affected groups
will of course be fierce.

6. (SBU) Comment. Some commentators have observed that the number
of public sector workers in Romania is not excessively high relative
to the size of the population when compared with other EU member
states. The real problem lies with public sector organization,
training, and productivity. By most measures, government worker
productivity has been stagnant or falling in recent years at the
same time that public sector wages were rising by double digits. If
the GOR focuses exclusively on cutting employees, without a system
to retain the best workers while weeding out the dead weight, then
Romania will derive no long-term benefit from the current exercise
and essential government services will suffer. End Comment.

GITENSTEIN

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