COMMISSION STAFF WORKING DOCUMENT Accompanying the documents Recommendation for a Council decision establishing that no effective action has been taken by Romania in response to the Council recommendation of 5 December 2017 Recommendation for a Council Recommendation with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania
Date: 2018-05-23
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, economic policy, economic reform, financial control, gross domestic product, multilateral surveillance, public finance, stability pact, stability programme

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2018  SWD(2018) 366 final  COMMISSION STAFF WORKING DOCUMENT Accompanying the documents Recommendation for a Council decision establishing that no effective action has been taken by Romania in response to the Council recommendation of 5 December 2017  Recommendation for a Council Recommendation with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania {COM(2018) 430 final} - {COM(2018) 432 final}  
 
 
COMMISSION STAFF WORKING DOCUMENT 

Accompanying the documents 

Recommendation for a Council decision establishing that no effective action has been 
taken by Romania in response to the Council Recommendation of 5 December 2017 

Recommendation for a Council recommendation with a view to correcting the 
significant observed deviation from the adjustment path toward the medium-term 
budgetary objective in Romania 

1. 

INTRODUCTION 

Since 2013, Romania has been subject to the preventive arm of the Stability and Growth Pact, 
which  requires  sufficient  progress  towards  the  medium-term  budgetary  objective  (MTO). 
Romania is not subject to the debt rule as its general government debt remains below 60% of 
GDP.  

This  staff  working  document  has  a  double  purpose.  First,  to  explain  the  reasons  behind  the 
Commission  recommendation  of  a  Council  decision  on  non-effective  action  in  2018  in 
response  to  the  Council  Recommendation  addressed  to  Romania  on  5  December  2017. 
Second,  to  support  the  Commission  recommendation  for  a  Council  recommendation  with  a 
view  to  correcting  the  significant  observed  deviation  from  the  adjustment  path  toward  the 
medium-term budgetary objective in Romania in 2017, as adopted by the Commission on 23 
May 2018. 

On 16 June 2017, the Council decided in accordance with Article 121(4) of the Treaty on the 
Functioning of the European Union ("TFEU") that a significant observed deviation from the 
MTO  occurred  in  Romania  in  2016.  In  view  of  the  established  significant  deviation,  the 
Council  on  16  June  2017  issued  a  recommendation  for  Romania  to  take  the  necessary 
measures to ensure that the nominal growth rate of net primary government expenditure1 does 
not exceed 3.3% in 2017, corresponding to an annual structural adjustment of 0.5% of GDP2.  

On  5  December  2017  the  Council  found  that  Romania  had  not  taken  effective  action  in 
response to the 16 June 2017 recommendation and issued a revised recommendation. In the 
new  recommendation  the  Council  asked  Romania  to  take  the  necessary  measures  to  ensure 
that the nominal growth rate of net primary government expenditure does not exceed 3.3% in 
2018,  corresponding  to  an  annual  structural  adjustment  of  0.8%  of  GDP3.  It  recommended 
Romania to use any windfall gains for reduction of its deficit, while budgetary consolidation 
measures should ensure a lasting improvement in the general government structural balance in 

1  

2  

3  

Net primary government expenditure is comprised of total government expenditure excluding interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  four-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 
Council Recommendation of 16 June 2017 with a view to correcting the significant observed deviation 
from  the  adjustment  path  toward  the  medium-term  budgetary  objective  in  Romania  (OJ  C  216, 
6.7.2017, p. 1). 
Council Recommendation of 16 June 2017 with a view to correcting the significant observed deviation 
from  the  adjustment  path  toward  the  medium-term  budgetary  objective  in  Romania  (OJ  C  216, 
6.7.2017, p. 1). 

1 

 
 
 
                                                 
a growth-friendly manner. The Council established a deadline of 15 April 2018 for Romania 
to  report  on  the  action  taken  in  response  to  the  recommendation.  The  Romanian  authorities 
submitted their report on action taken in response to Council recommendation (hereafter: "the 
report") on 20 April. i.e. after the deadline set by the Council. Moreover, on 10 and 11 April 
2018,  the  Commission  undertook  an  enhanced  surveillance  mission  in  Romania  for  the 
purpose  of  on-site  monitoring  under  the  Article  -11(2)  of  Council  Regulation  (EC)  No 
1466/97  and  subsequently  reported  to  the  Council  on  [23]  May  2017  and  made  its  findings 
public. 

Based  on  the  Commission  2018  spring  forecast,  Section  2  of  this  document  presents 
macroeconomic developments and outlook in 2017-19. Section 3 presents fiscal developments 
in 2017 and updated budgetary projections for 2018-2019. Section 4 presents an assessment 
of  compliance  with  the  obligations  stemming  from  the  Stability  and  Growth  Pact  in  2017, 
including an overall assessment of the reasons for the deviation from the requirements of the 
preventive  arm.  Section  5  assesses  compliance  with  the  Council  Recommendation  of  5 
December  2017.  Section  6  proposes  a  fiscal  effort  for  2018  and  2019  to  address  the 
significant deviation, including a new applicable expenditure benchmark rate compatible with 
the  suggested  annual  improvement  in  the  structural  balance.  Section  7  provides  overall 
conclusions. 

2. 

MACROECONOMIC DEVELOPMENTS AND OUTLOOK IN 2017-2019 

Romania's  economic  boom  intensified  in  2017,  with  real  GDP  increasing  by  6.9%,  a  post-
crisis high. The main driver of growth continued to be private consumption, which expanded 
by around 10% in real terms. The private consumption boom was spurred by an expansionary 
fiscal policy, including cuts to indirect taxes and public sector pay rises. After contracting in 
2016, investment returned to growth in 2017 on the back of rising private investment in both 
machinery  and  equipment  and  residential  construction.  Public  investment,  however,  fell 
sharply  for  the  second  consecutive  year.  The  contribution  of  net  exports  to  growth  was 
negative, as imports outpaced exports on the back of strong consumption growth. 

Looking ahead, growth is expected to decelerate but to remain robust. Private consumption is 
forecast  to  slow  down  starting  in  2018,  as  nominal  wage  growth  moderates  and  inflation 
increasingly weighs on real disposable income, but it will remain the main driver of growth. 
Investment,  however,  is  expected  to  further  strengthen  driven  by  a  pick-up  in  the 
implementation of projects co-financed by EU funds. Imports are projected to continue rising 
faster than exports. Accordingly, net exports will remain a drag on real GDP growth. Overall, 
real GDP is projected by the Commission to increase by 4.5% in 2018 and 3.9% in 2019. 

The current account deficit has been widening progressively since 2014, when it was close to 
zero, mainly on account of a weakening trade balance. It amounted to 3.5% of GDP in 2017 
and is forecast to increase further, to 3.6% of GDP in 2018 and 3.9% in 2019. 

The labour market continued to tighten in 2017 on the back of strong real GDP growth, with 
unemployment dropping to a 20-year low of 4.9%. The low unemployment rate, together with 
a 16% minimum wage hike in February 2017 and substantial public sector pay rises, led to an 
acceleration of wage growth. Compensation per employee increased by 15% in real terms in 
2017. Wages are expected to continue to grow in 2018, albeit at a slower pace, due to further 
increases in public wages and an additional 9% increase in the net minimum wage which took 
effect in January 2018. 

2 

 
 
After  two  consecutive  years  of  falling  consumer  prices,  inflation  turned  positive  in  2017, 
despite being dampened by a standard VAT rate cut and lower excise duties on fuel. Inflation 
started to accelerate in the second half of the year mainly on account of rising food and energy 
prices.  Inflation  further  accelerated  in  early  2018  as  the  effect  of  the  January  2017  tax  cuts 
faded away, reaching 4% by March. Inflation is forecast at 4.2% for 2018 as a whole and to 
decline to 3.4% in 2019 as energy price inflation moderates. 

There are  several risks  to Romania's  macroeconomic outlook. The gradual tightening of the 
central  bank’s  monetary  policy  in  response  to  emerging  inflation  pressures  and  a  widening 
output gap could dampen private investment. Investment could also be adversely affected if 
further  cuts  to  public  investment  were  to  take  place.  A  continuing  increase  in  unit  labour 
costs, due to wage growth outpacing productivity growth, may also curtail Romania's exports. 
More generally, uncertainty regarding the government’s policies could hamper growth. 

Table 1. Macroeconomic developments and forecast 

3. 

FISCAL DEVELOPMENTS AND OUTLOOK IN 2017-2019 

In  2017,  the  general  government  deficit  decreased  slightly  to  2.9%  of  GDP,  from  3.0%  of 
GDP in 2016, while the economy grew significantly above its potential. The decrease of the 
headline deficit was cyclical in nature and not due to fiscal consolidation measures. Tax cuts, 
in particular, a 1pp. cut to the standard VAT rate, had a negative effect on tax revenues. On 
the expenditure side, compensation for employees considerably increased (by 0.8% of GDP). 
At the same time, public investment dropped significantly (by 0.8% of GDP). Given that the 
output gap increased significantly and turned positive, the structural deficit increased to 3.3% 
of GDP in 2017, from 2.1% in 2016. 

3 

20162017201720182018201920192016OutturnCP 2017OutturnCP 2017CP 2018COMCP 2017CP 2018COMReal GDP (% change)4.85.26.95.56.14.55.75.73.9Private consumption (% change)7.67.310.16.46.54.96.26.14.2Gross fixed capital formation (% change)-2.06.94.77.97.97.48.48.46.9Exports of goods and services (% change)8.76.89.76.37.47.56.96.96.8Imports of goods and services (% change)9.88.511.37.98.58.28.18.07.4Contributions to real GDP growth:- Final domestic demand4.66.37.56.26.75.06.26.24.4- Change in inventories0.7-0.30.20.00.00.00.00.00.0- Net exports-0.5-0.8-0.7-0.7-0.6-0.5-0.6-0.6-0.5Output gap1-1.5-0.11.20.40.81.41.11.21.1Employment (% change)-0.90.72.60.92.40.91.01.80.1Unemployment rate (%)5.95.74.95.54.84.55.44.64.4Labour productivity (% change)5.84.44.24.53.63.64.63.83.9HICP inflation (%)-1.11.21.12.53.84.22.32.83.4GDP deflator (% change)2.12.05.32.12.15.21.91.94.0Comp. of employees (per head, % change)10.15.816.05.98.18.76.07.06.7Net lending/borrowing vis-à-vis the rest of the world (% of GDP)-1.10.4-1.90.8-1.4-2.10.9-0.9-2.1Source:1In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario using the commonly agreed methodology.20172018Note:Commission 2018 spring forecast (COM); Convergence Programmes (CP).2019 
 
 
The  2017  general  government  deficit  outcome  of  2.9%  of  GDP  fulfils  the  target  from  the 
2017 Convergence Programme. Both the revenues and the expenditures turned out lower than 
planned  in  the  2017  Convergence  Programme.  On  the  revenue  side,  the  target  for  both 
indirect and direct tax revenues was not achieved. On the expenditure side, public investment 
was significantly lower than planned. 

On  10  and  11  April  2018  the  Commission  undertook  an  enhanced  surveillance  mission  in 
Romania for the purpose of on-site monitoring under the Article -11(2) of Council Regulation 
(EC)  No  1466/97.  After  having  transmitted  its  provisional  findings  to  the  Romanian 
authorities for comments, the Commission  reported  its findings to  the Council on [23] May 
2018  and  made  its  findings  public.  The  Commission  report  finds  that  the  Romanian 
authorities do not intend to act upon the Council recommendation of 5 December 2017. The 
authorities confirmed that their target for 2018 remains the headline deficit of just below 3% 
of GDP. Given a positive and increasing output gap, this indicates a further deterioration of 
the underlying structural deficit, contrary to the Council recommendation. 

In their report on action taken, the authorities target a general government deficit of 2.96% of 
GDP in 2018, a slight increase compared both to the 2017 outturn and to the 2018 target in the 
2017 Convergence programme of 2.9%. The report does not contain projections of individual 
budgetary items or categories. The authorities provide a list of taken discretionary measures. 
The  list  only  includes  measures  with  a  positive  impact  on  the  budget  balance.  Adopted 
measures which reduce revenues or increase expenditures (such as a cut of the flat Personal 
Income Tax rate from 16% to 10% or significant increases to public sector wages) were not 
included.  Table  2,  below,  presents  the  measures  listed  in  the  report  with  a  significant 
budgetary  impact  as  estimated  by  the  authorities  (defined  as  an  impact  of  at  least  0.1%  of 
GDP).  On  the  expenditure  side,  the  listed  measures  (e.g.  limiting  new  hires  in  public 
administration,  indexation  of  special  pensions  only  by  inflation)  are  not  quantified  in  the 
report. The fiscal impact of the reported measures falls significantly short of the requirement 
stated in the Council Recommendation. 

Table 2. Discretionary fiscal measures listed in the report (impact above 0.1% of GDP)  

Title 

Reported 
impact on 
government 
balance  

Comments 

Increasing excise duties for energy products back to their 2016 level as 
of October 2017 (i.e. reversing a previous cut which entered into force 
in January 2017) 

Increasing  the  dividends  from  state-owned  companies  from  50%  to 
90%, similarly to 2017 

Increasing  the  taxation  base  for  companies  for  unemployed  persons 
with disabilities from September 2017 

Payment of social contributions at the level of the minimum wage for 
part time employees earning less than the minimum wage 

Starting the procedure for selling 5G licences 

+0.3 

+0.1 

+0.1 

+0.1 

+0.1 

An extension of a 
measure in force since 
2017 

According to the 
accounting rules used in 
Commisson forecasts 
(ESA-2010), the impact 
of this measure shoud be 

4 

 
 
 
 
 
smoothed out over 
several years  

Introducing a split-payment system in VAT, mandatory by companies 
in insolvency or with VAT arrears, optional to the rest 

Other measures to decrease tax evasion and increase tax collection 

+0.3 

+0.2 

Note:  

The budgetary impact in the table as reported by the naitonal authorities in the report on action taken. The table includes 
measures with a reported fiscal impact of at least 0.1%of GDP. 

Table 3. Discretionary revenue measures included in the Commission 2018 spring 
forecast (fiscal impact in % of GDP) 

Title 

2017 

2018 

2019 

Removal of 5 average wages cap from the tax base for social contributions 

+0.1 

Increase of dividends from SOEs from 50% to 90% of their profits 

+0.1 

-0.1 

Payment of social contributions at the level of the minimum wage for part 
time employees earning less than the minimum wage 

+0.1 

Exemption of pensions income from health contributions 

Abolishment of special constructions tax 

Iincrease of Personal Income Tax-free threshold for pension income  

Changes to the turnover tax on microenterprises 

Standard VAT rate cut from 20% to 19% 

Cut of excise duties for energy products 

-0.1 

-0.1 

-0.1 

-0.2 

-0.3 

-0.4 

Increasing  excise  duties for energy products  back  to  their  2016  level  as  of 
October 2017 (i.e. reversing the previous cut) 

+0.1 

+0.3 

Social contributions shift almost entirely on the employees 

Cut of flat Personal Income Tax rate from 16% to 10% and increase of tax 
allowances  

A  decrease  of  the  share  of  social  contrubutions  transferred  to  the  second 
pension pillar 

+1.2 

-1.5 

+0.2 

Note:  

The budgetary impact in the table as included in the Commission 2018 spring forecast. A positive sign implies that revenue 
increases as a consequence of this measure. The table includes measures with a fiscal impact of at least 0.1%of GDP. 

Based  on  the  Commission  spring  2018  forecast,  which  takes  into  account  the  measures 
described in the report from the authorities to the extent they are already enacted or credibly 

5 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
announced in sufficient detail, as well as information from all available sources, the general 
government deficit is projected to increase to 3.4% of GDP in 2018. The unified wage law, 
enacted  in  summer  2017,  increased  gross  public  wages  by  25%  as  of  January  2018  and 
contains additional wage increases in health and education sectors, leading to an increase of 
the  spending  on  compensation  of  employees  by  0.7  percentage  points  relative  to  GDP.  The 
fiscal cost  of these  increases of gross wages is set to be partially compensated by a shift  of 
social security contributions from 22.75% for employers and 16.5% for employees to 2.25% 
and 35% respectively. Moreover, the government partially reversed the past systemic pension 
reform  by  lowering  the  proportion  of  the  social  contributions  transferred  to  the  second 
pension pillar (which is classified outside of the general government) from 5.1% to 3.75% of 
gross wages. At the same time, the flat personal income tax (PIT) rate was cut from 16% to 
10%.  As  a  consequence  of  these  measures,  the  revenue  from  social  contributions  is  set  to 
increase  by  1.4  percentage  points  of  GDP  while  the  revenue  from  direct  taxes  is  set  to 
decrease  by  1.3  percentage  points.  The  general  government  deficit  is  projected  by  the 
Commission spring 2018 forecast to reach 3.8% of GDP in 2019, driven by increases in social 
payments  and  public  investment  (increase  of  expenditure  on  both  categories  by  0.2 
percentatge  points  of  GDP).  As  a  consequence  of  the  fiscal  easing  described  above, 
Romania’s structural deficit is projected by the Commission to increase from 3.3% of  GDP in 
2017 to 3.8% in 2018 and 4.3% in 2019. The composition of the budget and its adjustments in 
nominal and structural terms are presented in Table 3 below. 

The  Romanian  authorities  in  the  2018  Convergence  Programme  plan  a  headline  deficit  of 
2.95% of GDP in 20184. Total revenues as a share of GDP are higher than in the Commission 
forecast  (difference  of  0.4  percentage  points),  while  the  expenditure  ratio  is  the  same  as 
projected  by  the  Commission.  The  underlying  macroeconomic  projection  of  6.1%  of  real 
GDP  growth  is  more  optimistic  than  4.5%  forecasted  by  the  Commission,  with  a  positive 
impact  on  tax  revenues.  The  projection  of  revenues  from  all  main  categories  of  taxes  and 
social  contributions  is  higher  than  in  the  Commission  forecast  (see  Table  2).  On  the 
expenditure  side,  current  expenditures  (in  particular  social  benefits  and  intermediate 
consumption) are somewhat lower while capital expenditures somewhat higher than projected 
by the Commission. 

4 The slight difference of the 2018 deficit target compared to the 2.96% of GDP from the report on action taken 
in  response  to  Council  recommendation  of  5  December  2017  is  due  to  the  revised  underlying 
macroeconomic projection. 

6 

 
 
 
 
 
                                                 
Table 4. Composition of the budgetary adjustment 

7 

2016201720172018201820182019201920192016OutturnCP 2017OutturnCP 2017CP 2018COMCP 2017CP 2018COMRevenue31.632.230.532.331.330.932.831.331.1of which:- Taxes on production and imports11.311.010.311.010.810.411.010.810.5- Current taxes on income, wealth, etc.6.56.66.16.84.94.77.04.94.8- Social contributions8.88.79.38.710.910.79.010.910.6- Other (residual)5.15.94.85.84.75.05.84.75.2Expenditure34.635.133.435.234.334.335.434.334.9of which:- Primary expenditure33.133.732.033.732.932.933.932.933.4of which:Compensation of employees8.98.49.78.310.310.48.110.310.3Intermediate consumption5.35.14.95.04.74.95.04.74.9Social payments11.511.711.612.011.411.611.711.411.8Subsidies0.40.40.40.50.40.40.50.40.4Gross fixed capital formation3.64.32.84.02.92.94.52.93.1Other (residual)3.33.92.64.13.12.84.23.12.9- Interest expenditure1.51.41.31.51.41.41.51.41.4General government balance (GGB)-3.0-2.9-2.9-2.9-3.0-3.4-2.5-3.0-3.8Primary balance-1.5-1.6-1.6-1.4-1.5-2.0-1.0-1.5-2.4One-off and other temporary measures-0.40.00.00.00.0-0.10.00.00.0GGB excl. one-offs-2.6-2.9-2.9-2.9-3.0-3.3-2.5-3.0-3.8Output gap1-1.5-0.11.20.40.81.41.10.81.1Cyclically-adjusted balance1-2.5-2.9-3.3-3.0-3.3-3.9-2.9-3.3-4.2Structural balance2-2.1-2.9-3.3-3.0-3.3-3.8-2.9-3.3-4.2Structural primary balance2-0.6-1.5-2.0-1.5-1.9-2.3-1.4-1.9-2.72019Notes:1Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission on the basis of the programme scenario using the commonly agreed methodology.2Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.Source:Convergence Programmes (CP); Commission 2018 spring forecasts (COM); Commission calculations.(% of GDP)20172018 
 
 
 
 
 
Table 5. Debt developments 

In 2017, the general government debt-to-GDP ratio decreased by 2.4% of GDP, on the back 
of the high nominal GDP growth, reaching 35.0% of GDP. It is projected by the Commission 
to increase to 36.4% of GDP by 2019. 

4. 

COMPLIANCE WITH THE ADJUSTMENT TOWARDS THE MTO IN 2017 

Romania's MTO is a deficit of 1% of GDP in structural terms. 

On  16  June  2017  the  Council  issued  a  recommendation  for  Romania  to  take  the  necessary 
measures to ensure that the nominal growth rate of net primary government expenditure does 
not exceed 3.3% in 2017, corresponding to an annual structural adjustment of 0.5% of GDP. 

In 2017, the growth of net primary government expenditure was well above the expenditure 
benchmark, pointing to a significant deviation by a large margin (deviation of 3.3% of GDP). 
The  structural  balance  deteriorated  to  -3.3%  of  GDP  from  a  position  of  -2.1%  of  GDP  in 
2016, also pointing to a significant deviation from the recommended structural adjustment by 
a large margin (deviation of 1.7% of GDP). The size of deviation indicated by the structural 
balance is positively impacted by a higher point estimate for potential GDP growth compared 
to the medium-term average underlying the expenditure benchmark while the drop in public 
investment is smoothed out in the expenditure benchmark. Taking into account these factors, 
the  overall  assessment  confirms  a  significant  deviation  from  the  Council  recommendation. 
This assessment is also in line with the earlier conclusion of 5 December 2017, in which the 
Council  found  that  Romania  had  not  taken  effective  action  in  response  to  the  Council 
recommendation of 16 June 2017 and issued a revised recommendation. 

8 

2016201720172018201820182019201920192016OutturnCP 2017OutturnCP 2017CP 2018COMCP 2017CP 2018COMGross debt ratio137.438.035.038.335.435.338.135.836.4Change in the ratio-0.30.4-2.30.30.40.2-0.20.41.2Contributions2:1. Primary balance1.51.61.61.41.52.01.01.02.42. “Snow-ball” effect-0.9-1.2-2.7-1.2-1.1-1.7-1.2-1.1-1.1Of which:Interest expenditure1.51.31.31.51.51.41.51.41.4Growth effect-1.7-1.8-2.3-1.9-2.0-1.4-2.0-1.9-1.3Inflation effect-0.7-0.7-1.8-0.7-0.7-1.6-0.6-0.6-1.33. Stock-flow adjustment-0.80.1-1.10.10.00.00.00.50.02019Notes:1 End of period.2 The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth and inflation on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash and accrual accounting, accumulation of financial assets and valuation and other residual effects. Source:Commission 2018 spring forecast (COM); Convergence Programmes (CP), Commission calculations.(% of GDP)20172018 
 
 
5. 

COMPLIANCE  IN  2018  WITH  THE  COUNCIL  RECOMMENDATION  OF  5  DECEMBER 
2017  

On 5 December 2017 the Council recommended Romania to take the necessary measures to 
ensure that the nominal growth rate of net primary government expenditure does not exceed 
3.3% in 2018, corresponding to an annual structural adjustment of 0.8% of GDP. 

Based  on  the  Commission  2018  spring  forecast,  the  growth  of  net  primary  government 
expenditure amounts to 10.8%, which is well above the expenditure benchmark of 3.3%. The 
structural balance is set to deteriorate by 0.4 % of GDP, reaching a deficit of 3.8% in 2018. 
This is the opposite of the recommended structural improvement of 0.8% of GDP relative to 
2017.  Therefore,  both  pillars  point  to  a  deviation  from  the  recommended  adjustment  by  a 
wide  margin.  The  expenditure  benchmark  points  to  a  deviation  of  2.4%  of  GDP.  The 
structural balance confirms this reading, indicating a somewhat smaller deviation of 1.8% of 
GDP. The size of the deviation indicated by the structural balance is negatively impacted by 
the  higher  underpinning  estimate  of  potential  GDP  growth  compared  to  the  medium-term 
average  underlying  the  expenditure  benchmark.  Taking  this  into  account,  the  overall 
assessment confirms the deviation from the recommended adjustment by a wide margin. 

The  deterioration  compared  to  2017  is  largely  driven  by  increases  in  expenditure  on  the 
compensation of public employees, enacted in summer 2017 and which entered into force in 
January  2018.  Since  the  Commission  autumn  2017  forecast,  which  was  the  basis  for  the 
Council recommendation of 5 December 2017, the authorities have partially reversed the past 
systemic pension reform by lowering the proportion of social contributions transferred to the 
second  pension  pillar  (which  is  classified  outside  the  general  government)  from  5.1%  to 
3.75%  of  gross  wages.  This  cut  is  set  to  have  a  positive  short-term  effect  on  government 
revenues and thus on government balance. However, that fiscal gain is set to dissipate in the 
long term as the social contributions diverted from the second pillar are accompanied by an 
obligation  to  pay  old-age  pensions  in  the  future.  In  addition,  this  reversal  will  result  in  less 
diversified retirement income. It could also have negative implications for the development of 
capital markets 

Additionally, the headline deficit in Romania is projected to increase to 3.4% of GDP in 2018 
and 3.8% of GDP in 2019 according to the Commission spring 2018 forecast and thus breach 
the 3% of GDP deficit reference value of the Treaty. 

9 

 
 
Table 6. Compliance with the MTO or the required adjustment towards it 

10 

(% of GDP)2017Medium-term objective (MTO)-1.0Structural balance2 (COM)-3.3Structural balance based on freezing (COM)-3.3Position vis-a -vis the MTO3Not at MTO2017COMCPCOMCPCOMRequired adjustment40.5Required adjustment corrected50.5Change in structural balance6-1.2-0.4-0.40.5-0.4One-year deviation from the required adjustment7-1.7-1.2-1.2-0.3-1.2Two-year average deviation from the required adjustment7-1.7-1.5-1.5-0.8-1.2Applicable reference rate81.0One-year deviation adjusted for one-offs9-3.3-0.7-2.0-0.2-1.1Two-year deviation adjusted for one-offs9-2.7-2.0-2.7-0.5-1.6PER MEMORIAM: One-year deviation10-3.0-0.7-2.1-0.2-1.0PER MEMORIAM: Two-year average deviation10-2.8-1.9-2.6-0.5-1.6Conclusion over one yearSignificant deviationSignificant deviationSignificant deviationOverall assessmentSignificant deviationConclusion over two yearsSignificant deviationSignificant deviationSignificant deviationSignificant deviationSignificant deviationSource:-1.0-1.0(% of GDP)20182019Structural balance pillarConvergence Programme (CP); Commission 2018 spring forecast (COM); Commission calculations.20182019Initial position1-3.8-4.2-3.8-Not at MTONot at MTO5  Required adjustment corrected for the clauses, the possible margin to the MTO and the allowed deviation in case of overachievers.0.80.8Expenditure benchmark pillar3.35.1Conclusion0.80.89 Deviation of the growth rate of public expenditure net of discretionary revenue measures, revenue increases mandated by law and one-offs from the applicable reference rate in terms of the effect on the structural balance. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed methodology. A negative sign implies that expenditure growth exceeds the applicable reference rate. Notes1 The most favourable level of the structural balance, measured as a percentage of GDP reached at the end of year t-1, between  spring forecast (t-1) and the latest forecast, determines whether there is a need to adjust towards the MTO or not in year t.  A margin of 0.25 percentage points (p.p.) is  allowed in order to be evaluated as having reached the MTO.10 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law from the applicable reference rate in terms of the effect on the structural balance. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed methodology. A negative sign implies that expenditure growth exceeds the applicable reference rate. 2  Structural balance = cyclically-adjusted government balance excluding one-off measures.3 Based on the relevant structural balance at year t-1.4 Based on the position vis-à-vis the MTO, the cyclical position and the debt level (See European Commission:Vade mecum on the Stability and Growth Pact, page 38.).6 Change in the structural balance compared to year t-1. Ex post assessment (for 2017) is carried out on the basis of Commission 2018 spring forecast. 7  The difference of the change in the structural balance and the corrected required adjustment. 8  Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its MTO in year t. A corrected rate applies as long as the country is adjusting towards its MTO, including in year t.  
 
 
6. 

PROPOSED ADJUSTMENT PATH TO THE MTO AND REQUIRED FISCAL EFFORT  

Based on the Commission 2018 spring forecast, Romania's structural balance is estimated to 
be at -3.8% of GDP in 2018 and at -4.2% in 2019, increasingly away from its MTO of -1% of 
GDP. Romania is projected to remain in normal economic times (as its projected output gap 
of +1.4% in 2018 and +1.1% in 2019 is between -1.5% and +1.5% of potential GDP). General 
government  debt  is  set  to  remain  below  the  60%  of  GDP  threshold.  The  required  structural 
effort  prescribed  by  Regulation  (EC)  No  1466/97  and  the  matrix  of  requirements5,  which 
factors  in  the  prevailing  economic  circumstances  and  sustainability  concerns,  amounts  to 
0.5% of GDP in both 2018 and 2019. 

An  additional  and  persistent  effort  necessary  to  correct  for  the  cumulated  deviations  and  to 
bring  Romania  back  on  an  appropriate  consolidation  path  following  the  repeated  slippages 
since  2016  can  complement  the  minimum  adjustment  requirement.  Romania's  structural 
deficit has increased by 2.1% of GDP in 2016 and by 1.2% of GDP in 2017, to 3.3% of GDP 
in 2017. An additional effort of 0.3% of GDP seems appropriate given the magnitude of the 
observed significant deviation from the recommended adjustment path towards the MTO and 
it  will  accelerate  adjustment  back  towards  the  MTO.  The  proposed  adjustment  would 
contribute  to  a  strengthening  of  macroeconomic  fundamentals.  Given  the  current  strong 
cyclical  position  of  the  economy,  GDP  growth  would  remain  robust  despite  the  fiscal 
correction, particularly if the adjustment is carried out in a growth friendly manner. 

Based on the Commission forecast, the above-mentioned 0.8% of GDP structural adjustment 
target  in  both  years  is  consistent  with  a  nominal  growth  rate  of  net  primary  government 
expenditure of 3.3%  in  2018 and 5.1%  in  2019, compared to  the respective growth rates  of 
10.8% and 8.4% projected by the Commission. 

The Commission 2018 spring forecast projects a further deterioration of the structural balance 
by  0.5%  of  GDP  in  2018  and  by  a  further  0.4%  of  GDP  in  2019.  Therefore,  a  structural 
improvement  of  0.8%  of  GDP  in  both  2018  and  in  2019  translates  into  the  need  to  adopt 
measures  of  a  total  structural  yield  of  1.3%  of  GDP  in  2018  and  additonal  measures  of  a 
structural yield of 1.2% of GDP in 2019 compared to the current baseline in the Commission 
2018 spring forecast. 

Moreover, according to the Commission spring 2018 forecast Romania is projected to breach 
the 3% of GDP deficit reference value of the Treaty, both in 2018 and in 2019, based on the. 
The  required  structural  adjustment  of  0.8%  of  GDP  in  both  years  would  also  ensure  that 
Romania respects the 3% of GDP deficit reference value of the Treaty with a margin, which is 
crucial in view of the existing risks and the forecast breach in 2018 and 2019. 

7. 

CONCLUSIONS 

Romania has not contained the net primary government expenditure nor has it delivered the 
improvement in the structural balance as recommended by the Council on 5 December 2017. 

In  2017,  GDP  growth  reached  a  post-crisis  high  of  6.9%,  driven  mainly  by  consumption, 
which was boosted by an expansionary, pro-cyclical fiscal policy, including wage hikes. The 
structural deficit increased to 3.3% of GDP, from 2.1% of GDP in 2016. Both the structural 
balance  and  the  expenditure  benchmark  pillars  point  to  a  significant  deviation  from  the 

5  “Commonly  agreed  position  on  Flexibility  within  the  SGP”,  formally  endorsed  by  ECOFIN  Council  on  12 
February 2016, available at: http://data.consilium.europa.eu/doc/document/ST-14345-2015-INIT/en/pdf 

11 

 
 
                                                 
 
recommended  adjustment  path  towards  the  MTO  in  2017.  An  overall  assessment  confirms 
that the observed deviation in 2017 is significant. 

An improvement in Romania's structural balance by 0.8% of GDP both in 2018 and in 2019 
relative to the 2017 outturn would put Romania on an appropriate adjustment path towards the 
MTO.  Such  an  improvement  is  consistent  with  the  nominal  growth  rate  of  net  primary 
government expenditure not exceeding 3.3% in 2018 and 5.1% in 2019. This translates into a 
need  to  adopt  measures  of  a  total  structural  yield  of  1.3%  of  GDP  in  2018  and  additional 
measures of a structural yield of 1.2% of GDP in 2019 compared to the current 2018 baseline 
from the Commission 2018 spring forecast. 

Such an adjustment seems also appropriate to ensure that Romania respects the 3% of GDP 
deficit reference value of the Treaty in 2018 and 2019 with a margin. 

12