VZCZCXRO7494
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0009/01 0090706
ZNR UUUUU ZZH
P 090706Z JAN 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 7755
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BUCHAREST 000009 
 
SIPDIS 
 
STATE FOR EUR/NCE - AJENSEN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN PGOV SOCI RO
SUBJECT:  ROMANIA PASSES 2008 BUDGET WITH VOTERS IN MIND 
 
Sensitive But Unclassified - please handle accordingly. Not for 
Internet distribution. 
 
Summary 
------- 
 
¶1.  (SBU) Clearly padded to reflect political calculations ahead of 
local and national elections over the next 24 months, the Government 
of Romania's 2008 budget includes sizable increases for education, 
health care, social services, and retirement pensions.  The 
Parliament approved the state and social assistance budget laws just 
before Christmas, and President Traian Basescu promulgated both laws 
at the end of December.  GDP growth, revenue, and inflation 
projections underlying the budget appear too optimistic, however, 
with a high probability the GOR will have to scale back spending 
later in the year or run higher budget deficits to sustain funding 
levels.  End summary. 
 
A Little Something for Everybody 
-------------------------------- 
 
¶2. (U) Passed by Parliament December 20 and promulgated by the 
President just before the New Year, Romania's 2008 state budget and 
social assistance budget laws lay out robust spending plans 
calculated to appeal to broad sectors of the populace.  Consolidated 
expenditures are programmed to rise to 42.3% of GDP, up from 38% in 
2007, with revenues projected to reach the equivalent of 39.3% of 
GDP, up from 35.1% in 2007.  The GOR anticipates accessing EU 
structural funds equivalent to 2.9% of GDP in 2008. 
 
¶3. (U) Winners in the new budget include public sector employees, 
educators, and pensioners, all of whom will see higher wages or 
stipends.  GOR personnel expenditures are projected to increase 5% 
over 2007, with social assistance (including social security) up a 
whopping 31% - including a 43% hike in pensions.  Social programs 
also include extension of a popular school meal program through 
middle school grades, and a jump in the per-child "allowance" paid 
directly to parents from the equivalent of USD $10.20 to $16.30 per 
month.  GOR capital spending is projected to rise 34%, with much of 
the increase directed toward new or upgraded schools and health 
facilities.  Some of this will come at the expense of more 
transportation infrastructure spending, which will inch up only 
slightly over 2007 levels.  Total government spending on goods and 
services will increase by 19%, with interest payments on the public 
debt rising 16% over last year. 
 
¶4. (U) Measured in percentage of GDP, the education budget will top 
6%, an historic high, while health care spending will rise to 4.5%, 
up from 4.0 last year.  The Ministry of Agriculture will get 2.7%, 
essentially flat from 2007 (though this masks a planned USD $100 
million transfer from the budget of the Ministry of Economy and 
Finance to Agriculture for direct income support payments to 
farmers).  The national defense appropriation is 1.89% of GDP, 
compared to 1.4% last year. 
 
A Bit of Budgetary Hocus-Pocus? 
------------------------------- 
 
¶5. (U) According to the GOR, these planned, substantial spending 
increases will be possible without any tax increases, all while 
holding the budget deficit close to last year's levels as a measure 
of GDP.  In fact, the budget includes a three-stage, 6% total cut in 
the payroll tax, mostly benefiting employers; the GOR also postponed 
until at least 2009 a proposed new tax on agricultural production. 
(The Government did manage to kill a rehashed opposition proposal to 
cut the 19% VAT on basic foodstuffs.)  GOR revenue estimates are 
based on projected GDP growth of 6% and a targeted inflation rate of 
4.5%. 
 
¶6. (SBU) To offset the lower payroll tax, the GOR is forecasting 
additional payroll tax receipts from 95,000 new entrants into the 
labor force; a 12.3% estimated rise in the gross average salary; 
bigger contributions from high-salary workers due to elimination of 
deduction caps, with taxes now levied on employees' full salaries; 
and inclusion of bonuses within the taxable base.  Some of these 
measures may well provide additional revenue, though the forecast 
for new labor entrants is highly suspect given Romania's shortage of 
skilled labor, which is only expected to worsen in the next year. 
The GOR's projection of 6% GDP growth is a best-case scenario, and 
the 4.5% inflation target looks rather artificial in light of the 
fact that annualized inflation is currently running at nearly 7%. 
 
 
If You Scratch My Back... 
------------------------- 
 
¶7. (SBU) Parliamentary debate on the budget was occasionally sharp, 
with opposition MPs from the newly-established PDL leading the 
 
BUCHAREST 00000009  002 OF 002 
 
 
argument that the state budget was not realistic or sustainable. 
Still, the state budget law passed by a comfortable 249 to 93 
margin; the vote on last year's budget package was much tighter. 
While PSD MPs also spoke against the state budget, they were 
ultimately induced to vote in favor through inclusion of an extra 
USD $205 million for distribution to local governments in counties 
under PSD control.  By supporting the final budget, the PSD could 
also claim a share of the credit for the pension hike, an idea 
championed by the party last summer.  Despite PDL rhetoric about 
realistic budgeting, no one opposed the social assistance budget 
law, which contains some of the biggest spending increases.  The 
final vote there was 342 to 0, with two abstentions. 
 
 
Comment 
------- 
 
¶8. (SBU) The GOR's 2008 budget laws, full of populist goodies, were 
clearly drafted with voters' pocketbooks in mind - no surprise in 
advance of successive elections over the next 24 months.  It can be 
argued that the budget merely reflects Romania's new realities: a 
rapidly growing and modernizing economy that can afford to reward 
its citizens more generously.  The danger, of course, is that GOR 
revenue projections to sustain all this new spending look highly, 
some would even say wildly, optimistic. And with inflation running 
well above Central Bank targets, led by continuing increases in food 
and fuel costs, many Romanians (especially fixed-income retirees) 
will find that even higher stipends and other handouts may not go 
very far. 
 
¶9. (SBU) If, as seems likely, revenue projections fall short, then 
the GOR will face some difficult choices.  If forced to cut back on 
spending later in the year, transportation infrastructure is a 
likely target.  That would be unfortunate, since in the new budget 
infrastructure investment is already being restrained to help pay 
for social spending - and many analysts don't believe Romania will 
be able to sustain the high growth rates necessary to converge with 
the rest of the EU unless it commits higher levels of spending to 
infrastructure.  An unpleasant alternative would be to allow the 
budget deficit to spike.  That prospect is already having 
consequences.  The Central Bank cited the risk of higher deficits, 
among others, when it announced last week it was raising interest 
rates by another half percentage point.  End comment. 
 
Taplin