OFFICE OF THE MINISTER DELEGATED FOR BUDGET

Preliminary 2012 Budget Execution Report

Contents

I.Macroeconomic situation in 2012

II. Structural deficit and ESA deficit

III. Budget implementation in 2012

IV. Investment expenditures in 2012

V. Government financial and non-financial assets

VI. Budget deficit and public debt financing

Annex 1- Implementation of the general consolidated budget from January 1 to December 31, 2012

I. Macroeconomic situation in 2012

The budget for 2012 started from the macroeconomic forecast at end-2011, convergent with the projections of the European Commission, in line with the provisions of the fiscal and budgetary law. In addition, the macroeconomic projections for 2012 relied on the statistical data published by the National Institute for Statistics (NIS), before the month of October, in respect of the performance of the domestic economy in 2011.

- change % compared to previous year -

Macroeconomic framework for the 2012 budget / 2011 EC autumn forecast for Romania / Achieved
GDP / 2.1 / 2.1 / 0.3
Private consumption / 1.9 / 1.9 / 0.7
Government consumption / 1.2 / 1.5 / 1.9
GFCF / 4.5 / 2.6 / 4.0

The forecast took into account international circumstances and, in particular, outlooks in EU and the main MS with impact on Romania’s foreign trade, as published in the EC 2011 autumn forecast. When 2012 budget was being prepared, the situation was expected to be difficult in the entire EU and in the Euro zone; however, the economic growth, while much below the level of 2011, was going to be on the positive side.

Still, the economies performed much slower than initially expected. In 2012, real GDP growth was -0.3% in EU and -0.6% in the Eurozone, with a negative consequence on the foreign demand and, implicitly, on the domestic industry.

Economic growth and import in EU, 2012

change % compared to previous year -

GDP Growth / Imports of goods and services
2011 Autumn Forecast / Achieved / 2011 Autumn Forecast / Achieved
EU - 27 / 0.6 / -0.3 / 2.9 / -0.1
Eurozone / 0.5 / -0.6 / 3.0 / -0.7
Germany / 0.8 / 0.3 / 5.8 / 2.3

In 2012, Romania managed to avoid recession, as the economy did not shrink in two quarters in a row compared to the previous quarter. Among EU countries, the Czech Republic, Spain, Italy, France, Hungary, Portugal, Netherlands were in recession, either temporary or throughout this interval.

-%, compared to previous quarter -

2012 / Romania / EU - 27 / Eurozone
Q1 / -0.1 / 0.0 / -0.1
Q2 / 0.4 / -0.2 / -0.2
Q3 / -0.3 / 0.1 / -0.1
Q4 / 0.1 / -0.5 / -0.6

Sources of growth in 2012, which could alleviate the impact of international circumstances and drought, included investments (1 pp contribution to real GDP growth), which in their turn had an impact on constructions, which picked up, and consumption in particular in the service sector.

Components’ contribution to real GDP growth

- % -

2011 / 2012
Macroeconomic budget framework, 2012 / Achieved / Macroeconomic budget framework, 2012 / Achieved
Gross domestic product / 1.5 / 2.2 / 2.1 / 0.3
Domestic demand / 1.5 / 2.6 / 2.4 / 1.0
- Final consumption / 0.4 / 0.8 / 1.4 / 0.6
-- Private consumption expenditures / 0.5 / 0.8 / 1.3 / 0.4
-- Government consumption expenditures / -0.1 / 0.0 / 0.1 / 0.2
- Gross capital formation / 1.1 / 1.9 / 1.1 / 0.3
-- Gross fixed capital formation / 0.7 / 1.8 / 1.0 / 1.0
-- Change in stocks / 0.4 / 0.1 / 0.1 / -0.7
Net Export / 0.0 / -0.4 / -0.3 / -0.7
- Export of goods and services / 2.9 / 3.7 / 3.0 / -1.3
- Import of goods and services / 2.9 / 4.1 / 3.3 / -0.6

In terms of domestic supply, the service sector was the main factor of growth. Agriculture, which because of the drought saw the biggest output reduction over the past 20 years, was the main sector with a negative contribution to growth. In addition, what counted was the basic effect of the 2011 exceptional output.

Contribution of sectors to real GDP growth

- % -

2011 / 2012
Macroeconomic budget framework, 2012 / Achieved / Macroeconomic budget framework, 2012 / Achieved
Industry / 0.9 / 0.0 / 0.8 / -0.6
Agriculture, forestry, fishery / 0.4 / 0.7 / 0.0 / -1.4
Constructions / 0.1 / -0.6 / 0.4 / 0.0
Total services / 0.1 / 1.4 / 0.7 / 1.9
Net taxes on goods / 0.1 / 0.7 / 0.2 / 0.4
GROSS DOMESTIC PRODUCT / 1.5 / 2.2 / 2.1 / 0.3

In 2012, the gross domestic product in non-farming activities saw a higher real growth compared to 2011.

- change % compared to previous year -

2011 / 2012
VAB from Agriculture / 12.4 / -21.2
VAB from non-farming activities / 1.5 / 1.8
GDP / 2.2 / 0.3

Note: Non-farming activities include net taxes.

At the end of 2012, the annual inflation rate reached 4.95%, by 1.81 percentage points above the level at end-2011. The annual average was by 2.46 percentage points below the previous year, reaching 3.3%, due to the good performance of consumer prices in the first year half.

The growth pace accelerated, in Q3 especially, resulting in an annual inflation higher by 1.45 percentage points compared to estimates in the 2012 Budget Report, with average inflation higher than expected by only 0.33 percentage points.

The hike above expectations of consumer prices was the result of cumulated shocks on the supply side, with the most important increase seen for farming product prices, due to a lower farming output domestically and internationally as a consequence of the bad weather conditions.

Under these circumstances, the highest price increase compared to end-2011 was seen in food products group, (6.21%, by 1.26 percentage points above the inflation level).

An additional shock came from the regulated prices, with adjustments exceeding the initial assumptions. A significant increase in this price category was seen in electricity (+13.02%), water, sewerage, sanitation (+6.8%) and natural gas (+5.23%).

However, the demand deficit persisted, leading to an increase in non-food prices at the end of year, along with tariffs for services, which were below the total inflation at year end.

A bad effect on the consumer prices came from the domestic currency depreciation by 1.3 percentage points compared to the expected level, with prices of imported goods and prices of goods and services which are linked to the European currency adding to the inflation dynamics.

II. Structural deficit and ESA deficit

2.1 Structural deficit

Romania’s structural deficit dropped from 4.1% of GDP in 2011 to 2.2% in 2012, in line with the decrease of the general government deficit and as a result of a growth below the potential gross domestic product.

In 2012, the output-gap remained negative, by around 1.9 percentage points above the level of 2011, which pushed up the cyclical component by 0.5 percentage points and reduced the structural deficit to the same extent.

The structural deficit was influenced by a shift in the budget policy, which switched from the one-off measures on the expenditures side, in 2011, to one-off measures aimed at increasing the revenues which had no correspondent in the expenditure performance. The effect of one-off measures is, in fact, accounted for in the performance of the general consolidated budget. Thus, the impact of one-off measures became positive in 2012, reducing the budget deficit by 0.5% of GDP, while in 2011 this effect was negative, namely an increase by 1.1% of the budget deficit.

2.2 Deficit according to ESA

For 2012, the general government deficit was calculated based on final data submitted by public institutions and the provisional data of SOEs classified under the general government, with the preliminary deficit according to ESA 95 amounting to 2.8% of GDP.

Compared to 2011, the deficit according to ESA 95 calculated for 2012 went down by 2.9 pp, from 5.7% of GDP in 2011 to 2.8% of GDP in 2012, which is a reduction to half of the previous deficit despite of the election year.

Deficit of the general government according to ESA 95

2005 / 2006 / 2007 / 2008 / 2009 / 2010 / 2011 / 2012
Deficit / million lei / -3 344.1 / -7 709.5 / -12 115.7 / -29 242.1 / -45 107.9 / -35 741.3 / -32 004.2 / -16 471.3
% of GDP / -1.2 / -2.2 / -2.9 / -5.7 / -9.0 / -6.8 / -5.7 / -2.8

III. Budget implementation in 2012

  1. Impact of budget revisions

The 2012 state budget, approved in Law 293 of December 21, 2011, was based on the then-projected international circumstances, assuming a GDP increase between 1.8% and 2.3%.

The projection of revenues and expenditures was shaped based on the macroeconomic indicators estimated at the time the 2012 state budget was formulated, as well as on fiscal regulations applicable for the year 2012.

The estimation of budget indicators targeted an initial cash budget deficit of 1.9% of GDP, which could be increased during the year in line with the domestic circumstances.

The budget revision occurred in August 2012 and was passed in Government Ordinance 13/2012, based on the elements below:

 The performance of the economy in the first five months of 2012 reflected in the increase of GDP by around 1.2% in 2012, compared to 1.8-2.3% as estimated at the time of state budget law formulation.

 The review of budget results in the first half of 2012: the implementation of the general consolidated budget closed on a deficit of – 6.8 billion lei, i.e. 1.12% of GDP compared to the deficit on the same date of the previous year (-11.2 billion lei accounting for 1.94% of GDP).

 Continuation of the Stand-by preventive agreement with IMF, effective at end-March 2011, which required the continuation of the fiscal consolidation process and of structural reforms started under the previous agreement for encouraging growth and bringing macroeconomic stability, thus adding to the consolidation of investor confidence and reducing the spill-over risks.

 Adoption of pieces of legislation with impact on the budget revenues and expenditures, which created the legal framework for a gradual implementation of reparatory measures to pensioners and the employees of the public sector.

Hence, pursuant to the provisions of GEO nr. 19/16.05.2012 for the approval of a set of measures aimed at restoring wages of the public sector, the gross employment wages in the public sector was raised by 8% as of June 1 2012, compared to May 2012, and by 7.4% as of December 1 2012, compared to November 2012.

The impact of this measure on budget expenditures was estimated, for 2012, at 1,525.5 million lei (0.3% of GDP).

GEO 15/08.05.2012 on financial measures in the health insurance sector and the public finance sector introduced the social health insurance contribution base for pensioners as the portion of pensions exceeding 740 lei; GEO 17/16.05.2012 on measures aimed at the restitution of some health contributions provided for the restitution, in installments, of all amounts paid by pensioners between January 1 2011 and April 30 2012, which represented the difference between the net pensions resulted for the application of the social insurance contribution rate to the entire pension amount and the net pensions resulted from the application of the health contribution to the portion exceeding 740 lei.

The impact on the budget of this reparatory measure is 1,299.4 million lei, accounting for 0.2% of GDP.

 Continuation of the fiscal consolidation policy through a thorough control of public expenditures. In this respect, the Government identified a number of measures cutting public expenditures and introduced the legal framework for implementing those measures, namely GEO 26/06.06.2012 on measures to cut public expenditures and strengthen financial discipline and on the modification and supplementation of various pieces of legislation.

The main measures for reducing budget expenditures included:

- 30% cut of expenditures for meetings and trips abroad of public authorities and institutions of the central and local administration, irrespective of how they are financed and to whom they are subordinated, in the second half of 2012, compared to the same expenditures in the second half of 2011; budget impact: 60.0 million lei.

- Interdiction to purchase legal counsel, assistance or representation services for public authorities and institutions of the central and local administration, irrespective of how they are financed and to whom they are subordinated, national companies and companies fully or partially owned by the state, and regies autonomes with legal staff in their organizational chart; impact on the budget expenditures: 317.0 million lei;

- Interdiction to purchase from public funds any printed material and goods for meetings and representation purposes, for celebration days, including anniversaries; impact on the budget: 5.0 million lei.

- Number of persons on the missions abroad limited to 3 or 2, depending on the level of representation.

Total impact of budget expenditures reduction was estimated at 463.0 million lei.

Estimates in respect of the main categories of budget revenues were adjusted as follows:

Negative impact:

- excise duties: - 797.5 million lei ( -0.1% of GDP);

- non-fiscal revenues: -1,417.3 million lei (-0.2% of GDP);

- EU reimbursements against incurred payments: - 1859.0 million lei (-0.3% of GDP);

- capital income: - 578.5 million lei ( -0.1% of GDP)

Positive impact:

- VAT: +1805.0 million lei (0.3% of GDP);

- wage and income tax: + 430.9 million lei (0.07% of GDP);

- tax on goods, license fees for the use of goods and operating licenses: +288.8 million lei (0.05% of GDP).

Considering the main types of expenditures of the general consolidated budget, the impact is as follows:

 Staff expenditures raise by +1125.6 million lei ( +0.2% of GDP), mainly due to the increase of public wages;

 Interest expenditures raise by +890.4 million lei (+0.1% of GDP), as a result of revised macroeconomic indicators and increased budget deficit from 1.93% of GDP, as initially estimated, to 2.25% of GDP;

 Expenditures for projects funded from foreign grants drop by -911.2 million lei (0.2% of GDP);

 Social assistance expenditures increase by +346.6 million lei (+0.1% of GDP).

One of the main objectives of GO 13/2012 was to provide local governments with the funds they needed to clear arrears.

Hence, the amount of 500 million lei was provided to clear the arrears of several local governments and public institutions fully funded from local budgets subordinated those local governments, arrears which stemmed from contracts with various suppliers of goods, services and works, including companies which produce, transport and supply thermal power within the centralized system, and the debts of local governments to companies which produce, transport and supply thermal power within the centralized system .

Following the adoption of the GO 13/2012, the revenues to the general consolidated budget declined, in balance, by 252.3 million lei, from 196222.3 million lei, to 195971.0 million lei, and expenditures of the general consolidated budget dropped by 2222.9 million lei, from 207408.0 million lei, to 209631.0 million lei.

As a consequence, the general government deficit went up by 2475.2 million lei, from 11184.7 million lei, accounting for 1.9% of GDP, as initially estimated, to 13660.0 million lei, i. e. 2.25% of GDP.

The second budget revision in 2012, enabled by the GEO 61/ October 26 2012 on 2012 state budget revision was supported by:

  • the review of budget outcome in the first nine months of the years;
  • the need to provide operating funds needed by several main budget holders until the end of the year;
  • the need to secure the funds for clearing arrears in several sectors;
  • the need to keep the general government deficit at 13,660.0 million lei, namely 2.2 % of GDP.

Compared to the Government Ordinance 13/ August 23 2012 on the 2012 state budget revision, the new GEO 61/ October 26 2012 on the 2012 state budget revision increased the balance of revenues and expenditures of the general consolidated budget by 1,354.0 million lei:

The main positive influence on the general government revenues side came from the tax on the use of goods, license fees for the use of goods and operating licenses (additional revenues in amount of 908 million lei, in license fees for the use of radio frequencies, equivalent of 204.1 million Euros) and from non-fiscal revenues (in particular transfers from the profit of the National Bank of Romania), with the main negative corrections coming from the income tax (363 million lei) and VAT (210 million lei).

On the general government expenditures side, the additional amount of 1,354.0 million lei was intended as follows: 628.8 million lei to local budgets for the payment of arrears and other expenditures; 450 million lei to local budgets to clear debts and other settlement obligations recorded in the books of local governments and public institutions fully financed from the local budgets subordinated to them, stemming from contracts with suppliers of goods, works and services and with various public institutions; and 400.0 million lei to the Ministry of Agriculture and Rural Development for counteracting the effects of the drought and for the advance payments from direct payments granted in the vegetables sector;

In addition, GEO 61/ October 26 2012 added 150 million lei to the budget of the single social health insurance fund, for the payment of debts over 90 days (on the effective date of the ordinance) incurred by hospitals irrespective of the network to which they belonged; however, hospitals of the regional emergency network, defined according to art. 100 par. (1) and 101 par. (2) of Law 95/2006 on the reform of the health sector, as revised, were prioritized.

At the same time, local budget received 200 million lei for paying the entitlements of persons with severe disability and their assistants, or the monthly allowances to persons with severe disability.

Total investment expenditures, in the general consolidated budget, was estimated at 36.0 billion lei, accounting for 5.9% of GDP, in the first budget revision, and it was further increased to 37.2 billion lei (6.1% of GDP) in the second budget revision.

  1. Budget execution

Overall, judging on preliminary data, the execution of the general consolidated budget in January 1 – December 31 closed on a cash deficit of 14.8 billion lei, namely 2.5% of GDP, compared to an initial estimate of 13.7 billion lei.

Fiscal consolidation continued in 2012, and the budget deficit decreased by over 40% compared to 2011 (from 4.3% to 2.5% of GDP).

Cash Budget Deficit

2011 / 2012 / Variance 2012 vs. 2011
Deficit / million lei / -23 898.6 / -14 773.9 / 9 124.6
% of GDP / -4.3 / -2.5 / 1.8

2.1 Revenues of the general government

Revenues of the general government in 2012 amounted to 193.1 billion lei, accounting for 32.9% of GDP and an achievement rate of 97.1%compared to annual estimates.

The main budget revenues performed as follows: profits tax 98.8%; income tax 98.5%; VAT 97.6%, excise duties 98.4%, insurance contributions 101.1% and non-fiscal revenues 98.8%.

EU reimbursements for payments incurred underperformed, with a rate of 71.7%.

Budget collections reflected the economic performance and the fiscal policy decisions such as the raise of the minimum wage, the increase of public sector wages, the change of the calculation base for the health contribution paid by pensioners, change of excise duties rate and the temporary suspension of EU funds reimbursements over deficiencies in previous years.

Looking at the share of the main tax categories to total collected revenues, we can see an increase for taxes on profits, wages, personal income and capital income by 0.5 pp, as well as taxes and charges on goods and services by 1.2 pp, as a result of the increase of the share of revenues from taxes and charges on goods and services by 0.9 pp and of charges for the use of goods by 0.5 pp and for EU reimbursements for incurred payments and advance payments by 0.7 percentage points.

In parallel, a decrease was seen in the case of social contributions by 0.9 pp and non-fiscal revenues by 0.7 pp.

Compared to previous year revenues of the general government in 2012 increased in nominal terms by 6.2% and by 0.2 pp as share to GDP, from 32.7% in 2011 to 32.9% in 2012.

This nominal increase in revenues came in principal from collections of profit tax (+5.3%), wage and personal income tax (+9.9%), VAT (+ 5.4%), excise duties (+6%), insurance contributions (+2%), other taxes and charges on goods and services , donations from abroad and reimbursements from EU for incurred payments (+22.4%).