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 4 December 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: 2019-06-05
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, 5.6.2019  SWD(2019) 533 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 4 December 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(2019) 533 final} - {COM(2019) 538 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 4 December 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). 
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  for  a  Council  decision  on  non-effective  action  in  2019  in 
response  to  the  Council  Recommendation  addressed  to  Romania  on  4  December  2018. 
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 2018, as  adopted by the Commission on 5 
June 2019. 

On 22 June 2018 the Council found 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 expenditure1 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 year2.  

On  4  December  2018  the  Council  found  that  Romania  had  not  taken  effective  action  in 
response to the 22 June 2018 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 4.5% in 
2019,  corresponding  to  an  annual  structural  adjustment  of  1.0%  of  GDP3.  It  recommended 
Romania  to  use  any  windfall  gains  for  the  reduction  of  its  deficit,  while  budgetary 

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 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). 
Council  Recommendation  of  4  December  2018  with  a  view  to  correcting  the  significant  observed 
deviation  from  the  adjustment  path  toward  the  medium-term  budgetary  objective  in  Romania  (OJ  C 
460, 21.12.2018, p. 1).  

1 

 
 
 
                                                 
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 
April 2019 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  18  April.  i.e.  after  the  deadline  set  by  the 
Council.  Moreover,  on  14  and  15  March  2019,  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 5 
June 2019 and made its findings public. 

Based  on  the  Commission  2019  spring  forecast,  Section  2  of  this  document  presents  the 
macroeconomic developments and outlook in 2018-20. Section 3 presents fiscal developments 
in 2018 and updated budgetary projections for 2019-2020. Section 4 presents an assessment 
of  compliance  with  the  obligations  stemming  from  the  Stability  and  Growth  Pact  in  2018, 
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  4 
December  2018.  Section  6  proposes  a  fiscal  effort  for  2019  and  2020  to  address  the 
significant deviation, including a new applicable expenditure benchmark rate compatible with 
the suggested annual improvement in the structural balance. Section 7 concludes. 

2. 

MACROECONOMIC DEVELOPMENTS AND OUTLOOK IN 2018-2020 

Romania's economic boom started to cool down in 2018. Real GDP grew by 4.1%, compared 
to  7% in  2017. Private consumption followed the same trend.  It  grew, nonetheless,  5.2% in 
2018 and remained the main contributor to growth thanks to continuous increases in wages, 
including minimum and public wages. It was, however, somewhat tamed by record levels of 
inflation,  which  reached  4.1%  on  average  in  2018.  Investment  underperformed  with  a 
negative growth of 3.2%. This was despite growth of equipment investment and some pick-up 
in  public  investment.  Net  exports  also  contributed  to  lower  GDP  growth,  mainly  due  to  a 
more  pronounced  slowdown  in  export  relative  to  import  growth,  contributing  in  turn  to  a 
further worsening of the current account balance to -4.7% of GDP. Exports were affected by 
changes in auto emissions testing at the EU level, which led to production disruptions in the 
motor  industry,  and  a  more  uncertain  European  and  international  environment.  Imports 
remained strong on the back of strong consumption and a pick up in intermediate and capital 
goods. 

In its spring 2019 forecast, the Commission projects the slowdown in growth to  continue in 
2019 and 2020, with real GDP growing at 3.3% and 3.1%, respectively. Private consumption 
is  forecast  to  remain  strong  in  2019,  as  a  lower  inflation  partially  compensates  the  more 
moderate  increases  in  nominal  wages,  and  to  decelerate  in  2020.  Investment  growth  is 
expected to return to positive territory on the back of sustained improvements in equipment 
investment  and  a  rebound  in  construction  investment,  helped  by  a  pick-up  in  EU-funded 
projects. The growth in imports is projected to continue to outpace that of exports despite the 
overall slow down in both. However, the overall contribution of net exports to growth, while 
still negative, is projected to improve. The current account deficit is set to continue widening. 
It is forecast to reach 5.2% of GDP in 2019 and 5.3% in 2020. The worsening trade balance is 
set to be the main factor behind this development.  

Romania's unemployment rate reached a new 20-year low in 2018, at 4.2%. It is forecast to 
stand  at  4.1%  and  4%  in  2019  and  2020,  respectively.  The  tight  labour  market  is  likely  to 
continue exerting pressure on wages. Compensation per employee, which increased by 18.4% 

2 

 
 
in  2018  is  forecast  to  slow  down  to  single-digit  rates  by  2020,  as  increases  in  overall  and 
minimum wages fade out.  

Inflation further accelerated in 2018, reaching an average of 4.1%, the highest in the EU, due 
to hikes in food and energy prices. It is forecast to decrease to 3.6% for 2019 and 3% in 2020 
as energy price inflation moderates. 

Romania’s positive output gap started to narrow in 2018 and is set to close progressively on 
the back of decreasing labour and productivity contributions. 

Both  internal  and  external  uncertainties  could  take  a  toll  on  economic  growth.  Externally, 
uncertainties surrounding global demand and the EU economy could have a negative impact 
on Romania’s exports. Internally, a sustained increase in unit labour costs due to wage growth 
outpacing productivity growth could also curtail exports. The uncertainty and unpredictability 
of policymaking may also have a negative effect on consumption and investment, hampering 
growth. Finally, high increases in inflation in the first quarter of 2019 might point to higher 
price levels than originally expected throughout the year. 

Table 1. Macroeconomic developments and forecast 

3. 

FISCAL DEVELOPMENTS AND OUTLOOK IN 2018-2020 

In  2018,  the  general  government  deficit  increased  to  3.0%  of  GDP,  from  2.7%  of  GDP  in 
2017, while the economy grew above its potential. The rise of the deficit was  – similarly to 
previous years – mostly driven by expenditure on compensation for public employees, which 
increased by 1.1 percentage points of GDP. The unified wage law, enacted in summer 2017, 
increased  gross  public  wages  by  25%  as  of  January  2018  and  contained  additional  wage 
increases in the health and education sectors. The fiscal cost of these increases in gross wages 

3 

2017OutturnCP 2018OutturnCP 2018CP 2019COMCP 2018CP 2019COMReal GDP (% change)7.06.14.15.75.53.35.75.73.1Private consumption (% change)10.06.55.26.16.45.25.86.24.5Gross fixed capital formation (% change)3.57.9-3.28.46.91.48.67.92.3Exports of goods and services (% change)10.07.45.46.96.94.47.17.13.6Imports of goods and services (% change)11.38.59.18.07.86.97.97.94.9Contributions to real GDP growth:- Final domestic demand7.56.72.96.26.14.26.16.23.8- Change in inventories0.20.02.90.00.00.30.00.00.0- Net exports-0.7-0.6-1.7-0.6-0.6-1.3-0.5-0.5-0.7Output gap10.80.80.91.20.10.61.60.70.2Employment (% change)2.62.40.21.81.40.31.21.20.2Unemployment rate (%)4.94.84.24.64.14.14.54.04.0Labour productivity (% change)4.33.63.93.84.12.94.44.42.9HICP inflation (%)1.13.84.12.83.53.62.62.63.0GDP deflator (% change)4.72.15.91.93.55.21.91.93.7Comp. of employees (per head, % change)12.68.118.47.08.113.57.56.19.0Net lending/borrowing vis-à-vis the rest of the world (% of GDP)-1.8-1.4-3.1-0.9-1.7-3.4-0.3-0.8-3.4Source:1In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario using the commonly agreed methodology.20182019Note:Commission 2019 spring forecast (COM); Convergence Programmes (CP).2020 
 
 
was  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  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 increased by 2.1 percentage points of GDP while the revenue from direct taxes 
fell  by  1.4  percentage  points.  Public  investment  in  2018  remained  close  to  the  record  low 
levels as a share of GDP reached in 2017. Thanks to the one-off effect from reimbursements 
of  a  car  pollution  tax,  the  structural  deficit  increased  only  slightly,  from  2.9%  of  potential 
GDP in 2017 to 3.0% in 2018. 

The 2018 general government deficit outcome of 3.0% of GDP fulfils the target defined in the 
2018  Convergence  Programme.  However,  both  revenues  and  the  expenditures  were  higher 
than planned in the 2018 Convergence Programme. On the revenue side, indirect tax revenues 
were lower than planned, while the target for social contributions was overachieved. On the 
expenditure  side,  compensation  of  employees,  intermediate  consumption  and  social  benefits 
were all higher than planned, while public investment was lower. 

On  14  and  15  March  2019  the  Commission  undertook  an  enhanced  surveillance  mission  to 
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  5  June 
2019.  These  findings  were  made  public.  The  Commission  report  finds  that  the  Romanian 
authorities do not intend to act upon the Council Recommendation of 4 December 2018. The 
authorities confirmed to the Commission that the government has no intention to comply with 
the recommended structural adjustment. They continue to focus on maintaining the headline 
deficit below the 3% of GDP Treaty threshold, thus aiming to avoid the corrective arm of the 
Stability  and  Growth  Pact.  The  2019  budget  targets  an  accrual  deficit  of  2.8%  of  GDP. 
According to the government’s own estimates at the time of the mission, this headline would 
entail  a  structural  adjustment  of  around  0.1%  compared  to  2018,  significantly  short  of  the 
Council recommendation. 

In their report on action taken, the authorities target a general government deficit of 2.8% of 
GDP  in  2019,  a  decrease  compared  to  the  2018  outturn  of  3.0%.  The  2019  target  has  been 
revised upwards relative to the 2.4% of GDP target in the 2018 Convergence programme. The 
report  does  not  contain  projections  of  individual  budgetary  items  or  categories.  The 
authorities provide a list of discretionary measures taken, without estimating their budgetary 
impact.  Some  adopted  measures  (such  as  new  taxes  on  telecommunication,  energy  and  the 
banking sectors) are not mentioned in the report. Table 2, below, presents the measures listed 
in  the  report  with  a  significant  budgetary  impact  (defined  as  an  impact  of  at  least  0.1%  of 
GDP)  as  estimated  by  the  authorities  and  communicated  to  the  Commision  in  bilateral 
exchanges.  The  fiscal  impact  of  the  reported  measures  falls  significantly  short  of  the 
requirement stated in the Council Recommendation. 

4 

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

Reported fiscal 
impact in 2019 

Comments 

Revenues 

Dividends from SOEs at 90% of their net profits 

Sale of 5G licences 

Increase  of  gambling  taxes  and  of  excise  duties  on 
tobacco 

Construction  sector:  exemption  from  PIT  and  health 
contributions 

Expenditures 

+0.1 

+0.2 

+0.1 

-0.2 

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

+0.2 

Increase of child allowance 
Measures concerning public wages: 
Maintaining of bonuses, allowances, compensations, 
premiums and other elements that, according to the 
law, are part of the gross monthly salary, at the level 
granted in December 2018 for staff paid by public 
funds  
Granting of food allowance to all civil servants. 
Note:  
The budgetary impact in the table as estimated by the national authorities in their submission for Disrectionary Tax Database 
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. 

n/a 

5 

 
 
 
 
 
 
 
 
 
 
 
 
Table 3. Discretionary revenue measures included in the Commission 2019 spring 
forecast (fiscal impact in % of GDP) 

Measure 

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

Increase of excise duties for energy products as of October 2017  

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  

Construction sector: exemption from PIT and health contributions 

Sectoral taxes: turnover tax on telecommunication and energy sectors and tax 
on bank assets 

Remaning revenue measures 

Total impact 

2018 

+1.2 

+0.3 

+0.2 

-1.5 

+0.1 

+0.2 

2019 

-0.2 

+0.1 

+0.1 

0.0 

Note:  
The budgetary impact in the table as included in the Commission 2019 spring forecast. A positive/negative sign implies that 
revenue increases/decreases compared to the previous year.  

Based  on  the  Commission  spring  2019  forecast,  which  takes  into  account  the  measures 
described in the report from the authorities to the extent they are already enacted or credibly 
announced in sufficient  detail, as well as information from all available sources, the general 
government deficit is projected to increase to 3.5% of GDP in 2019. This rise is mostly driven 
–  similarly  to  recent  years  –  by  the  compensation  of  public  employees  (increase  by  0.9 
percentage points  of GDP). Expenditure on social  benefits  is  also  set to  rise, as the pension 
point (the main parameter used for pension indexation) is set to increase by 15% in September 
2019. Public investment is also projected to pick up. On the revenue side, social contributions 
are set to increase due to robust wage growth. 

The  general  government  deficit  is  projected  in  the  Commission  spring  2019  forecast  to  hit 
4.7% of GDP in 2020. The main driver of this projected deterioration is expenditure on old-
age  pensions,  driven  by  the  full-year  effect  of  the  15%  increase  in  the  pension  point  of 
September 2019 and a further increase of 40% in September 2020. 

As  a  consequence  of  the  fiscal  easing  described  above,  Romania’s  structural  deficit  is 
projected by the Commission  to  increase  from  3.0% of  GDP  in  2018 to  3.6% in  2019 and 
4.8%  in  2020.  The  composition  of the  budget  and  its  adjustments  in  nominal  and  structural 
terms are presented in Table 4 below. 

The  Romanian  authorities  in  the  2019  Convergence  Programme  plan  a  headline  deficit  of 
2.8% of GDP in 2019. Both total revenues and total expenditures as a share of GDP are higher 
than in the Commission forecast. The underlying macroeconomic projection of 5.5% of real 
GDP  growth  is  more  optimistic  than  3.3%  forecasted  by  the  Commission,  with  a  positive 
impact  on  tax  revenues.  The  projection  of  revenues  from  indirect  taxes  and  social 

6 

 
 
 
 
 
 
 
 
 
contributions  is  higher  than  in  the  Commission  forecast  (see  Table  1).  On  the  expenditure 
side,  current  expenditures  (in  particular  social  benefits)  are  lower  while  gross  fixed  capital 
formation is higher than projected by the Commission. 

Table 4. Composition of the budgetary adjustment 

7 

CP 2018OutturnCP 2018CP 2019COMCP 2018CP 2019COMRevenue31.332.031.533.832.531.833.833.3of which:- Taxes on production and imports10.810.410.310.710.410.410.510.4- Current taxes on income, wealth, etc.4.94.95.04.95.15.15.05.1- Social contributions10.911.411.512.311.911.812.512.2- Other (residual)4.75.24.75.95.24.55.85.5Expenditure34.335.033.936.636.133.636.438.0of which:- Primary expenditure32.933.832.635.434.832.235.136.7of which:Compensation of employees10.311.09.911.711.99.711.411.9Intermediate consumption4.75.14.55.05.14.24.95.1Social transfers11.411.711.811.511.911.612.313.0Subsidies0.40.40.40.40.40.40.40.4Gross fixed capital formation2.92.63.03.52.93.53.33.5Other (residual)3.13.12.93.22.72.82.82.8- Interest expenditure1.41.21.31.21.21.41.31.3General government balance (GGB)-3.0-3.0-2.4-2.8-3.5-1.8-2.7-4.7Primary balance-1.5-1.8-1.0-1.6-2.3-0.5-1.4-3.4One-off and other temporary measures0.0-0.30.0-0.1-0.10.00.00.0GGB excl. one-offs-3.0-2.7-2.4-2.7-3.4-1.8-2.7-4.7Output gap10.80.91.20.10.61.60.70.2Cyclically-adjusted balance1-3.3-3.3-2.8-2.8-3.7-2.4-2.9-4.8Structural balance2-3.3-3.0-2.8-2.7-3.6-2.4-2.9-4.8Structural primary balance2-1.9-1.8-1.5-1.5-2.4-1.01.3-3.520201Output 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 2019 spring forecasts (COM); Commission calculations.(% of GDP)20182019Notes: 
 
 
 
 
 
 
Table 5. Debt developments 

In 2018, the general government debt-to-GDP ratio decreased by 0.2% of GDP, on the back 
of the high nominal GDP growth, reaching 36.0% of GDP. It is projected by the Commission 
to increase to 38.4% of GDP by 2020 (see Table 5 above). 

4. 

COMPLIANCE WITH THE ADJUSTMENT TOWARDS THE MTO IN 2018 

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

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, corresponding to an annual structural adjustment of 0.8% of GDP. 

In 2018, the growth of net primary government expenditure was well above the expenditure 
benchmark,  pointing  to  a  significant  deviation  (deviation  of  2.4%  of  GDP).  The  structural 
balance  remained  broadly  stable  at  around  3.0%  of  potential  GDP,  also  pointing  to  a 
significant  deviation  from  the  recommended  structural  adjustment  (deviation  of  0.8%  of 
GDP). The size of the deviation indicated by the structural balance is negatively impacted by 
a revenue windfall, by a higher GDP deflator and by a higher underlying estimate of potential 
GDP  growth  as  compared  to  the  medium-term  average  underlying  the  expenditure 
benchmark. On the other hand, the size of the deviation indicated by the structural balance is 
positively  impacted  by  low  public  investment  expenditures,  which  are  smoothed  out  in  the 
expenditure benchmark.  Irrespective of that difference, both  indicators  confirm a significant 
deviation from the requirements of the preventive arm of the SGP in 2018. This assessment is 
also in line with the earlier conclusion of 4 December 2018, in which the Council found that 
Romania had not taken effective action in response to the Council recommendation of 22 June 
2018 and issued a revised recommendation. 

8 

2017OutturnCP 2018OutturnCP 2018CP 2019COMCP 2018CP 2019COMGross debt ratio135.235.435.035.835.436.035.435.438.4Change in the ratio-2.20.4-0.20.40.41.0-0.40.02.4Contributions2:1. Primary balance1.41.51.81.01.62.30.51.43.42. “Snow-ball” effect-2.6-1.1-2.0-1.1-1.7-1.5-1.2-1.2-1.0Of which:Interest expenditure1.31.51.21.41.21.21.31.31.3Growth effect-2.3-2.0-1.3-1.9-1.8-1.0-1.9-1.9-1.0Inflation effect-1.6-0.7-1.9-0.6-1.1-1.7-0.6-0.6-1.23. Stock-flow adjustment-0.90.00.00.50.60.30.4-0.20.0(% of GDP)20182019Commission 2019 spring forecast (COM); Convergence Programmes (CP), Commission calculations.2020Notes: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: 
 
 
5. 

COMPLIANCE  IN  2019  WITH  THE  COUNCIL  RECOMMENDATION  OF  4  DECEMBER 
2018  

On 4 December 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 
4.5% in 2019, corresponding to an annual structural adjustment of 1.0% of GDP. 

Based  on  the  Commission  2019  spring  forecast,  the  growth  of  net  primary  government 
expenditure amounts to 11.6%, which is well above the expenditure benchmark of 4.5%. The 
structural  balance is  set  to  deteriorate by 0.7% of GDP, reaching a deficit  of 3.6% in  2019. 
This is the opposite of the recommended structural improvement of 1.0% of GDP relative to 
2018.  Therefore,  both  pillars  point  to  a  deviation  from  the  recommended  adjustment.  The 
expenditure benchmark points to a deviation of 2.1% of GDP. The structural balance confirms 
this  reading,  indicating  a  somewhat  smaller  deviation  of  1.7%  of  GDP.  The  size  of  the 
deviation  indicated  by  the  structural  balance  is  smaller  thanks  to  a  revenue  windfall  and 
thanks to a higher GDP deflator. Taking this into account, the overall assessment confirms a 
deviation from the recommended adjustment. 

The projected increase of the deficit compared to 2018 is largely driven, similarly to previous 
years, by increasing expenditures on the compensation of public employees. 

According  to  the  Commission  spring  2019  forecast,  the  headline  deficit  is  projected  to 
increase to 3.5% of GDP in 2019 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 

6. 

PROPOSED ADJUSTMENT PATH TO THE MTO AND REQUIRED FISCAL EFFORT  

Based on the Commission 2019 spring forecast, Romania's structural balance is estimated to 
be -3.6% of GDP in 2019 and -4.8% in of GDP in 2020, increasingly away from its MTO of -
1% of GDP. Romania is projected to remain in normal economic times, as its projected output 

10 

(% of GDP)2018Medium-term objective (MTO)-1.0Structural balance2 (COM)-3.0Structural balance based on freezing (COM)-3.3Position vis-a -vis the MTO3Not at MTORequired adjustment40.8Required adjustment corrected50.8Corresponding expenditure benchmark63.3COMCPCOMCPCOM      Change in structural balance70.0-0.2-0.7-0.2-1.2      One-year deviation from the required adjustment8-0.8-1.2-1.7-0.9-1.9      Two-year average deviation from the required adjustment8-1.3-1.0-1.2-1.1-1.8      Net public expenditure annual growth corrected for one-offs911.511.311.67.810.8      One-year deviation adjusted for one-offs10-2.4-2.0-2.1-0.8-1.8      Two-year deviation adjusted for one-offs10-2.9-2.2-2.3-1.4-2.0Finding of the overall assessmentSignificant deviationDeviationDeviationDeviationDeviationLegendNotesSource:Compliance with the required adjustment to the MTO1.01.00.750.755  Required adjustment corrected for the clauses, the possible margin to the MTO and the allowed deviation in case of overachievers.Setting the required adjustment to the MTO--3.64.55.1Not at MTO'Some deviation' - a deviation from the recommended structural adjustment is being observed, but it is below the threshold for a significant deviation.'Significant deviation' - a deviation which has reached or breached the threshold for a significant deviation (i.e. 0.5% of GDP over one year, 0.25% of GDP over two years on average).10 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. 1 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.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.). In case of a SDP, the requirement corresponds to the Council recommendation when available, otherwise it refers to the Commission recommendation to the Council.7 Change in the structural balance compared to year t-1. Ex post assessment (for 2019-1) is carried out on the basis of Commission 2019 spring forecast. 8  The difference of the change in the structural balance and the corrected required adjustment. 'Compliance' - the recommended structural adjustment or a higher adjustment is being observed.Convergence Programme (CP); Commission 2019 spring forecast (COM); Commission calculations.20192020Background budgetary indicators1-3.6-4.8Not at MTOStructural balance pillarExpenditure benchmark pillar-1.0-1.09 Net public expenditure annual growth (in %) corrected for discretionary revenue measures, revenue measures mandated by law and one-offs (nominal)6  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.  
 
 
gap  of  +0.6%  in  2019  and  +0.2%  in  2020  is  between  -1.5%  and  +1.5%  of  potential  GDP. 
General government debt is set to remain below the 60% of GDP threshold in 2019-2020. The 
required  structural  effort  prescribed  by  Regulation  (EC)  No  1466/97  and  the  matrix  of 
requirements4,  which  factors  in  the  prevailing  economic  circumstances  and  sustainability 
concerns, amounts to 0.5% of GDP in both 2019 and 2020. 

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  should  complement  the  minimum  adjustment  requirement.  Romania's  structural 
deficit increased by 1.7% of GDP in 2016 and by 1.2% of GDP in 2017 and remained broadly 
stable  in  2018.  Therefore,  an  additional  effort  of  0.5%  of  GDP  in  2019  and  0.25%  in  2020 
should complemented the matrix requirement. The additional effort seems appropriate given 
the  magnitude  of  the  accumulated  deviation  from  the  MTO  and  from  the  recommended 
adjustment path towards it. Such an effort would be in line with the adjustment recommended 
for 2019 by the Council on 4 December 2018.  It would  accelerate adjustment back towards 
the MTO, without putting economic growth at risk. 

Based  on  the  Commission  forecast,  the  above-mentioned  structural  adjustment  targets  are 
consistent with a nominal growth rate of net primary government expenditure of 4.5% in 2019 
and 5.1% in 2020, in contrast to the respective growth rates of 11.6% and 10.8% projected by 
the Commission. 

The Commission 2018 spring forecast projects a further deterioration of the structural balance 
by  0.7%  of  GDP  in  2019  and  an  additional  1.2%  of  GDP  in  2020.  Therefore,  a  structural 
improvement of 1.0% of GDP in 2019 and of 0.75% in 2020 translates into the need to adopt 
measures  of  a  total  structural  yield  of  1.7%  of  GDP  in  2019  and  additonal  measures  of  a 
structural yield of 1.95% of GDP in 2020 compared to the current baseline in the Commission 
2019 spring forecast. 

According to the Commission spring 2019 forecast, Romania is projected to breach the 3% of 
GDP  deficit  reference  value  of  the  Treaty.  The  required  structural  adjustment  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  fiscal  and  macroeconomic  risks  and  the 
projected breach. 

7. 

CONCLUSIONS 

Romania  has  not  contained  its  net  primary  government  expenditure  nor  has  it  delivered  the 
improvement  in  the  structural  balance  recommended  by  the  Council  on  4  December  2018. 
Moreover,  both  the  structural  balance  and  the  expenditure  benchmark  pillars  point  to  a 
significant deviation from the recommended adjustment path towards the MTO in 2018. An 
overall assessment confirms that the observed deviation in 2018 is significant. 

An improvement in Romania's structural balance by 1.0% of GDP in 2019 and by 0.75% of 
GDP in 2020 seems appropriate given the magnitude of the accumulated deviation from the 
MTO  and  from  the  recommended  adjustment  path  towards  it.  Such  structural  adjustment  is 
consistent with a nominal growth rate of net primary government expenditure of 4.5% in 2019 
and  5.1%  in  2020.  It  would  accelerate  adjustment  back  towards  the  MTO  without  putting 

4  “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 

 
 
                                                 
 
economic growth at risk. This adjustment 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 fiscal and macroeconomic risks and the projected breach. 

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