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 22 June 2018 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: 2018-11-21
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 programme

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 21.11.2018  SWD(2018) 503 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 22 June 2018  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) 802 final} - {COM(2018) 803 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 22 June 2018 

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) of -
1% of GDP. Romania is not subject to the debt rule as its  general government debt remains 
below 60% of GDP.  

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 an observed significant deviation from the 
MTO  occurred  in  Romania  in  2016.  In  view  of  the  established  significant  deviation,  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  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  another  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.  On  22  June  2018  the 
Council found that Romania had not taken effective action in response to the recommendation 
of 5 December 2017. 

Moreover, on 22 June 2018 the Council decided in accordance with Article 121(4) TFEU that 
an  observed  significant  deviation  from  the  adjusment  path  toward  the  MTO  occurred  in 
Romania  in  2017.  In  view  of  the  established  significant  deviation,  the  Council  on  22  June 
2018 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  2018 
and 5.1% in 2019, corresponding to an annual structural adjustment of 0.8% of GDP in each 
year4.  It  also  recommended  Romania  to  use  any  windfall  gains  for  deficit  reduction,  while 

1  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. 

2  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). 

3   Council  Recommendation  of  5  December  2017  with  a  view  to  correcting  the  significant  observed  deviation 
from the adjustment path toward the medium-term budgetary objective in Romania (OJ C 439, 20.12.2017, p. 
1). 

4  Council Recommendation of 22 June 2018 with a  view to correcting the significant observed deviation from 

the adjustment path toward the medium-term budgetary objective in Romania (OJ C 223, 27.6.2018, p. 3). 

1 

 
 
 
                                                 
budgetary  consolidation  measures  should  ensure  a  lasting  improvement  in  the  general 
government  structural  balance  in  a  growth-friendly  manner.  The  Council  established  a 
deadline  of  15  October  2018  for  Romania  to  report  on  action  taken  in  response  to  the 
recommendation.  

On 13 July 2018, the Council addressed recommendations to Romania within the context of 
the  European  Semester.  In  the  area  of  public  finances,  the  Council  recommended  that 
Romania ensure compliance with the Council Recommendation of 22 June 2018 with a view 
to  correct  the  significant  deviation  from  the  adjustment  path  toward  the  medium-term 
bdgetary objective.   

The  Romanian  authorities  delivered  their  report  on  action  taken  in  response  to  Council 
Recommendation  of  22  June  20185  (hereafter:  "the  report")  shortly  after  the  deadline. 
Moreover,  on  27-28  September  2018  the  Commission  undertook  an  enhanced  surveillance 
mission  in  Romania  for  the  purpose  of  on-site  monitoring  under  the  Article  -11(2)  of 
Regulation (EC) No 1466/97. The findings of the enhanced fiscal surveillance mission were 
subsequently made public. 

Section  2  of  this  document  presents  macroeconomic  developments  and  outlook  in  2018-19. 
Sections 3 presents fiscal developments in 2018 and updated budgetary projections for 2019. 
Section  4  assesses  compliance  with  the  Council  Recommendation  of  22  June  2018,  while 
Section 5 proposes a new adjustment path for 2019. Section 6 concludes.  

2. 

MACROECONOMIC DEVELOPMENTS AND OUTLOOK IN 2018 AND 2019 

Romania's economic boom has started to cool down in 2018. The Commission autumn 2018 
forecast  projects  real  GDP  growth  at  3.6%  in  2018,  a  strong  deceleration  compared  to  the 
previous  year's  growth of 7.3%. Private consumption is weakening, although it still remains 
the  main  contributor  to  growth.  That  development  stems  from  persistently  high  inflation, 
mainly  due  to  energy  prices,  and  the  fading-out  of  public  policies  directed  at  increasing 
disposable  income.  Investment  is  expected  to  remain  subdued  for  the  rest  of  2018.  Import 
growth, although lower than in 2017, remains dynamic. Export growth is also decelerating but 
at a higher pace than imports,  increasing the drag of net exports on real GDP growth. 

In 2019, private consumption growth is forecast by the Commission to remain at similar rates 
as  in  2018  as  nominal  wage  growth  moderates  and  inflation  continues  to  weigh  on  real 
disposable income. It is expected nonetheless to remain the main driver of growth. Investment 
is  expected  to  increase  its  contribution  to  growth  on  the  back  of  an  improvement  in  non-
residential  construction.  Overall,  real  GDP  growth  is  projected  to  amount  to  3.8%  in  2019. 
Imports are projected to continue rising at a higher pace than exports in 2019. However, the 
overall contribution of net exports, while still negative, is projected to improve.  

The current  account  deficit is  set to  continue widening.  It  is  forecast  to  reach 3.7% in  2018 
and 4.2% in 2019. The worsening trade balance is the main factor behind this development.   

Romania's  labour  market  is  forecast  by  the  Commission  to  remain  tight  with  new  historical 
lows in unemployment of 4.3% and 4.2% for 2018 and 2019, respectively. The tight labour 
market is likely to exert further pressure on wages. Compensation per employee continued to 
increase  in  2018  and  is  forecast  at  13%  in  real  terms,  before  declining  in  2019  to  6.7%  as 
increases in public and minimum wages slow down.  

5 Available at http://data.consilium.europa.eu/doc/document/ST-13279-2018-INIT/en/pdf 

2 

 
 
                                                 
Inflation  further  accelerated  in  early  2018  as  the  effect  of  the  January  2017  tax  cuts  faded, 
reaching 4.7% by August. Inflation is forecast at 4.3% for 2018 as a whole, declining to 3.5% 
in 2019 as energy price inflation moderates. 

The output gap, which turned positive in 2017, is projected in the Commission autumn 2018 
forecast  to  narrow  in  2018  and  2019.  For  2018  it  is  due  to  the  deceleration  of  real  GDP 
growth, which is set to more than halve from the peak observed in 2017.  At the same time, 
potential output is set to continue expanding, due to the continued improvement in the labour 
market,  namely  lower  structural  unemployment  as  measured  by  the  NAWRU  and  a  higher 
participation  rate.  In  2019  the  projected  slight  recovery  of  GDP  growth  is  insufficent  to 
reverse the decreasing output gap trend. 

Risks  to  Romania's  macroeconomic  outlook  are  tilted  to  the  downside.  A  main  risk  is  that 
to  outpace  productivity  growth,  causing  Romania’s 
wage  growth  could  continue 
competitiveness  to  decline  and  weakening  export  growth.  Furthermore,  volatile  food  prices 
and persistently high international commodity prices could cause the current account deficit to 
widen even further. Uncertainty regarding the government’s policies, with potential negative 
repercussions  on  the  business  environment,  and  the  challenge  of  budgetary  deficit  targets 
could hamper investment decisions. On the other hand, an improved absorption of European 
Union funds represents a positive risk for GDP growth in 2019 and 2020. 

Table 1. Macroeconomic developments and forecast 

3 

2017OutturnCPPRCOMCPPRCOMReal GDP (% change)7.36.14.53.65.75.53.8Private consumption (% change)10.16.55.44.66.16.04.6Gross fixed capital formation (% change)4.77.93.54.68.47.95.6Exports of goods and services (% change)9.77.47.26.36.96.96.5Imports of goods and services (% change)11.28.510.09.18.08.07.4Contributions to real GDP growth:- Final domestic demand7.36.75.74.26.26.04.3- Change in inventories0.70.01.00.70.00.00.0- Net exports-0.7-0.6-1.3-1.3-0.6-0.6-0.6Output gap11.50.80.20.51.20.60.2Employment (% change)2.82.40.30.21.81.5-0.3Unemployment rate (%)4.94.84.34.34.64.24.2Labour productivity (% change)4.33.63.33.84.0HICP inflation2 (%)1.13.84.74.32.82.83.5GDP deflator (% change)4.62.15.96.51.92.13.8Comp. of employees (per head, % change)11.18.113.07.06.7Net lending/borrowing vis-à-vis the rest of the world (% of GDP)-1.6-1.4-2.1-0.9-2.5Source:1In % of potential GDP. For Convergence Programme, the potential GDP growth is recalculated by Commission services on the basis of the Programme scenario using the commonly agreed methodology.2018Notes:Commission 2018 autumn forecast (COM); Romania's 2018 Convergence Programme (CP), Romanian Prognosis Commission's autumn forecast (PR)2 CPI for Prognosis Commission2019 
 
 
3. 

FISCAL DEVELOPMENTS AND OUTLOOK IN 2018 AND 2019 

On 27 and 28 September 2018 the Commission undertook an enhanced surveillance mission 
in Romania for the purpose of on-site monitoring under the Article -11(2) of 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  21  November  2018  and 
made its findings public. The mission found that the Romanian authorities continue to target a 
headline  deficit  of  just  below  3%  of  GDP  in  2018  and  thus  do  not  intend  to  act  upon  the 
Recommendation  of  22  June  2018.  The  2018  budget  amendment,  published  in  early 
September, maintained the original 2018 target of a headline deficit of 2.97% of GDP in cash, 
which  translates  into  2.96%  in  ESA  (accrual)  terms.  The  mission  also  confirmed  that  the 
government's target for 2019 is a headline deficit of 2.38% in ESA (accrual) terms, the same 
as  announced  in  the  2018  Convergence  Programme.  However,  the  measures  remain  to  be 
specified. 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. 

In their report on action taken, the authorities confirmed the general government deficit target 
from  the  2018  Convergence  Programme  of  2.96%  of  GDP  in  2018,  close  to  the  outturn  in 
2017. For 2019 the authorities confirmed that they will target a headline deficit of 2.38% of 
GDP.  The  report  does  not  contain  a  comprehensive  projection  of  individual  budgetary 
categories. According to the authorities, the corresponding structural balance would amount to 
3.2% of GDP in 2018 and 2.7% of GDP in 2019.  

Table  2  below  presents  new  measures/policies  listed  in  the  report.  The  report  does  not 
mention  new  measures  for  2018.  For  2019,  the  report  relies  on  containing  expenditure  on 
compensation  of  employees  and  goods  and  services,  without  backing  it  by  sufficiently 
detailed and adopted, or at least credibly announced measures. On the revenue side the report 
mentions a prolongation of  already existing measures and some actions  aimed at increasing 
tax  compliance.  It  mentions  policies  with  a  potential  positive  impact  on  the  budget  but 
without giving a complete list of estimates. New measures which are set to reduce revenues or 
increase expenditures (such as an enacted cut of the VAT rate on hotels and restaurants from 
January 2019) were not included in the report. Moreover, the report explicitly mentions that 
its estimates do not take into account the provisions of the draft pensions law adopted by the 
government which contains increases to the old age pensions in 2019 and beyond.  

4 

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

Reported fiscal 
impact in 2019 

Comments 

Revenues 

Dividends from SOEs at 90% of their net profits 

Starting the procedure for selling 5G licences 

Maintainance of tax on natural resources 

improving 

Measures  aimed  at 
tax  collection: 
introduction of electronic cash registers, amendment of 
law,  modernisation  of  border-crossing 
insolvency 
points. 

Expenditures 
Freeze of gross wages of  public employees at the 
December 2018 levels and giving holiday vouchers at 
the same level as in 2018, keeping the average number 
of employees in the public sector at the 2018 level 
Freeze of maintenance and operating expenditures at 
the level of 2018 

+0.2 

+0.1 

+0.1 

n/a 

-0.3 

-0.3 

A prolongation of a measure 
already in force since 2017  
According to the ESA-2010 
accounting rules, the impact of 
this measure shoud be smoothed 
out over several years 

A prolongation of a measure 
already in force since 2013 

Subsequent public 
announcements questioned the 
introduction of the wage freeze 

Note:  
The budgetary impact in the table as estimated by the national authorities in their report or in the subsequent exchanges with 
the Commission, following the reception of the report. A positive sign implies that revenue/expenditure increases as a 
consequence of the measure. 

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

Measure 

Social contributions shift almost entirely on the employees, from 22.75% for 
employers and 16.5% for employees to 2.25% and 35% respectively 

Increasing excise duties for energy products as of October 2017  

A  decrease  of  the  share  of  social  contributions  transferred  to  the  second 
pension pillar from 5.1% to 3.75% of gross wages 

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

Remaning measures 

Total impact 

2018 

+1.2 

+0.3 

+0.2 

-1.5 

+0.1 

+0.2 

2019 

-0.1 

-0.1 

Note:  
The budgetary impact in the table as included in the Commission 2018 autumn forecast. A positive/negative sign implies that 
revenue increases/decreases compared to the previous year.  

5 

 
 
 
 
 
 
 
 
 
 
 
 
 
Based on the Commission autumn 2018 forecast, the general government deficit is projected 
to  increase  to  3.3%  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 spending on compensation 
of employees  relative to GDP by 1.0 percentage point. The fiscal cost  of those 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 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, the revenue 
from social contributions is set to increase by 2.1 percentage points of GDP while the revenue 
from direct taxes is set to decrease by 1.4 percentage points.  

The  general  government  deficit  is  projected  in  the  Commission  autumn  2018  forecast  to 
slightly increase to 3.4% of GDP in 2019, driven by public expenditure on compensation of 
employees. 

Despite the projected increase of the headline deficit, Romania’s structural deficit is forecast 
by the Commission to remain broadly stable, at 3.4% of GDP in 2017, 3.3% in 2018 and 3.4% 
in 2019, thanks to the decreasing output gap. 

A positive risk to the 2018 budget balance forecast comes from possibly lower than budgeted 
public  investment.  A  possible  freeze  in  public  wages  and  potential  changes  to  the  draft 
pension  law  represent  a  positive  risk  for  2019  and  beyond.  On  the  other  hand,  a  potential 
rebound  of  public  investment  from  its  record-low  levels  represents  a  negative  risk  to  the 
general government balance projection in 2019 and 2020 via increased expenditure.  

The  composition  of  the  budget  and  its  adjustments  in  nominal  and  structural  terms  are 
presented in Table 4. 

6 

 
 
 
 
Table 4. Composition of the budgetary adjustment 

7 

201720182018201920192017OutturnCPCOMCPCOMRevenue30.731.331.831.331.8of which:- Taxes on production and imports10.310.810.110.810.1- Current taxes on income, wealth, etc.6.14.94.74.94.7- Social contributions9.310.911.410.911.3- Other (residual)5.14.75.64.75.6Expenditure33.634.335.134.335.1of which:- Primary expenditure32.332.933.732.933.7of which:Compensation of employees9.810.310.810.310.9Intermediate consumption5.14.75.14.75.1Social payments11.611.411.511.411.5Subsidies0.40.40.40.40.4Gross fixed capital formation2.62.92.82.92.8Other (residual)2.83.13.13.13.0- Interest expenditure1.31.41.41.41.4General government balance (GGB)-2.9-3.0-3.3-3.0-3.4Primary balance-1.5-1.5-1.9-1.5-1.9One-off and other temporary measures0.00.0-0.10.00.0GGB excl. one-offs-2.9-3.0-3.2-3.0-3.4Output gap11.50.80.50.80.2Cyclically-adjusted balance1-3.4-3.3-3.5-3.3-3.4Structural balance2-3.4-3.3-3.3-3.3-3.4Structural primary balance2-2.0-1.9-1.9-1.9-2.0Convergence Programme (CP); Commission 2018 autumn forecast (COM); Commission calculations.(% of GDP)20182019Notes: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: 
 
 
 
 
Table 5. Debt developments 

The general government debt-to-GDP ratio is projected by the Commission to remain stable at 
35.1%  of  GDP  in  2018  thanks  to  high  nominal  GDP  growth.  It  is  projected  by  the 
Commission to increase to 35.9% of GDP in 2019. 

4. 

COMPLIANCE WITH THE COUNCIL RECOMMENDATION OF 22 JUNE 2018  

On  22  June  2018  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 and 5.1% in 2019, corresponding to an annual structural adjustment of 0.8% of 
GDP in each year. 

In  2018,  based  on  the  Commission  2018  autumn  forecast,  the  growth  of  net  primary 
government expenditure is set to amount to 11.3%, well above the expenditure benchmark of 
3.3%. The structural deficit is set to marginally decrease, by 0.04 % of GDP in 2018, reaching 
a deficit of 3.3% of GDP. Therefore, both pillars point to a deviation from the recommended 
adjustment. The expenditure benchmark points to a deviation of 2.3% of GDP. The structural 
balance confirms that reading, indicating a smaller deviation of 0.8% of GDP. The structural 
balance  is  positively  affected  by  a  significantly  higher  GDP  deflator  and  by  a  higher  point 
estimate  for  potential  GDP  growth  compared  to  the  medium-term  average  underlying  the 
expenditure benchmark. This impact is partially offset by the impact of an increase of public 
investment,  which  is  smoothed  out  in  the  expenditure  benchmark.  Therefore,  the  overall 
assessment  confirms  the  deviation  by  a  wide  margin  from  the  requirements  of  the  Council 
Recommendation of 22 June 2018.  

8 

2017OutturnCPCOMCPCOMGross debt ratio135.135.435.135.835.9Change in the ratio-2.20.30.00.40.9Contributions2:1. Primary balance1.51.51.91.01.92. “Snow-ball” effect-2.6-1.1-1.8-1.1-1.0Of which:Interest expenditure1.31.51.41.41.4Growth effect-2.4-2.0-1.1-1.9-1.2Inflation effect-1.5-0.7-2.1-0.6-1.23. Stock-flow adjustment-1.10.00.00.50.0(% of GDP)2018Commission 2018 autumn forecast (COM); Convergence Programme (CP), Commission calculations.2019Notes: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: 
 
 
In 2019, based on the Commission 2018 autumn forecast, the growth of nominal government 
expenditure, net of discretionary revenue measures and one-offs is set to amount to 7.5%, well 
above the expenditure benchmark of 5.1% (deviation of 0.7% of GDP from the recommended 
adjustment). The structural balance is set to increase by 0.1 % of GDP, reaching a deficit of 
3.4%  (deviation  of  0.9%  of  GDP).  Therefore,  as  both  pillars  point  to  a  deviation  from  the 
required adjustment by a similar magnitude, the overall assessment confirms the deviation in 
2019 from the requirements of the Council Recommendation of 22 June 2018. 

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

5. 

PROPOSED ADJUSTMENT PATH TO THE MTO AND REQUIRED FISCAL EFFORT  

Based on the Commission 2018 autumn forecast, Romania's structural balance is estimated to 
be at -3.4% in 2019, at a far distance from its MTO of -1% of GDP.  

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  adjustment  recommended  by  the  Council  on  22  June  2018. 
Romania's structural deficit has increased by 2.1% of GDP in 2016 and by 1.2% of GDP in 
2017.  It  reached  3.4%  of  GDP  in  2017  and  is  projected  to  stabilize  in  2018.  Therefore,  an 

9 

(% of GDP)201720182019Medium-term objective (MTO)-1.0-1.0-1.0Structural balance2 -3.4-3.3-3.4Structural balance based on freezing-3.3-3.3Position vis-a -vis the MTO3Not at MTONot at MTONot at MTO(% of GDP)201720182019Required adjustment40.50.80.8Required adjustment corrected50.50.80.8Change in structural balance6-1.20.0-0.1One-year deviation from the required adjustment7-1.7-0.8-0.9Two-year average deviation from the required adjustment7-1.7-1.3-0.8Applicable reference rate83.33.35.1One-year deviation adjusted for one-offs9-3.3-2.3-0.7Two-year deviation adjusted for one-offs9-2.7-2.8-1.5Conclusion over one yearSignificant deviationSignificant deviationSignificant deviationConclusion over two yearsSignificant deviationSignificant deviationSignificant deviation1 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 Initial position1Structural balance pillarExpenditure benchmark pillarConclusionNotes8  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 9 Deviation of the growth rate of public expenditure (net of discretionary revenue measures, revenue increases mandated by law and one-offs) from the 10 Deviation of the growth rate of public expenditure (net of discretionary revenue measures and revenue increases mandated by law) from the applicable Source: Commission 2018 autumn forecast; Commission calculations.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:5  Required adjustment corrected for the clauses, the possible margin to the MTO and the allowed deviation in case of overachievers.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.  
 
 
additional effort of 0.2% of GDP in 2019 should complement the structural effort of 0.8% of 
GDP recommended by the Council on 22 June 2018. The additional effort seems appropriate 
given the magnitude of the deviation  from  the MTO and the recommended adjustment path 
towards it. It would accelerate adjustment back towards the MTO without putting economic 
growth at risk.  

Based  on  the  Commission  forecast,  a  1.0%  of  GDP  structural  adjustment  target  in  2019  is 
consistent  with  a  nominal  growth  rate  of  net  primary  government  expenditure  of  4.5%  in 
2019, compared to the growth rate of 7.5% projected by the Commission. 

The  Commission  2018  autumn  forecast  projects  a  deterioration  of  the  structural  balance  by 
0.1% of GDP in 2019. Therefore, a structural improvement of 1.0% of GDP translates into the 
need to  adopt  measures  of a total  structural  yield of 1.1% of GDP in  2019 compared to  the 
current baseline in the Commission 2018 autumn forecast. 

According to the Commission 2018 autumn forecast Romania is projected to breach the 3% of 
GDP deficit reference value of the Treaty. The required structural adjustment of 1.0% of GDP 
in 2019 would also ensure that Romania respects the 3% of GDP deficit reference value of the 
Treaty in 2019 with a margin, which is crucial in view of the existing risks and the forecast 
breach. 

6. 

CONCLUSIONS 

On  22  June  2018  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 and 5.1% in 2019, corresponding to an annual structural adjustment of 0.8% of 
GDP in each year. 

Romania has not delivered the recommended improvement in the structural balance, nor has it 
contained  net  primary  government  expenditure  in  2018,  or  in  2019.  Moreover,  the 
Commission 2018 autumn forecast projects Romania's general government deficit to be above 
the 3% of GDP Treaty reference value in 2018 and beyond. 

In light of an insufficient response to the Council Recommendation of 22 June 2018 and the 
cumulated high deviation from the required adjustment path toward the MTO, it is appropriate 
to  address  to  Romania  a  revised  recommendation.  An  improvement  in  Romania's  structural 
balance  by  1.0%  of  GDP  in  2019  relative  to  the  2018  outturn  would  put  Romania  on  an 
adjustment  path  towards  the  MTO.  Such  an  improvement  is  consistent  with  the  nominal 
growth  rate  of  net  primary  government  expenditure  not  exceeding  4.5%  in  2019.  Such  an 
adjustment  also  seems  appropriate  to  ensure  that  Romania  respects  the  3%  of  GDP  general 
government deficit threshold with a margin.  

10