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Romanian budget gap widens on spending for EU entry

Romania's state budget deficit widened to 1.7% of GDP last year from 0.8% in 2005 as spending increased before the country joined the European Union.

„Fiscal and budget policy were confronted by two major challenges in 2006,” the Finance Ministry said in a statement today. It cited the need to „continue the process of disinflation” while meeting „commitments to the EU to develop national infrastructure and education, health, rural areas and environmental protection.” Romania increased spending on roads, railways, pensions and other areas last year, mainly in December, to bring standards closer to those in the EU, which it joined on January 1. The government plans to raise spending more this year, widening the budget deficit to 2.8% of GDP. Much of the spending last year came in December. As late as November, Romania posted a budget surplus of 1.2% of GDP.The IMF and the EU have said Romania should seek to narrow its budget deficit to avoid accelerating inflation from a 16-year low of 4.7% in November last year and 4.9% in December. The Finance Ministry said today the government boosted revenue to 31.8% of GDP last year from 30.3% the previous year, helping meet a key EU recommendation.

EU Monetary Affairs Commissioner Joaquin Almunia said last year that budget revenue as a proportion of GDP was lower than in any EU nation and recommended the country increase it. Economic growth, which the government has estimated at about 8% last year from 4.1% in 2005, also stimulated revenue collection, the finance ministry said. The annual inflation rate last year slowed to 4.9% in December from 8.9% a year earlier. Romanian government spending increased 25% last year in nominal terms and accounted for 33.5% of GDP, from 31.2% in 2005, the ministry said. Income tax collection rose 44.7% to 9.8 billion lei ($3.8 billion). Romania has said income tax revenue has consistently increased since January 1, 2005, when it introduced a flat tax of 16% on corporate and personal income, the lowest in eastern Europe. It replaced a corporate tax rate of 25% and a personal income tax rate of as high as 40%. The Finance Ministry said revenue from the 19% value added tax increased 23% last year and totaled 8.3% of GDP and customs tax collection rose 19%. (Bloomberg)