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 14 June 2019 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: 2019-11-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, budgetary assessment, budgetary control, economic policy, gross domestic product, medium-term forecast, multilateral surveillance, stability pact, stability programme

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.11.2019  SWD(2019) 932 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 14 June 2019  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) 912 final} - {COM(2019) 913 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 14 June 2019 

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.  The 
medium-term budgetary objective for Romania is a structural deficit of 1% of GDP. Romania 
is not subject to the debt rule as its general government debt remains below 60% of GDP.  

In  June  2017  and  June  2018,  the  Council  found  in  accordance  with  Article  121(4)  of  the 
Treaty  on  the  Functioning  of  the  European  Union  ("TFEU")  that  in  2016  and  2017, 
respectively,  there  had  been  a  significant  observed  deviation  from  Romania’s  medium-term 
budgetary  objective  or  from  the  adjustment  path  towards  it.  In  view  of  those  established 
significant  deviations,  the  Council  issued  Recommendations  on  16  June  20171  and  22  June 
20182,  recommending  that  Romania  take  the  policy  measures  necessary  to  address  those 
deviations.  The  Council  subsequently  found  that  Romania  had  not  taken  effective  action  in 
response  to  those  Recommendations  and  issued  revised  Recommendations  on  5  December 
20173 and 4 December 20184. The Council found that Romania had not taken effective action 
in response to those revised Recommendations either. 

On  14  June  2019,  the  Council  found  in  accordance  with  Article  121(4)  TFEU  that  an 
observed significant  deviation  from  the  adjustment path  toward the medium-term  budgetary 
objective occurred in  Romania in  2018.  In view  of the established significant  deviation,  the 
Council  on  14  June  2019  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 4.5% in 2019 and 5.1% in 2020, corresponding to an annual structural adjustment 
of  1.0%  of  GDP  in  2019  and  0.75%  in  20205,  thereby  putting  Romania  on  an  appropriate 
adjustment path toward the medium-term budgetary objective. It also recommended Romania 
to use any windfall gains for deficit reduction, while budgetary consolidation measures should 

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). 

2  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). 

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  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). 

5  Council Recommendation of 14 June 2019 with a  view to correcting the significant observed deviation from 

the adjustment path toward the medium-term budgetary objective in Romania (OJ C 210, 21.6.2019, p. 1). 

1 

 
 
 
  
                                                 
ensure  a  lasting  improvement  in  the  general  government  structural  balance  in  a  growth-
friendly  manner.  The  Council  established  a  deadline  of  15  October  2019  for  Romania  to 
report on action taken in response to this Recommendation.  

On 9 July 2019, the Council addressed recommendations to Romania within the context of the 
European Semester6. In the area of public finances, the Council recommended that Romania 
ensure compliance with the Council Recommendation of 14 June 2019 with a view to correct 
the  significant  deviation  from  the  adjustment  path  toward  the  medium-term  budgetary 
objective.   
The Romanian authorities delivered their report on action taken7 in response to that Council 
Recommendation  (hereafter: "the report") on 15 October 2019. Moreover, on 25 September 
2019  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  2019-20. 
Sections 3 presents fiscal developments in 2019 and updated budgetary projections for 2020. 
Section  4  assesses  compliance  with  the  Council  Recommendation  of  14  June  2019,  while 
Section 5 proposes a new adjustment path for 2020. Section 6 concludes.  

2. 

MACROECONOMIC DEVELOPMENTS AND OUTLOOK IN 2019 AND 2020 

The Commission 2019 autumn forecast projects real GDP growth of 4.1% in 2019, compared 
to  4%  in  2018.  Private  consumption  is  expected  to  remain  the  main  contributor  to  growth, 
with  disposable  income  supported  by  minimum  wage  and  public  wage  hikes.  Investment  is 
expected to recover in 2019, following a drop in 2018, and making a positive contribution to 
growth.  Import  and  export  growth,  although  lower  than  in  2018,  remain  positive  but  net 
exports continue to subtract from GDP growth. 

In 2020, real GDP growth is projected to decelerate to 3.6%. Private consumption growth is 
forecast  by  the  Commission  to  slightly  decline  compared  to  2019  but  still  remain  the  main 
driver of GDP growth. Nominal wage growth is projected to moderate while pensions are set 
to increase significantly driven by the new pension law. Inflation is set to continue to weigh 
on  real  disposable  income.  Investment  is  forecast  to  contribute  again  positively  to  growth, 
supported by construction and the projected acceleration of spending on projects co-funded by 
the EU towards the end of the current programming period. Imports are projected to continue 
increasing  at  a  higher  pace  than  exports.  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 5.1% in  2019 
and  5.3%  in  2020,  with  the  worsening  trade  balance  being  partially  compensated  by  an 
improvement in the secondary balance.   

Romania's  labour  market  is  projected  to  remain  tight  with  new  historical  lows  in 
unemployment of 3.9% and 4.2% for 2019 and 2020, respectively. The tight labour market is 
likely to exert further pressure on wages, albeit less than in previous years. Compensation per 
employee is forecast to grow by 14.5% in real terms in 2019, but is expected to slow down to 
10.2% in 2020 as the effects of past increases in public and minimum wages fade away.  

6 Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Romania and delivering 

a Council opinion on the 2019 Convergence Programme of Romania (OJ C 301, 5.9.2019, p. 135). 

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

2 

 
 
                                                 
Inflation  increased  in  the  first  part  of  2019,  reaching  4.4%  by  May,  but  decelerated  in 
September on account of a decline in energy and food prices. Inflation is forecast at 3.9% for 
2019  as  a  whole,  declining  to  3.5%  in  2020  as  energy  price  inflation  is  expected  to  remain 
subdued. 

The  output  gap,  which  turned  positive  in  2017,  is  projected  to  narrow  in  2019  and  turn 
slightly negative in 2020. 

Risks  to  Romania's  macroeconomic  outlook  are  tilted  to  the  downside.  A  slowdown  in  the 
economies  of  Romania’s  main  trading  partners  could  translate  into  weaker  export  growth. 
Moreover,  a  busy  electoral  calendar  throughout  2019  and  2020  could  limit  the  appetite  for 
pursuing  much  needed  structural  reforms.  The  continued  unpredictability  of  public  policy 
together with recent political uncertainty could negatively affect the business environment and 
result  in  postponed  investment  decisions.  The  challenge  of  meeting  the  budgetary  deficit 
targets in 2020 and 2021 could also hamper public investment in particular due to the strong 
growth  of  more  rigid  expenditure  items  in  recent  years.  On  the  other  hand,  a  faster 
acceleration of spending on projects co-funded by the EU represents a positive risk for GDP 
growth in 2020 and 2021. 

Table 1. Macroeconomic developments and forecast 

3 

2018OutturnCPCOMCPCOMReal GDP (% change)4.05.54.15.73.6Private consumption (% change)5.26.45.86.25.2Gross fixed capital formation (% change)-3.36.98.07.93.4Exports of goods and services (% change)5.46.93.87.13.7Imports of goods and services (% change)9.17.87.37.95.6Contributions to real GDP growth:- Final domestic demand5.76.15.86.24.6- Change in inventories2.90.00.00.00.0- Net exports-1.7-0.6-1.7-0.5-1.0Output gap10.40.10.10.7-0.1Employment (% change)0.21.40.21.20.1Unemployment rate (%)4.24.13.94.04.2Labour productivity (% change)3.74.13.94.43.4HICP inflation 2 (%) 4.13.53.92.63.5GDP deflator (% change)5.93.57.31.94.5Comp. of employees (per head, % change)16.38.113.06.19.2Net lending/borrowing vis-à-vis the rest of the world (% of GDP)-3.2-1.7-3.7-0.8-3.9Sources:Commission 2019 autumn forecast (COM); 2019 Convergence Programme (CP)20201In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario using the commonly agreed methodology.2019Note: 
 
 
3. 

FISCAL DEVELOPMENTS AND OUTLOOK IN 2019 AND 2020 

On  25  September  2019,  the  Commission  undertook  an  enhanced  surveillance  mission  in 
Romania  for  the  purpose  of  on-site  monitoring  under  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  20  November  2019  and 
made  its  findings  public.  The  2019  budget  amendment,  adopted  in  August,  maintained  the 
same target of a headline deficit of 2.8% of GDP mentioned in the original 2019 budget law 
and  in  the  2019  Convergence  Programme.  Going  forward,  the  authorities  target  a  headline 
deficit of 2.9% of GDP in 2020, which is higher than the 2020 target of 2.7% of GDP in the 
2019 Convergence Programme. The authorities did not inform the mission of their structural 
deficit  targets,  but  explained  that  these  headline  deficit  targets  imply  that  a  structural 
adjustment would only start in 2022. 

On 15 October 2019, the Romanian authorities submitted a report on action taken in response 
to the Council Recommendation of 14 June 2019. In their report, the authorities confirmed the 
headline deficit targets of 2.8% of GDP in 2019 and 2.9% of GDP in 2020 mentioned during 
the mission. According to the authorities, the corresponding structural balance would amount 
to  2.8%  of  GDP  in  2019  and  3.1%  of  GDP  in  2020.  The  report  does  not  contain  a 
comprehensive projection of individual budgetary categories as recommended by the Council 
on 14 June 2019. It therefore does not describe exactly how the authorities intend to reach the 
proposed targets,  in  particular in  view of significant  pension expenditure increases resulting 
from the new pension law adopted in summer 2019. Also, the report does not comment on the 
substantial overruns in the execution of the budget in the first nine months of 20198. 

Table 2 below presents measures and policies listed in the report. The report does not include 
the budgetary impact of each mentioned measure as recommended by the Council on 14 June 
2019. For 2019 the report mentions two new measures included in  the August  2019 budget 
amendment:  a  tax  amnesty  and  reimbursement  from  EU  funds  of  spending  on  projects 
originally financed from the National Program for Local Development (PNDL). For 2020, the 
report  relies  on  containing  operating  and  investment  expenses,  without  backing  it  with 
sufficiently detailed and adopted, or at least credibly announced, measures.  

8 According to cash budget execution data, the public deficit was 0.85 % of GDP higher in the first three quarters 

of 2019 than in the equivalent period of 2018. 

4 

 
 
 
 
 
                                                 
Table 2. Discretionary fiscal measures and policies listed in the report (fiscal impact in 
% of GDP, as reported by the authorities) 

Fiscal impact  
2020 
2019 

Comments 

Revenues 

Tax amnesty. 

Maintaining  VAT  and  excise  duties 
revenues 
projection  at  the  level  programmed  for  the  second 
semester and renewing the commitment to improve tax 
collection and reduce tax evasion. 

+0.2 

+0.4 

Tax on bank assets. 

 +0.03 

Not a new measure. The 2019 budget 
amendment maintained the overall projection 
of tax revenues at the same % of GDP as in the 
original 2019 budget. The impact of 0.4% of 
GDP stated in the report is compared to the 
updated revenue projection at the time of 
adoption of the budget amendment. 

Measure in force since the beginning of 2019 
but not included in the original 2019 budget. 

Maintaining  the  original  targets  for  revenue  from 
dividends. 

n/a 

Not a new measure compared to the original 
2019 budget law. 

Sale of 5G licences. 

Reimbursement from EU funds of spending on projects 
originally  financed  from  the  National  Program  for 
Local Development (PNDL). 

+0.2 

+0.2 

Increase of excise duty on tobacco. 

+0.1 

Expenditures 

New pension law 

n/a 

n/a 

Not a new measure. Already included in the 
original 2019 budget. According to the ESA-
2010 accounting rules, the impact should be 
smoothed out over several years. 

The report does not quanitfy the fiscal impact 
of the law. According to the memorandum 
accompanying the law, it will increase 
government expenditures by 0.8% of GDP in 
2019 and by additional 1.5% of GDP in 2020, 
compared to the nominal 2018 level. 

n/a 

n/a 

Cancellation of some amounts that could not be 
committed in the first half of 2019 and reallocation of 
funds taking into account the low degree of execution 
in expenditure categories. 
Public wages: (i) increase of the basic salaries as 
stipulated by the existing law; (ii) continued 
restrictions on non-awarding of prizes, overtime 
payments, maintenance of the amount of bonuses; (iii) 
nominal freeze of holiday vouchers and of food 
allowances at their 2019 level. 
Nominal freeze of social benefits funded from the state 
budget, such as guaranteed minimum pension and child 
allowances at their 2019 levels. 
Maintaining the 2019 formula of assigning collected 
taxes to local administrative units. 
Providing 2% of GDP on defense. 
Operating and investment expenses of the ministries 
kept at a “minimum level”. 
Note:  
The budgetary impact in the table as estimated by the national authorities in the action report or - in their absence - in the 
submission for Discrectionary 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. 

No impact on general government balance. 

0.0 

n/a 

n/a 

n/a 

5 

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

Measure 

Construction sector: exemption from PIT and health contributions 

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

Increase of excise duty on tobacco 

Remaining measures 

Total impact 

2019 

-0.2 

+0.2 

+0.1 

+0.1 

0.0 

2020 

+0.1 

0.0 

+0.1 

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

Based on the Commission autumn 2019 forecast, the general government deficit is projected 
to  increase  to  3.6%  of  GDP  in  2019,  from  3.0%  in  2018,  driven  by  increased  spending  on 
compensation  of  employees  and  on  goods  and  services.  Public  investment  is  set  to  rebound 
somewhat from the record low levels of the recent years. 

The  general  government  deficit  is  projected  by  the  Commission  to  reach  4.4%  of  GDP  in 
2020, driven by the significant increases to old-age pensions resulting from the new pension 
law enacted in  summer 20199.  In particular, the  pension point (the main parameter used for 
pension  indexation)  was  increased  by  15%  in  September  201910  and  is  set  to  grow  by  an 
additional 40% in September 2020. As a consequence, public expenditures on social benefits 
are set to increase by 0.9 % of GDP in 2020. Moreover, public investment is set to continue 
increasing  due  to  an  acceleration  of  spending  on  projects  co-funded  by  the  EU  towards  the 
end of the current programming period. 

Romania’s structural deficit is forecast by the Commission to increase from 2.7% in 2018 to 
3.5% in 2019 and 4.4% in 2020, driven by increased expenditures. 

The  composition  of  the  budget  and  its  adjustments  in  nominal  and  structural  terms  are 
presented in Table 4. The table compares the Commission 2019 autumn forecast to the 2019 
Convergence  Programme,  which  is  the  latest  detailed  fiscal  projection  published  by  the 
Romanian authorities. 

9  The  general  government  deficit  is  projected  by  the  Commission  to  increase  even  further,  to  6.1%  in  2021, 

driven by the pension increases.  

10 The 15% increase of September 2019 was already included in the original 2019 budget. 

6 

 
 
 
 
 
 
 
                                                 
Table 4. Composition of the budgetary adjustment 

7 

2018OutturnCPCOMCPCOMRevenue32.333.832.233.832.7of which:- Taxes on production and imports10.610.710.610.510.6- Current taxes on income, wealth, etc.4.94.95.05.05.1- Social contributions11.512.311.612.511.7- Other (residual)5.25.95.05.85.3Expenditure35.236.635.836.437.1of which:- Primary expenditure34.035.434.635.135.9of which:Compensation of employees11.011.711.411.411.5Intermediate consumption5.15.05.34.95.3Social payments10.811.510.812.311.7Subsidies0.40.40.40.40.4Gross fixed capital formation2.73.53.03.33.4Other (residual)4.13.33.82.83.8- Interest expenditure1.21.21.21.31.2General government balance (GGB)-3.0-2.8-3.6-2.7-4.4Primary balance-1.8-1.6-2.4-1.4-3.2One-off and other temporary measures-0.3-0.1-0.10.00.0GGB excl. one-offs-2.6-2.7-3.5-2.7-4.4Output gap10.40.10.10.7-0.1Cyclically-adjusted balance1-3.1-2.8-3.7-2.9-4.4Structural balance2-2.7-2.7-3.5-2.9-4.4Structural primary balance2-1.6-1.5-2.3-1.6-3.1(% of GDP)20192020Notes: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 Source:2019 Convergence Programme (CP); Commission 2019 autumn forecast (COM); Commission calculations. 
 
 
 
 
Table 5. Debt developments 

The  general  government  debt-to-GDP  ratio  is  projected  by  the  Commission  to  increase  to 
35.5% of GDP in 2019 and 37.2% in 2020, driven by high fiscal deficits. 

4. 

COMPLIANCE WITH THE COUNCIL RECOMMENDATION OF 14 JUNE 2019  

On  14  June  2019,  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 and 5.1% in 2020, corresponding to an annual structural adjustment of 1.0% of 
GDP in 2019 and 0.75% in 2020. 

In  2019,  based  on  the  Commission  2019  autumn  forecast,  the  nominal  growth  rate  of  net 
primary  government  expenditure  is  set  to  amount  to  12.8%,  well  above  the  expenditure 
benchmark of 4.5%. The structural balance is set to deteriorate by 0.8% of GDP, reaching a 
deficit  of  3.5%  of  GDP  in  2019.  Therefore,  both  pillars  point  to  a  deviation  from  the 
recommended adjustment. The expenditure benchmark points to a deviation of 2.5% of GDP. 
The structural balance confirms that reading, indicating a smaller deviation of 1.8% 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  a 
projected increase of public investment, which is smoothed out in the expenditure benchmark. 
Therefore, the overall assessment confirms the deviation from the requirements of the Council 
Recommendation of 14 June 2019.  

8 

2018OutturnCPCOMCPCOMGross debt ratio135.035.435.535.437.2Change in the ratio0.00.40.50.01.7Contributions2:1. Primary balance1.81.62.41.43.22. “Snow-ball” effect-1.7-1.7-2.5-1.2-1.4Of which:Interest expenditure1.21.21.21.31.2Growth effect-1.1-1.8-1.4-1.9-1.2Inflation effect-1.9-1.1-2.3-0.6-1.53. Stock-flow adjustment0.10.60.5-0.20.0(% of GDP)20192020Notes: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 2019 autumn forecast (COM); 2019 Convergence Programme (CP), Commission calculations. 
 
 
In 2020, based on the Commission 2019 autumn forecast, the nominal growth rate of primary 
government expenditure is set to amount to 11.1%, well above the expenditure benchmark of 
5.1% (deviation of 1.8% of GDP from the recommended adjustment). The structural balance 
is set to deteriorate further by 0.8% of GDP, reaching a deficit of 4.4% (deviation of 1.6% of 
GDP).  The  structural  balance  is  positively  affected  by  a  higher  GDP  deflator  and  by  a 
projected  revenue  windfall.  This  impact  is  partially  offset  by  the  impact  of  a  projected 
increase  of  public  investment,  which  is  smoothed  out  in  the  expenditure  benchmark. 
Therefore, the overall assessment confirms the deviation in 2020 from the requirements of the 
Council Recommendation of 14 June 2019. 

Table 6. Compliance with the medium-term budgetary objective or the required adjustment 
towards it 

5. 

PROPOSED ADJUSTMENT PATH TO THE MEDIUM-TERM BUDGETARY OBJECTIVE AND 
REQUIRED FISCAL EFFORT  

Based on the Commission 2019 autumn forecast, Romania's structural balance is estimated to 
be at  -4.4% in  2020, far from  its medium-term  budgetary objective of  -1%  of GDP and the 
adjustment path recommended by the Council on 14  June 2019.  

9 

(% of GDP)201820192020Medium-term objective (MTO)-1.0-1.00.0Structural balance2 (COM)-2.7-3.5-4.4Structural balance based on freezing (COM)-3.3-3.5-Position vis-a -vis the MTO3Not at MTONot at MTONot at MTORequired adjustment40.81.00.75Corresponding expenditure benchmark53.34.55.1      Change in structural balance60.0-0.8-0.8      One-year deviation from the required adjustment7-0.8-1.8-1.6      Two-year average deviation from the required adjustment7-1.3      Net public expenditure annual growth corrected for one-offs811.812.811.1      One-year deviation adjusted for one-offs9-2.4-2.5-1.8      Two-year deviation adjusted for one-offs9-2.9Finding of the overall assessmentSignificant deviationDeviationDeviationNotesSource:6 Change in the structural balance compared to year t-1. Ex post assessment (for 2018) is carried out on the basis of Commission 2019 spring forecast. 7  The difference of the change in the structural balance and the corrected required adjustment. 8 Net public expenditure annual growth (in %) corrected for discretionary revenue measures, revenue measures mandated by law and one-offs (nominal)9 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. Commission 2019 autumn forecast; Commission calculations1 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.5  Reference rate for the growth of net government expenditure. It is expressed in real terms until 2017 and in nominal terms from 2018 onwards.Expenditure benchmark pillarCompliance with the required adjustment to the MTOStructural balance pillarSetting the required adjustment to the MTOBackground budgetary indicators1 
 
 
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 adjustment recommended by the Council on 14 June 2019. 
Romania's  structural  deficit  has  increased  by  2.5%  of  GDP  between  2015  and  2018  and  is 
projected  to  increase  by  a  further  0.8%  of  GDP  in  2019.  Therefore,  an  additional  effort  of 
0.25%  of  GDP  in  2020  should  complement  the  structural  effort  of  0.75%  of  GDP 
recommended by the Council on 14 June 2019. That additional effort seems appropriate given 
the magnitude of the cumulated deviations from the medium-term budgetary objective and the 
recommended  adjustment  path  towards  it.  It  will  accelerate  adjustment  back  towards  the 
medium-term budgetary objective without putting economic growth at risk.  

According to the Commission 2019 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 2020 would also ensure that Romania respects the 3% of GDP deficit reference value of the 
Treaty in 2020 with a margin. This is crucial in view of the existing risks and the projected 
breach. 

Based  on  the  Commission  forecast,  a  1.0%  of  GDP  structural  adjustment  target  in  2020  is 
consistent  with  a  nominal  growth  rate  of  net  primary  government  expenditure  of  4.4%  in 
2020, compared to the growth rate of 11.1% projected by the Commission. 

The  Commission  2019  autumn  forecast  projects  a  deterioration  of  the  structural  balance  by 
0.8% of GDP in 2020. Therefore, a structural improvement of 1.0% of GDP translates into the 
need to  adopt  measures  of a total  structural  yield of 1.8% of GDP in  2020 compared to  the 
current baseline in the Commission 2019 autumn forecast. 

6. 

CONCLUSIONS 

On  14  June  2019  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 and 5.1% in 2020, corresponding to an annual structural adjustment of 1.0% of 
GDP in 2019 and 0.75% in 2020. 

Romania has  not  taken the necessary measures to ensure the  recommended improvement in 
the structural balance, nor has it contained the nominal growth rate of net primary government 
expenditure in 2019, nor is it projected to in 2020. Moreover, the Commission 2019 autumn 
forecast  projects  Romania's  general  government  deficit  to  be  above  the  3%  of  GDP  Treaty 
reference value in 2019 and beyond. 

In light of an insufficient response to the Council Recommendation of 14 June 2019 and the 
cumulated  high  deviation  from  the  required  adjustment  path  toward  the  medium-term 
budgetary  objective,  it  is  appropriate  to  address  a  revised  recommendation  to  Romania.  An 
improvement  in  Romania's  structural  balance  by  1.0%  of  GDP  in  2020  relative  to  the  2019 
outturn  would  put  Romania  on  an  appropriate  adjustment  path  towards  the  medium-term 
budgetary objective. Such an improvement is consistent with the nominal growth rate of net 
primary government expenditure not exceeding 4.4% in 2020. Such an adjustment also seems 
appropriate  to  ensure  that  Romania  respects  the  3%  of  GDP  general  government  deficit 
threshold with a margin.  

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