VZCZCXRO7693
OO RUEHIK
DE RUEHBM #0868/01 3640550
ZNR UUUUU ZZH
O 300550Z DEC 09
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0209
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHINGTON DC
UNCLAS SECTION 01 OF 02 BUCHAREST 000868
STATE FOR EUR/NCE - ASCHEIBE, EB/IFD
STATE PASS USTR - LISA ERRION
TREASURY FOR BAKER
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/CEEB/BURGESS/KIMBALL
STATE PASS USAID
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: ECON ETRD EIND EFIN RO
SUBJECT: GOR APPROVES 2010 BUDGET DRAFT, EASY PARLIAMENT VOTE
EXPECTED
BUCHAREST 00000868 001.2 OF 002
1. (SBU) On December 23, the new Boc Cabinet approved the 2010
draft budget for submission to Parliament for debate and approval.
Parliament, under the new ruling coalition of PD-L, UDMR, other
ethnic minorities, and a recently formed group of "independents",
will likely pass the proposal in January with only minor amendments.
The government based the 2010 budget plan on the following
assumptions: 1.3% economic growth, 3.7% inflation, 4.25 RON/Euro
average forex rate, and a consolidated budget deficit at 5.9% of the
GDP.
2. (SBU) The government plan incorporates a series of extremely
ambitious expectations. Consolidated budget revenues have been
programmed to reach 168.8 billion RON or 31.3% of the GDP. This
represents an 8.7% increase over anticipated revenues for 2009-an
extremely bold target, considering the negative economic growth
trend this year. Profit tax collection has been programmed to
increase 5.2% against 2009 expectations, which is again inconsistent
with the current economy's harsh reality. The budget reflects a
4.1% increase in income revenues notwithstanding higher unemployment
and public sector income constraints. VAT revenues are programmed
to remain the largest single source of income, growing 5.1% despite
the retail sector's obvious cool off. The proposed budget assumes
that excise taxes will rise 17.9%, a slightly more realistic growth
rate in light of the EC harmonization process. Finally, payroll tax
revenues are calculated to increase 3.7%. The GOR budget does not
include any change to basic VAT, flat, or payroll tax rates in 2010.
In fact, the Boc cabinet has proposed a social security tax holiday
as an incentive for employers to hire the jobless. The details,
including start date and duration, have yet to be determined.
3. (SBU) Consolidated budget expenditures have been projected at
200.75 billion RON (37.2% of the GDP), up 4.6% from the revised 2009
budget. Programmed expenditures for goods and services in 2010 are
down 2.1% from the 2009 revised program, while interest expenditures
are set to jump 43.6% due to higher and more expensive public debt
costs. Personnel expenditures are expected to drop 1.6% in 2010, a
minimal decrease considering the hype generated by the government's
focus on public sector labor costs. The GOR has promised to freeze
government employees' real wages; specifically, it intends to limit
any wage increase to cover inflation and, in the cases of
state-owned companies, to grant wage hikes only for companies that
posted profits in 2009. Additionally, significant employment
benefits will be eliminated in 2010. The GOR will stop giving
employees tax-deductible lunch and holiday tickets. Lunch tickets
account for about USD 180 million, out of approximately USD 214
million for all tickets in the public sector. The abolition of the
government employees' holiday tickets comes less than 12 months
after the same Prime Minister and tourism minister launched the
program for the first time. The 2010 budget also stipulates that
funds allocated for co-financing post-accession external grants can
no longer be transferred between ministries or other public
authorities. Finally, any salary increases awarded in courts will
not be paid during the first half of 2010.
4. (SBU) The ministries receiving the highest allocation of funds
in the proposed 2010 budget are: Ministry of Labor with 4.4% of the
GDP (compared to 2.8% in 2009); Ministry of Education, which will
take over the Ministry of Youth and Sports, with 2.7% of the GDP, up
from 2.1% in 2009; Ministry of Transportation with 2% of the GDP
against 1.8% in 2009; Ministry of Interior and Public Administration
with 1.96% of the GDP, compared to 1.7% in 2009; and Ministry of
Agriculture with 1.7% of the GDP against 1.5% in 2009. The Ministry
of National Defense's budget will hold steady at 1.3% of the GDP and
the Ministry of Health will see a modest increase from .7% of the
GDP in 2009 to 0.76% in 2010. Many government entities will see
dramatic increases over 2009. Among the most significant are: the
Government General Secretariat (up 103.7% from 2009), which will be
assuming responsibility for religious organizations previously under
the jurisdiction of the Ministry of Culture; Constitutional Court
(up 59% from 2009), Special Telecommunications Service (up 39.8%),
Ministry of Economy (up 38.7%), Ministry of Justice (up 31.6%),
General Prosecutor's Office (up 30.8%), Ministry of Foreign Affairs
(up 15.2%), Ministry of Communications (up 8.5%), Supreme Court (up
8.3%), Ministry of Labor (up 5.2%), and the Presidency (up 4.6%).
Among the most draconian budget cuts compared to the 2009 budget are
those for: Ministry of Culture (down 31.1%), Ministry of Environment
(down 27.3%), Ministry of Finance (down 24.1%), Chamber of Deputies
(down 16.5%), Senate (down 10.7%), and Audit Court (down 6%).
5. (SBU) COMMENT. The proposed 2010 budget legislative package
lacks major structural changes. The program is built on optimistic
assumptions, leaving a lax fiscal deficit largely untouched. This
seems to be a paradox, given the generous, flexible IMF-led
BUCHAREST 00000868 002.2 OF 002
financial package from the IFOs and the close supervision of the IMF
technical missions over the 2009 budget adjustments and 2010
planning. The Parliament may pass minor amendments in January, but
the GOR's budget draft will likely pass largely intact, due to the
ruling coalition's desire to draw as much as possible from the IMF
loan as quickly as possible. For 2010, the two critical factors to
watch will be: how much of the IFOs' installments will be channeled
toward the economy versus public sector wages and social assistance;
and how will Romania's central bank maintain its independence, faced
with increasing pressures to relax key interest rates and the
perpetual necessity to defend price stability.
GITENSTEIN