Sunday, December 23, 2007

Romania approves 2008 budget law, inflation at risk

By Radu Marinas and Marius Zaharia
BUCHAREST, Dec 20 (Reuters) - Romania's parliament approved on Thursday the government's 2008 budget with a deficit of 2.7 percent of gross domestic product, boosting social spending in a move that analysts say may hamper the fight against inflation.
The centrist minority government has faced an uphill battle to push its fiscal plan through parliament, where the leftist opposition Social Democrats (PSD) threatened to block it unless the cabinet backed greater welfare help.

Prime Minister Calin Tariceanu defended the final plan, saying it would help Romanians to catch up with higher living standards in the European Union, which Romania joined in January.
"Your vote represents an investment in the future of Romania," Tariceanu told deputies. "The budget reflects our status as European Union member and allows for a decreasing of gaps compared with other member states."

However, economists said the planned widening of the deficit, from this year's target of 2.4 percent, and insufficient spending on investment, coupled with more money spent on consumption, threatened Romania's economic stability.

"It is an electoral budget ... Bad news for the central bank as it proposes higher social spending leading to revenue rises when Romania needs to control aggregate demand," said Ionut Dumitru, head of research at Raiffeisen Bank in Bucharest.

"Inflationary expectations are so strong ... the central bank will be forced to hike rates as early as next year."

LOOSER STRINGS

Market watchers and the central bank have warned Bucharest's centrist government should tighten its fiscal and wage plans to safeguard a fast-growing economy from overheating.
But several PSD amendments made their way into the law, including bigger pensions for surviving spouses and raises in scholarships and student aid.

Other proposals, such as increasing minimum monthly wages to 640 lei ($261) from a recently agreed 500 lei, or a sharp reduction of the value added tax for staple food were not included.
"This budget represents further fiscal loosening. This does not seem to be a budget focusing on greater investment and lower consumption. It is mainly focusing on consumption," said Catalina Constantinescu, ABN Amro analyst in Bucharest.

"Revenues are overestimated ... the budget deficit goal is not adequate from the perspective of a widening external gap ... and double digit wage rises might boost pressures on the demand side, so inflation will be much difficult to control."

Romania's inflation has jumped to more than 6 percent late this year, on the back of fast wage growth, internal consumption and global gains in food costs.

Analysts say the central bank will struggle to bring annual price growth to within next year's goal of 2.8-4.8 percent, from this year's estimated figure of just under 6 percent.

They also warn about the risk of further spending on consumption next year, when Romania holds general elections. Major opposition groupings and the ruling Liberal party are all struggling to boost their flagging public support. (Editing by David Christian-Edwards)

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