REPORT FROM THE COMMISSION TO THE COUNCIL Commission report to the Council pursuant to Article -11(2) of Regulation (EC) No 1466/97 on the enhanced surveillance mission in Romania, of 27-28 September 2018
Date: 2018-11-21
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, economic convergence, economic reform, financial control, gross domestic product, multilateral surveillance, public debt, public finance, stability programme

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 21.11.2018  COM(2018) 801 final  REPORT FROM THE COMMISSION TO THE COUNCIL Commission report to the Council pursuant to Article -11(2) of Regulation (EC) No 1466/97 on the enhanced surveillance mission in Romania, of 27-28 September 2018  
 
 
This  report  on  an  enhanced  surveillance  mission  to  Romania  is  transmitted  to  the  Council 
pursuant to Article -11(4) of Regulation (EC) No 1466/971. As foreseen by Article -11(5) of 
Regulation  (EC)  No  1466/97,  the  provisional  findings  of  that  mission  have  been  previously 
transmitted to Romanian authorities for comments. 

Romania – Significant Deviation Procedure 
enhanced surveillance mission, 27-28 September 2018 

Report 

1. Introduction 

Romania  has  been  under  significant  deviation  procedures  since  spring  2017.  Romania 
was the first Member State subject to a significant deviation procedure (SDP). The first SDP 
was  launched  in  spring  2017  as  a  consequence  of  Romania's  observed  significant  deviation 
from  its  medium-term  budgetary  objective  (MTO)  in  2016,  when  the  structural  deficit 
increased  to  2.1%  of  GDP,  from  0.2%  in  2015.  In  June  2017  the  Council  issued  a 
recommendation  asking  Romania  for  a  structural  adjustment  of  0.5%  of  GDP  in  2017,  the 
standard matrix-based requirement in "normal times". In December 2017, the Council decided 
that Romania had not taken effective action in response to its recommendation of June 2017, 
with efforts solely focused on avoiding breaching the 3% of GDP headline deficit reference 
value. In December 2017 the Council issued a second SDP recommendation in which it asked 
for a structural adjustment of 0.8% of GDP in 2018. In June 2018 the Council again decided 
that Romania had not taken effective action in response to its recommendation of December 
2017. Regulation (EC) No 1466/97 does not foresee a repeated revised recommendation under 
a single SDP.  Therefore, as in  December 2017, in June 2018 the SDP  expired with  another 
Council decision establishing non-effective action.  

As  a  consequence  of  Romania’s  significant  deviation  from  the  adjustment  path  to  its 
medium-term budgetary objective in 2017, a new SDP has been launched in spring 2018. 
On  23  May  2018,  the  Commission  issued  a  warning  to  Romania  and  recommended  to  the 
Council to launch a new SDP. In its recommendation, approved on 22 June 2018, 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  and  5.1  %  in  2019.  They 
correspond  to  an  annual  structural  adjustment  of  0.8  %  of  GDP  in  each  year,  above  the 
standard matrix-based requirement of 0.5% of GDP for both years. In its 2018 fiscal Country 
Specific  Recommendation  the  Council  directly  referred  to  that  new  SDP  recommendation. 
Romania has reported to the Council on action taken in response to the SDP recommendation 
on  16  October  2018.  The  assessment  of  action  taken  by  Romania  was  adopted  by  the 
Commission on 21 November 2018.  

1 Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance 
and coordination of economic policies, OJ L 209, 2.8.1997, p. 1 

1 

 
 
 
 
                                                           
This  report  presents  Commission's  findings from  the  enhanced  surveillance  mission  to 
Romania that took place on 27 and 28 September 2018. The mission was carried out on the 
basis of Article -11(2) of Regulation (EC) 1466/97. It met the Minister of Finance, Mr. Eugen 
Teodorovici,  the  Deputy-Governor  of  the  National  Bank  of  Romania,  Mr.  Liviu  Voinea, 
members of the Senate's and Chamber of Deputies' committees on budget and fiscal policy, 
and the head of the Fiscal Council of Romania, Mr Ionut Dumitru. As with previous similar 
missions,  the  aim  was  to  discuss  the  fiscal  actions  planned  by  the  authorities,  stress  the 
existence  of  fiscal  risks,  and  encourage  compliance  with  the  SDP  recommendation.  This 
report is based on information obtained until and during the mission.  

2. Findings of the mission 

The Romanian authorities maintain the 2018 headline deficit target of just below 3% of 
GDP  and  thus  do  not  intend  to  act  upon  the  SDP  recommendation.  The  2018  budget 
amendment ("rectification"), published 3 September 2018, maintains the original 2018 target 
of a headline deficit of 2.97% of GDP in cash, which translates into 2.96% in ESA (accrual) 
terms,  slightly  higher  than  the  2017  deficit  outturn.  However,  the  general  government  cash 
deficit  for  January-August  2018  amounted  to  around  1.5%  of  GDP,  more  than  double  that 
from the equivalent period of 2017, which was itself already above the execution in previous 
years.  The  Minister  of  Finance  confirmed  the  official  2018  budgetary  targets.  He  explained 
that  the  main  new  measure  being  considered  for  2018  is  a  reclassification  of  public 
investment  already  concluded  under  the  National  Plan  for  Local  Development  (investments 
by local authorities which are financed by the central government). The objective is that these 
investments  would  obtain  co-financing  from  European  Union  funds,  thus  increasing 
government  revenues.  The  Minister  expected  to  discuss  that  plan  with  the  relevant 
Commission services. The Minister added that he also hoped to receive Union reimbursement 
of  swine  flu  related  expenditures  from  Union  animal  health  funds  as  well  as  of  emergency 
spending  on  this  year's  floods  from  the  Union  Solidarity  Fund.  The  authorities  are  also 
considering a tax amnesty. According to the  Minister, those measures might allow to reduce 
the deficit targeted for 2018. The mission stressed that the report on action taken, due by 15 
October 2018, must contain details and quantification of the planned measures. 

The  government  plans  to  lower  the  headline  deficit  in  2019  relative  to  2018,  but  the 
measures remain to be specified. The Minister of Finance confirmed that the government's 
fiscal  targets  for 2019 werea headline deficit of  2.58% in  cash and 2.38% in  ESA (accrual) 
terms, the same as specified in the 2018 Convergence Programme. The draft 2019 budget, to 
be adopted by the government in mid- to  end-November, will contain the details on how to 
achieve  those  targets.  The  Minister  is  considering  further  cuts  to  VAT  and  excise  duties, 
namely  a  lowering  of  the  VAT  rate  forrestaurants  and  hotels  and  a  reversal  of  the  past 
increase  of  excise  duties  on  fuel.  The  Minister  believes  that,  thanks  to  the  second-round 
effects, those indirect tax cuts would not have a significant impact on government deficit. He 
argued  that  this  was  the  case  of  the  VAT  rate  reduction  from  24%  to  9%  for  agro-food 
products in mid-2015. 

2 

 
 
A  draft  pension  lawposes  a  significant  upward  risk  to  the  fiscal  deficit  in  2020  and 
beyond. The draft law has been recently published for consultation by the Ministry of Labour. 
It  specifies the timetable of the increases of the  pension point (the main parameter used for 
pension indexation), starting in  2019, thus  implementing the  government’s programme. The 
draft  law  would  also  revise  upwards  the  other  pension  parameters  from  2021.  As  a  result, 
according  to  the  government’s  own  calculations,  public  expenditure  on  old-age  pensions 
would more than double in 2022 (to around 13.4% of GDP in 2022 compared to 6.8% of GDP 
in 2018). 

The mission exchanged views with the National  Bank of Romania  (NBR) on the fiscal, 
macroeconomic and financial situation.  The NBR Board works under the assumption that 
the public deficit would not increase above 3% of GDP in 2018. The Deputy-Governor also 
pointed out that consumer inflation reached its peak in May-June, earlier than expected, and 
was projected by the NBR to fall to 3.5% in 2019 and 3.0% in 2020, i.e. within the inflation 
target. He also stressed that the financial sector in Romania wasmuch stronger that ten years 
ago. 

The  mission  exchanged  views  on  the  fiscal  policy  with  members  of  the  parliament's 
committees on budget and fiscal policy. The chair of the joint committees explained that the 
fiscal  expansion  since  2015  was  aimed  at  spurring  economic  growth,  which  was  succesful 
given  that  Romania  was  among  the  fastest-growing  economies  in  the  Union.  He  added  that 
the  government’spriority  was  to  reverse  and  prevent  further  outflow  of  skilled  workers,  by 
increasing wages in the health and education sectors. On the other hand, the chair shared the 
Commission's  concern  regarding  the  fall  of  public  investment  in  recent  years.  The  mission 
replied  that  the  Commission  shared  those  goals  butdisagreed  on  the  methods.The  mission 
expressed concern at the pace of the fiscal expansion and pointed out that those goals could be 
achieved  by  improving  the  efficiency  of  public  spending.  A  representative  of  the 
oppositionexpressed similar concerns. 

The  Fiscal  Council  expressed  its  concern  at  the  fiscal  outlook.  According  to  the  Fiscal 
Council, there are significant risks of exceeding the headline deficit target and thus the 3% of 
GDP  Treaty  threshold  in  2018  in  the  absence  of  countervailing  fiscal  measures.  The  Fiscal 
Council's  opinion  on  the  draft  budget  September  revision,  which  is  public,  stresses  that  the 
2018 deficit may exceed the 2.97% headline deficit target by RON 6 billion (0.6% of GDP). 
The  Fiscal  Council  is  also  concerned  about  the  structure  of  public  spending.  Current 
expenditures,  in  particular  personnel  spending,  have  been  rapidly  expanding  at  the  cost  of 
public  investment,  which  fell  in  2017  to  a  post-accession  low  as  a  share  of  GDP.  That 
spending structure raises concerns as to its impact on long-term growth. Moreover, increases 
to public wages and to old-age pensions are politically difficult to reverse. 

3