Friday, December 19, 2008

Romania coalition vows tight budget, analysts wary

BUCHAREST, Dec 19 (Reuters) - Romania's centre-left coalition pledged on Friday to slash its budget deficit next year in a bid to protect the country from global crisis, but economists said its new targets were unrealistic. Fiscal discipline is seen as the key test for Bucharest's incoming government, a broad partnership between a centrist and left-wing grouping that finished almost tied in last month's parliamentary election.

Without stringent spending cuts and convincing fiscal plans, Romania may plunge into recession next year, economists warn, but the coalition of unlikely partners is expected to face deep differences over social policies and welfare expenditures. Finance minister-designate Gheorghe Pogea said his goal was to lower the fiscal deficit to 1.7 percent of gross domestic product (GDP) next year, from around 4 percent expected in 2008. "We plan to drastically reduce the budget deficit from around 4 percent this year. The crisis cannot wait any longer," Pogea told Reuters in a phone interview. "There will be dramatic cuts in public spending and we will favour only investment-related spending."

But economists said that without drastic cuts in pensions and wages, likely to be opposed by his Social Democrat (PSD) partners, this was unrealistic. "It does not seem plausible to commit to a deficit below 3 percent," said Nicolaie Alexandru-Chidesciuc, senior economist with ING Bank in Bucharest. "What they can do is to take measures that clearly show the intention of taking the deficit below 3 percent over 2-3 years." The coalition faces a parliamentary confidence vote on Monday, which it is widely expected to win.

But economists say its cabinet lineup announced on Thursday includes too few tested reformists to raise hopes of reviving economic reforms that have stalled for the last two years. Pogea's efforts to introduce fiscal restraint may face opposition from PSD-nominated politicians such as Education Minister Ecaterina Andronescu, a proponent of massive pay hikes for teachers, or Labour Minister Marian Sarbu, once a trade union leader.

Fiscal restraint will be key to ensure Romania can finance its vast current account deficit, seen around 13 percent of GDP this year. The main obstacles are slowing economic growth, likely to decline to less than half of this year's expected rate of 9 percent, and massive pre-election spending promises made by the outgoing centrist government as well as the coalition parties.

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