March 17, 2017 / 1:28 PM / 10 months ago

UPDATE 2-Romanian deficit to miss target unless measures taken, IMF says

(Adds currency, IMF comment)

BUCHAREST, March 17 (Reuters) - Romania’s fiscal shortfall will far exceed targets this year and next, bloated by tax cuts and wage hikes to the detriment of public investment, the IMF said on Friday, echoing concerns from the others that have weighed on the leu currency.

The International Monetary Fund’s Romania mission chief Reza Baqir said the deficit was projected to reach 3.7 percent of gross domestic product this year without additional measures. That compares with the Social Democrat government’s 3 percent of GDP target.

The European Commission expects the deficit to reach 3.6 percent of GDP this year in what is the European Union’s fastest-growing but also second-poorest economy.

“Successive tax cuts, wage increases in excess of productivity and limited high quality public investment ... are constraining potential growth,” Baqir said at the end of regular consultations.

The gap is expected to widen even further, to 3.9 percent of GDP, next year, preliminary IMF estimates showed. Baqir said the government could lower the deficit by cutting unnecessary spending and boosting tax collection and European Union funds absorption.

It could also postpone a planned rise in state pensions later in 2017, he said. But it is unlikely the Social Democrats, who won December’s election on a promise to boost living standards, will act on the recommendation.

The Romanian leu has been particularly vulnerable this year due to political and fiscal uncertainty. On Friday, it hit a 9-month low against the euro.

“Issues pertaining to the quality of the budget are as important as the numbers,” Baqir said.

“If the government were to do many high-quality investments in a transparent manner and there was consensus and broad support for the deficit to be a bit higher, it would not be a problem. Markets would see that this is actually increasing potential for sustainable growth.”

The government plans to hike public sector wages further via a multi-year unified single wage bill, as well as further cut taxes next year. Baqir said a preliminary estimate showed the net impact of the pending unified single wage bill would be around 2.1 percent of GDP over 2017-2020.

Earlier this week, the finance minister, without elaborating, said the government will keep the deficit at 3 percent and could enforce measures to cut spending if needed.

Romania has shrunk its budget and current account deficits under a series of IMF-led aid deals during 2009-2015. (Reporting by Luiza Ilie, editing by Radu Marinas/Jeremy Gaunt)

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