REPORT FROM THE COMMISSION TO THE COUNCIL Commission report to the Council pursuant to Article -11(2) of Regulation (EC) No 1466/97 on the enhanced surveillance mission in Romania of 25 September 2019
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

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   EUROPEAN COMMISSION  Brussels, 20.11.2019  COM(2019) 910 final  REPORT FROM THE COMMISSION TO THE COUNCIL Commission report to the Council pursuant to Article -11(2) of Regulation (EC) No 1466/97 on the enhanced surveillance mission in Romania of 25 September 2019  
 
 
This  report  on  an  enhanced  surveillance  mission  to  Romania  is  transmitted  to  the  Council 
pursuant to Article -11(4) of Regulation (EC) No 1466/971. As foreseen by Article -11(5) of 
Regulation  (EC)  No  1466/97,  the  provisional  findings  of  that  mission  have  been  previously 
transmitted to Romanian authorities for comments. 

Romania – Significant Deviation Procedure 
enhanced surveillance mission, 25 September 2019 

Report 

1. Introduction 

Romania has been under significant deviation procedures since spring 2017. Both in June 
2017 and June 2018 the Council found, in accordance with Article 121(4) of the Treaty, that 
there  had  been  a  significant  observed  deviation  from  the  medium-term  budgetary  objective 
and from the adjustment path towards it in 2016 and 2017, respectively. The Council issued 
recommendations  asking  Romania  to  take  the  necessary  policy  measures  to  address  these 
deviations. Both recommendations were revised six months later, when the Council concluded 
that  Romania  had  taken  no  effective  action  in  response  to  the  June  recommendations. 
Romania took no action to address the revised recommendations either2.  

As  a  consequence  of  the  significant  deviation  in  2018,  a  new  significant  deviation 
procedure  has  been  launched  in  spring  2019.  On  5  June  2019,  the  Commission  issued  a 
warning  to  Romania  that  in  2018  it  had  again  deviated  from  the  adjustment  path  to  its 
medium-term  budgetary  objective  and  proposed  to  the  Council  to  launch  a  new  significant 
deviation  procedure.  In  its  new  recommendation,  approved  on  14  June,  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 and 5.1% in 2020, corresponding to an 
annual structural adjustment of 1.0% of GDP in 2019 and 0.75% in 2020. . 

This  report  presents  the  findings  from  the  enhanced  surveillance  mission  to  Romania 
that  took  place  on  25  September  2019.  The  mission  was  based  of  Article  -11(2)  of 
Regulation  (EC)  1466/97.  The  mission  met  Ms  Daniela  Pescaru  and  Mr  Tiberiu  Valentin 
Mavrodin, secretaries of state at the Ministry of Finance, Ms Mirela Călugăreanu, head of tax 
administration (ANAF), Mr. Mugur Isărescu, governor of the National Bank of Romania, and 
Mr.  Daniel  Dăianu,  President  of  the  Fiscal  Council  of  Romania,  accompanied  by  their 
respective staff. As with previous similar missions, the aim was to discuss the fiscal measures 
planned by the authorities, stress the existence of fiscal risks, and encourage compliance with 

1 Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance 
and coordination of economic policies, OJ L 209, 2.8.1997, p. 1 
2 The Council recommendations and other relevant significant deviation procedure documents are available at: 
https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-
correction/stability-and-growth-pact/preventive-arm/significant-deviation-procedure_en#romania 

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the  significant  deviation  procedure  recommendation.  This  report  is  based  on  information 
obtained until and during the mission.  

2. Findings of the mission 

The  authorities  do  not  intend  to  act  upon  the  significant  deviation  procedure 
recommendation.  The  representatives  of  the  Ministry  of  Finance  explained  that  the 
government  does  not  plan  a  structural  adjustment  in  2019  or  in  2020.  The  Romanian 
authorities  continue  to  focus  on  maintaining  the  headline  deficit  below  the  3%  of  GDP 
reference  value  of  the  Treaty,  thus  aiming  to  avoid  the  corrective  arm  of  the  Stability  and 
Growth Pact. The 2019 budget amendment, adopted in August 2019, maintained the headline 
deficit target of 2.76% of GDP in cash terms (2.78% of GDP in ESA terms). The Romanian 
government  already  approved  the  expenditure  ceilings  for  the  upcoming  2020  budget  and 
provided  estimates  for  the  medium  term.  The  headline  deficit  targets  are  2.92%  of  GDP  in 
2020,  2.99%  in  2021,  2.74%  in  2022  and  2.40%  in  2023.  The  Ministry  did  not  provide  the 
structural  deficit  targets  during  the  mission,  but  explained  that  these  headline  deficit  targets 
imply  that  structural  adjustment  would  start  only  in  2022.  The  line  ministries  are  preparing 
concrete spending plans within the approved expenditure ceilings. 

There are risks to achievement of the 2019 budget target. Public deficit in cash terms in 
January-August 2019 was 0.6 percentage points of GDP higher than in the equivalent period 
of  the  previous  year  (public  deficit  in  cash  terms  amounted  to  2.9%  of  GDP  in  2018  as  a 
whole).  According  to  the  Fiscal  Council,  there  are  significant  risks  of  exceeding  the  2019 
deficit  target  and  even  the  3%  of  GDP  reference  value  of  the  Treaty.  This  is  due  to 
overestimated revenues (in particular, revenues from VAT and from social contributions) and 
underestimated expenditures on social benefits and on goods and services. The Fiscal Council 
estimates  that,  provided  if  no  credible  additional  compensatory  measures  are  adopted,  the 
budget deficit could be between 3.4% and 3.7% of GDP in 2019. The Fiscal Council observed 
that the government would probably try to control the headline deficit through cutting public 
investment, which is already close to record-low levels, and other measures of lesser impact. 

The  new  pension  law  poses  a  significant  upward  risk  to  public  deficit  in  2020  and 
beyond. The law, in force since June 2019, contains significant ad-hoc annual increases of the 
pension  point  (the  main  parameter  used  for  old-age  pension  indexation)  in  2019-2021, 
including  a  40%  increase  in  September  2020.  It  also  contains  generous  changes  to  the 
standard  pension  indexation  formula  and  an  upward  recalculation  of  existing  pensions  from 
2022.  According  to  the  official  government  estimates  from  the  accompanying  explanatory 
memorandum, the law will increase government expenditure by 0.8% of GDP in 2019, 2.3% 
in 2020 and 4.9% in 2021, compared to the nominal level from 2018. The Ministry of Finance 
staff stated that the fiscal strategy for the upcoming  years provides sufficient fiscal space to 
accommodate these costs, thanks to improved tax compliance and expenditure freezes. Staff 
offered  to  share  the  details  during  the  upcoming  Commission  forecast  visit.  The  mission 
participants stressed that it is unclear how the new pension law (in particular the 40% pension 
increase) can be accommodated without changing its implementation schedule. According to 

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the Fiscal Council and the National Bank of Romania, the implementation of the pension law 
in the legislated timeframe is not compatible with maintaining the headline deficit within the 
3% of GDP reference value of the Treaty.  

The  president  of  the  tax  administration  (ANAF)  gave  an  overview  of  planned  actions 
and objectives to increase tax collection. They include the appointment of a new advisory 
council,  simplification  of  tax  declarations  and  payments,  measures  on  transfer  pricing, 
development  of  criteria  for  differentiated  treatment  of  taxpayers  based  on  fiscal  risk, 
reorganisation of the tax administration (ANAF) resources towards regional offices that need 
them most (e.g. Bucharest), new tax audits based on integrated risk analysis, aggregation and 
analyses  of  data  collected  from  electronic  cash  registers,  increased  digitalisation  of  the  tax 
administration  (ANAF),  development  of  monitoring  system  of  transported  goods  and 
estimation  of  VAT  gap.  The  mission  participants  welcomed  these  efforts  but  cautioned  that 
improving tax compliance takes time and in  any case it might  not  be enough to  finance the 
enacted  increases  in  pensions.  The  Fiscal  Council  considers  that  as  a  matter  of  principle  of 
fiscal prudence, the potential positive budgetary impact of measures aimed at improving tax 
collection should not be taken into account ex ante in the projection of budgetary revenues. 

The  Fiscal  Council  expressed  concerns  over  the  structure  of  public  finances  and  the 
National  Bank  of  Romania  expressed  worries  over  the  impact  of  budget  deficits  on 
monetary policy. The Fiscal Council is worried that budgetary revenues are not sufficient to 
finance the necessary public spending. Fiscal revenues are very low, driven by low statutory 
tax rates and weak tax compliance, as evidenced by the high VAT gap. Romania should learn 
from  good  experiences  of  regional  peers,  such  as  Bulgaria  and  Poland,  in  improving  tax 
collection.    The  National  Bank  of  Romania  concurs  with  this  analysis,  pointing  to  low  tax 
revenues  and  low  quality  of  public  spending  as  the  main  structural  problems  of  public 
finances.  The  National  Bank  of  Romania  is  worried  that  high  fiscal  deficits  and  an 
expansionary fiscal policy complicate the conduct of monetary policy. 

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