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Viewing cable 09BUCHAREST85, ROMANIA: 2009 BUDGET MIXES REALISM WITH WISHFUL THINKING

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Reference ID Created Released Classification Origin
09BUCHAREST85 2009-02-11 12:26 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Bucharest
VZCZCXRO8434
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHBM #0085/01 0421226
ZNR UUUUU ZZH
P 111226Z FEB 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 9195
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
UNCLAS SECTION 01 OF 03 BUCHAREST 000085 
 
STATE FOR EUR/CE ASCHEIBE AND EEB 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD PGOV RO
SUBJECT: ROMANIA: 2009 BUDGET MIXES REALISM WITH WISHFUL THINKING 
 
REF: A) Bucharest 1008, B) Bucharest 1016 
 
Sensitive but unclassified; not for Internet distribution. 
 
SUMMARY 
 
1.  (SBU) The Cabinet of Ministers has approved a 2009 budget draft 
that is expected to be approved by Parliament without substantial 
amendments.  The final draft combines selected doses of austerity 
with an effort to balance competing interests by promising priority 
projects to all parties; the results are likely to leave everyone 
less than satisfied.  The budget draft aims to convey an image of 
the Government of Romania (GOR) responding to the global economic 
slump by billing several spending initiatives as "anti-crisis" 
measures, although much-anticipated populist measures -- such as 
major hikes in public sector wages and pensions -- have been pared 
dramatically.  Overall, the proposed budget underscores the fact 
that the new governing coalition is a fragile balancing act between 
its PD-L and PSD partners, whose marriage of convenience will be 
constantly tested by money matters throughout the coming year.  End 
Summary. 
 
COOKING THE NUMBERS SUNNY-SIDE UP 
 
2. (SBU) While an improvement over the pie-in-the-sky numbers 
proposed by the former Tariceanu Government in its first budget 
draft late last year, the underlying economic assumptions on which 
PM Emil Boc's Government has based its 2009 budget still look too 
optimistic in light of current economic weakness.  The budget 
programs a year-end fiscal deficit of two percent of GDP based on 
projections of a "stable" macroeconomic outlook for 2009, despite 
early indications that this year will be anything but stable for 
Romania.  (Comment: Skeptics naturally point to last year's 
projected deficit of 2.5 percent, while the actual 2008 deficit came 
in at 5.2 percent in a year when GDP grew by eight percent.  End 
Comment).  The 2009 budget plans for overall GDP growth of 2.5 
percent coupled with five percent inflation and an average exchange 
rate of four RON per Euro.  According to outside analysts, inflation 
may fall to five percent or less based on how dramatically the 
economy slows, but few outside the GOR believe 2.5 percent GDP 
growth is realistic.  Similarly, the currency would have to 
strengthen considerably from the present rate of nearly 4.3/Euro to 
meet the GOR target.  The biggest disconnect is that the GOR 
forecasts its state budget revenues will increase by 24 percent over 
2008 to RON 76 billion (USD 24.3 billion), despite weaker growth and 
a 30 percent fall-off in revenue in the last two months of 2008. 
These ephemeral revenue projections form the basis for a planned 17 
percent increase in expenditures over 2008 to RON 94 billion (USD 
30.1 billion). 
 
AND THE WINNERS ARE... 
 
3. (SBU) The underlying subtext for budget allocations to individual 
ministries has been the need to balance competing coalition 
interests.  This distribution between the PSD controlling the main 
"social spending" Ministries (Labor, Agriculture, Education, and 
Health)  and the PD-L running the Ministries of Economy, Finance, 
and Transport (ref A) meant delays in the budget submission to allow 
more time for intra-coalition negotiations.  The final results seem 
to be a careful calibration of various interests which, depending on 
what numbers are used, could be seen as a victory for either party. 
The biggest gainers over last year are the PSD-run Ministry of 
Foreign Affairs (up 61 percent); the PD-L Ministry of Youth and 
Sports, which had been demoted to a subcabinet agency by the last 
government (up 47 percent); and the offices of the President, Prime 
Minister, and Parliament (up 46 percent, 31 percent, and 23 percent 
respectively).  However, in terms of share of GDP the biggest 
ministries by far are the PSD-led Ministries of Labor, Family, and 
Social protection (2.8 percent of GDP) and Education and Research 
(2.1 percent of GDP).  The PD-L-controlled Transportation, Interior 
and Public Administration, and Defense Ministries are also among the 
biggest spenders (at 1.8, 1.7, and 1.3 percent of GDP respectively), 
while the PSD Ministries of Agriculture (1.5 percent) and Health 
(0.7 percent) rounded out the major spenders.  The PD-L-run Finance 
Ministry will additionally be responsible for allocating other funds 
worth up to 2.8 percent of GDP over the next year. 
 
4.  (SBU) Acknowledging the global economic downturn, the GOR is 
labeling several spending measures and tax cuts as an economic 
stimulus program.  Most notable is the plan to spend 20 percent of 
the 2009 budget, amounting to 40 billion RON (12.8 billion USD), on 
much-needed infrastructure investments.  The hope is that this 
number can be substantially augmented by EU structural funds, and 
every ministry is under orders to devote more staff and resources to 
this task. (Comment:  To date the GOR has made little progress in 
accessing EU funds and remains a net contributor to the EU budget, 
despite being one of the EU's poorest members.  End Comment).  There 
 
BUCHAREST 00000085  002 OF 003 
 
 
is broad political consensus that Romania desperately needs more and 
better highways, hospitals, and schools.  The biggest challenge for 
the GOR, however, will not simply be allocating more money to 
infrastructure, but using the funds productively.  In past years, 
poor administrative capacity and lax internal controls meant that 
many infrastructure funds went unused, fueling end-of-year spending 
binges on non-productive consumption (2008 being a good case in 
point). 
 
PENSIONERS AND PUBLIC SECTOR WORKERS DISAPPOINTED 
 
5.  (SBU) The draft budget throws only half a bone to core PSD 
constituencies, such as pensioners.  In line with PSD campaign 
promises, the Government will establish a new minimum pension of 350 
RON (112 USD) per month which will extend coverage to all elderly 
persons regardless of prior work history.  The GOR will also pay 90 
percent of the cost of pharmaceuticals for all pensioners receiving 
less than 600 RON (192 USD) a month.  Other populist measures 
include a three-month tax holiday for temporarily laid-off workers, 
50 percent coverage for adult education and training programs, and 
an across-the-board, five percent increase in public sector wages 
and pensions.  However, the GOR has dropped other, more generous 
measures, including a scheduled increase of more than 20 percent in 
certain categories of pensions due on January 1 under the pension 
law.  Teachers will get the general five percent wage increase, but 
not the much-debated 50 percent hike promised in a law passed before 
the November 2008 elections.  The five percent raise will be offset 
almost entirely by reductions in bonuses and other payments.  The 
GOR is also contemplating the need for some public sector layoffs. 
In response, teachers' unions are filing suit over breach of the 
law, and other public sector unions and pensioners' groups are 
threatening work stoppages and demonstrations in the coming weeks. 
 
SOME U.S. COMPANIES GETTING PAID, OTHERS NOT 
 
6.  (SBU) To its credit, the GOR is moving to pay arrears, including 
to U.S. firms, left behind by the Tariceanu Government.  New 
Minister of Transport Radu Berceanu has promised Bechtel that all 
arrears on the Transylvania Motorway project, totaling over 140 
million euros, will be paid by March and that installments due in 
2009 will be made on time.  (At the same time the Minister is 
pressuring Bechtel to agree to contract modifications, insisting 
that the GOR cannot afford the contract as it stands).  Lockheed 
Martin and other defense contractors have received similar firm 
assurances on long-overdue payments from the Ministry of National 
Defense. 
 
7.  (SBU) However, another sore point with many companies -- the 
failure of the Ministry of Finance to return long-overdue VAT 
refunds -- remains a problem.  The new budget proposal includes a 
plan to allow companies to offset these overdue reimbursements by 
deducting them from future VAT payments.  This may satisfy some 
companies, but offers little short-term relief to others such as 
Cargill which are owed tens of millions of euros in VAT refunds 
dating back over a year.  The GOR is also aiming to save some money 
by freezing its contributions to the private pension scheme at 2.0 
percent of individuals' gross income, instead of raising it to 2.5 
percent as mandated in the national pension law.  This has private 
pension fund managers, including AIG, alarmed that the GOR is 
jeopardizing their substantial long-term investments in the sector 
for short-term budgetary gains.  Post coordinated with like-minded 
EU embassies on a letter to the Prime Minister asking that this 
proposal be dropped. 
 
WILL ATTEMPTS TO BOOST REVENUES BE ENOUGH? 
 
8.  (SBU) With economic growth slowing dramatically, the GOR is 
proposing several tax increases to make up for falling revenue, and 
is betting that some revenue sources will continue to grow despite 
the slowdown.  One lingering bright spot (so far) is retail 
consumption; the GOR is projecting VAT receipts will grow by nine 
percent.  Continued inflation will bolster income tax receipts by 
8.7 percent and corporate income tax revenues by three percent 
(despite a provision making reinvested dividends tax-free beginning 
in the second half of the year).  The GOR proposes to hike excise 
taxes on cigarettes and alcohol to boost revenue by a programmed 31 
percent, and to introduce a new surtax on gambling and luxury goods. 
 More controversially, a hefty social security tax hike of 3.3 
percent, to 43.5 percent of the gross salary, will allow social 
security revenues to rise by 25 percent, but will do little to 
stimulate job growth in a falling economy.  A big hole in the 
proposed budget is a projected 165 percent increase in public debt 
servicing costs to 7.4 billion RON (2.36 billion USD) in 2009. 
 
COMMENT 
 
9.  (SBU) The 2009 budget is evidence that a difficult economic 
correction is underway in Romania, but it also illustrates that 
 
BUCHAREST 00000085  003 OF 003 
 
 
political responses to the deteriorating economy still lag behind 
economic realities.  While modified since December, the budget's 
revenue and deficit projections in particular still evince some 
detachment from the harsh climate Romania is facing.  Of course, if 
past years are a guide, the budget is almost certain to be revised 
several times over the course of the year, so budgeted amounts now 
will bear little resemblance to the final spending tally at the end 
of 2009.  This track record will keep the business sector nervous 
and will increase the pressure on the Government to conclude some 
kind of external financing arrangement to restore a sense of 
stability.  Tellingly, at a time when other central banks in the 
region are actively cutting interest rates, Romania's central bank 
(BNR) announced only a miniscule (0.25) cut in the benchmark rate to 
10 percent right after the GOR budget was presented.  In recent 
years the BNR has had to shoulder the burden of countering the 
effects of the Government's profligate fiscal policies.  The tiny 
cut, despite worsening economic indicators, signals a lack of 
confidence that the GOR can truly rein in spending enough to allow 
for a more relaxed monetary policy.  BNR would no doubt be happy to 
furnish a bit more stimulus if the Government would only exercise 
more fiscal restraint.  End Comment. 
 
GUTHRIE-CORN