To understand the concept of a “Budget Deficit,” it’s essential first to grasp the meaning of the state budget. The state budget is an annual financial plan that outlines all anticipated expenditures and the revenues collected by public administrations. Therefore, a budget deficit refers to a situation where an entity’s expenditures exceed its revenues. This term is commonly used concerning a government’s budget deficit but can also apply to businesses or even individuals.
What are the causes of a budget deficit in Romania?
Currently, most countries worldwide experience a budget deficit; this issue became more prominent in public discourse during the 1980s. Several factors contribute to budget deficits, including:
- Increased spending on certain social programs;
- Increased expenditures in specific economic sectors;
- Decline in the production of goods and services within the economy;
- Growth of undeclared (informal) work.
A decrease in economic productivity inevitably leads to reduced state revenues. This decline also affects the population’s income levels, resulting in lower tax contributions.
Furthermore, if companies operating in the market experience reduced income and profits, they may cease fulfilling their tax obligations, exacerbating the budget deficit.
Undeclared work, commonly known as “black market labor,” significantly impacts the budget deficit. An increasing number of individuals opt for this type of employment to avoid paying taxes and contributions, a trend that directly contributes to the deficit.
How can we address the budget deficit, and what measures should be taken?
As previously mentioned, most countries face budget deficits, varying in severity. The necessary measures to combat budget deficits differ from one country to another and are tailored to address specific underlying issues.
Budget Deficit in Romania
Over time, Romania has implemented various measures to combat the budget deficit. One primary approach has been reducing government expenditures, involving budget reallocations to priority sectors and cutting funds. Other strategies include increasing taxes and expanding the tax base by identifying new sectors for taxation or raising existing tax rates. Additionally, the government has focused on enhancing tax collection and reducing tax evasion through stricter enforcement of fiscal legislation.
According to the Ministry of Finance, Romania’s budget deficit was 5.68% of GDP in 2023, a decrease from the previous year. However, as of early 2024, the deficit has risen to 8.65% of GDP, a concerning increase. The Maastricht Treaty stipulates that a country’s budget deficit should not exceed 3% of its GDP. Given the current upward trend, there is a risk of continued deficit growth. Failure to address this issue may result in Romania losing access to certain European Commission funds.
Measures announced to date aim to increase revenues, such as raising taxes, eliminating reduced VAT rates for specific product categories, and removing tax benefits for employees in construction or IT sectors. The situation remains dynamic, with further measures anticipated.
Other factors contributing to the reduction of the budget deficit in 2023 compared to 2022 include:
- Social security contributions;
- Corporate income tax revenues;
- Net VAT revenues;
- Excise duty revenues;
- Non-tax revenues.
Determining the sustainable level of budget deficit acceptable to markets is challenging. Projections suggest that the deficit may reach up to 10% of GDP this year, potentially maintaining this level for the next two years, depending on various developments.