Work Kicks Off to Defuse Budget Timebomb in EU’s East

(Bloomberg) -- Romania’s new finance minister pledged to wrest control of a budget gap that’s forecast to become the European Union’s widest in the coming years.

Florin Citu, part of a Liberal Party government that took power last week, said Thursday that the 2019 deficit will breach the EU’s ceiling of 3% gross domestic product and could even top 4% if measures aren’t put in place to curb it.

He didn’t reveal specific plans, blaming the previous administration for “undermining the economy” and may seek a criminal probe into what he called its misappropriation of public funding.

“We discovered the situation is much worse than we estimated,” Citu told reporters in Bucharest. “But we have some solutions to contain it.”

The shortfall, stoked by the last government’s spending largess, has become a key test for Prime Minister Ludovic Orban’s team, which wants to avoid EU punishment for exceeding the bloc’s fiscal limits.

But closing the gap will be a challenge. Without action, the European Commission predicts it will reach more than 6% of GDP in 2021 -- double the maximum permitted.

The projections include the last government’s pledges of double-digit growth in pensions in 2020 and 2021. Dialing back promises for expenditure would be unpopular and tricky for Orban’s minority cabinet, which faces elections next year.

Citu said next year’s budget will honor existing spending commitments, including the boost to pensions. But he said the plan will also respect EU rules and will focus on investments -- an area that’s been neglected of late.

He said Tuesday on Facebook that poor tax collection and rosy projections resulted in revenue missing forecasts by 21 billion lei ($4.9 billion) so far this year.

What’s more, Citu said Thursday that the last government pushed through significant spending during its final days in office for allies in local administrations.

The need for action is clear, and pressure from the EU and markets may soon be felt.

“In the absence of corrective measures, the budget deficit will soar to levels that could put Romania under the Excessive Deficit Procedure next year, trigger a negative response from rating agencies and lead to an increase in borrowing costs,” said Eugen Sinca, an economist at Erste Group Bank AG in Bucharest.

To contact the reporters on this story: Andra Timu in Bucharest at atimu@bloomberg.net;Irina Vilcu in Bucharest at isavu@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley

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