COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Romania Accompanying the document Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Romania
Date: 2020-03-04
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, economic policy, economic reform, gross domestic product, public debt, public finance, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 4.3.2020  SWD(2020) 53 final  COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Romania Accompanying the document Recommendation for a  COUNCIL RECOMMENDATION      with a view to bringing an end to the situation of an excessive government deficit in Romania {COM(2020) 91 final}  
 
 
1. 

INTRODUCTION  

In  June  2013,  following  the  notification  of  its  2012  headline  deficit,  Romania  exited  the 
excessive  deficit  procedure  (EDP)  opened  in  2009.  Following  the  abrogation  of  the  EDP, 
Romania was subject to the preventive arm of the Stability  and Growth Pact (SGP).  

Romania  has  been  under  consecutive  Significant  Deviation  Procedures  (SDP)  under  the 
preventive arm of the SGP since spring 2017. As a consequence of the significant deviation 
by Romania from its medium-term budgetary objective (MTO) in 2016, the Council launched 
an  SDP  in  spring  2017.  Since  then,  the  Council  has  issued  bi-annual  recommendations  to 
which  Romania  has  not  responded  with  effective  action,  repeatedly  significantly  deviating 
from the recommended adjustment path. 

On  10  December  2019  the  government  adopted  and  sent  to  the  Parliament  its  Fiscal-
Budgetary  Strategy  for  2020-22  (the  Fiscal  Strategy)1,  with  a  general  government  deficit 
target of 3.8% of GDP in 2019. This is well above and not close to the Treaty reference value 
of 3% of GDP. The report adopted by the Commission in accordance with Article 126(3) of 
the Treaty on the Functioning of the European Union (TFEU)2 found that the excess over the 
Treaty reference value in 2019 is also not exceptional for the purposes of the Treaty and the 
SGP,  as  it  neither  results  from  an  unusual  event  nor  from  a  severe  economic  downturn. 
Moreover, the excess over the 3%-of-GDP reference value is not temporary for the purposes 
of  the  Treaty  and  the  SGP.  Indeed,  the  budgetary  forecasts  by  the  Commission,  and  by  the 
government in the Fiscal Strategy, project the deficit to remain above the reference value in 
2020 and in 2021. Finally, the analysis presented in the report included the assessment of all 
relevant  factors,  which  according  to  the  Treaty  and  SGP  are  to  be  taken  into  account.  The 
relevant factors did not provide mitigating elements. 

Accordingly, the report under Article 126(3) TFEU concluded that the deficit criterion of the 
Treaty is not fulfilled and an EDP is thus warranted. 

The  Economic  and  Financial  Committee,  in  its  opinion  in  accordance  with  Article  126(4) 
TFEU of 24 February 2020, supported the assessment in the Commission report. 

2. 

MACROECONOMIC DEVELOPMENTS AND OUTLOOK 

Romania’s economy has been growing robustly in recent years, with private consumption as 
its  main  driver.  Real  GDP  growth  amounted  to  4.4  %  in  2018  and  is  projected  in  the 
Commission  2020  winter  forecast  to  have  stood  at  3.9%  in  20193.  Private  consumption 
remained the main growth driver, the result of a tight labour market and high wage increases, 
particularly  in  the  public  sector.  Investment  is  expected  to  have  made  a  significant 
contribution  to  growth  in  2019,  supported  mainly  by  construction.  The  contribution  of  net 
exports to GDP growth is expected to have been negative, more so than in previous years, as 
import  growth  became  increasingly  more  dynamic  than  export  growth.    More  sluggish 
external demand was the main driver behind weaker export growth and also led to a decline in 

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2  
3  

The Fiscal Strategy was promulgated into law on 18 December 2019. 
Available at: https://ec.europa.eu/info/files/edp-step-commission-report_en 
The  flash  estimate,  published  after  closing  of  the  Commission  forecast,  put  GDP  growth  in  2019  at 
4.1%. 

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industrial  production.  As  a  result,  the  current  account  deficit  has  steadily  increased  from  a 
nearly balanced position in 2014 to an estimated 5.1% of GDP in 20194. 

Based on a no-policy-change assumption, real GDP growth is forecast by the Commission to 
moderate but remain robust at 3.8% in 2020 and at 3.5% in both 2021 and 2022. On the one 
hand, the significant fiscal stimulus implied by current policies would continue giving some 
impetus to private consumption. On the other hand, a continued widening of the fiscal deficit 
would  erode  consumers’  and  investors’  confidence  in  the  sustainability  of  the  economy’s 
growth trajectory. As a result, consumption and investment are projected to weaken compared 
to  the  previous  years,  i.a.  as  private  investors  take  account  of  increasing  macroeconomic 
imbalances. The contribution of net exports is expected to remain negative over the forecast 
horizon,  as  exports  continue  to  be  affected  by  weak  external  demand  while  imports  are 
supported by private consumption. This in turn is expected to worsen further the already high 
current account deficit. 

The  growth  outlook  is  subject  to  predominantly  downside  risks.  A  continuation  of  policies 
that  aggravate  existing  macroeconomic  imbalances  could  affect  consumers’  and  investors’ 
confidence even more strongly. Persistent legislative unpredictability and a delay of structural 
reforms  could  also  affect  the  business  environment  and    negatively  impact  the  investment 
climate. An economic slowdown in some of Romania’s main trading partners also represents 
a downside risk.  

According  to  the  Commission’s  estimates,  potential  GDP  growth  is  projected  to  gradually 
decline from 4.7% in 2018 to 3.6% in 2022. Total factor productivity is set to decelerate, but 
remain  the  main  contributor  to  potential  GDP  growth.  The  contribution  of  capital 
accumulation  is  projected  to  remain  relatively  stable.  At  the  same  time,  the  already  modest 
contribution  of  labour  is  forecast  to  turn  negative,  mainly  due  to  the  trend  decrease  in  the 
working age population.  

The output gap, estimated based on the commonly agreed methodology, is expected to have 
decreased to  0.1% of potential GDP in  2019, from  0.7% in  2018.  It is  projected to  close in 
2020  and  turn  slightly  negative  afterwards.  Estimates  of  the  output  gap  are  subject  to 
uncertainty.  The  large  and  growing  current  account  deficit,  as  well  as  high  wage  and  price 
inflation suggest  that  the economy may  be in  a  more advanced phase of the cycle than that 
signalled by the output gap. 

BUDGETARY DEVELOPMENTS AND OUTLOOK 

3. 
According  to  fiscal  data  notified  by  the  Romanian  authorities  on  30  September  20195  and 
subsequently validated by Eurostat, the general government deficit in Romania reached 3.0% 
of  GDP  in  2018,  while  debt  stood  at  35.0%  of  GDP.  Taking  into  account  the  revised  GDP 
figures  announced  by  the  national  statistical  office  after  the  publication  of  Eurostat’s  press 
release,  the  headline  deficit  in  2018  stood  at  2.9%  of  GDP  and  debt  at  34.7%  of  GDP.  For 
2019, the notification planned a general government headline deficit of 2.8% of GDP. 

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The balance of payment data together with the flash GDP estimate, both published after closing of the 
Commission forecast, put the current account deficit in 2019 at 4.7% of GDP. 
Pursuant to Regulation (EC)  No 479/2009, Member States have to report to the Commission, twice  a 
year,  their  planned  and  actual  government  deficit  and  debt  levels.  The  most  recent  notification  of 
Romania  can  be  found  at:  https://ec.europa.eu/eurostat/web/government-finance-statistics/excessive-
deficit-procedure/edp-notification-tables 

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On 10 December 2019 the government adopted and sent to the Parliament its Fiscal Strategy, 
with a revised general government deficit target  of 3.8% of GDP in 2019. That revision, up 
from originally planned 2.8% of GDP, was based on budget execution data for the  year to–
date. The deterioration compared to the general government deficit of 2.9% of GDP in 2018 
stemmed from increased current spending, on compensation of employees and on goods and 
services.  Moreover,  capital  spending  increased  from  historically  low  levels  of  the  previous 
years. 

The  Commission  2020  winter  forecast,  extended  with  fiscal  variables  until  2022,  projects  a 
general government deficit of 4.0% of GDP in 2019, 4.9% in 2020, 6.9% in 2021 and 7.7% in 
2022.  The  structural  deficit  is  projected  to  deteriorate  by  1.0%  of  GDP  in  2019,  by  further 
1.9%  in  GDP  in  2021  and  by  further  0.8%  in  2022.  The  projected  increase  in  the  deficit  is 
mostly  driven  by  significant  pension  increases  enacted  in  summer  2019,  in  particular  an 
increase in pensions of 40% scheduled for September 2020 and a further upward recalculation 
of  pensions  scheduled  for  September  2021.  The  higher  government  spending  on  pensions 
would contribute 0.9 pp. of GDP to the deficit increase in 2020, a further 1.7 pp. of GDP in 
2021  and  a  further  1.1  pp.  of  GDP  in  2022.  Moreover,  in  December  2019  the  authorities 
reduced excise duties on fuel and lowered social security contributions on part-time workers, 
with an overall estimated revenue loss of 0.4% of GDP. The authorities also doubled the child 
allowance  due  to  enter  into  force  from  August  2020,  with  an  annualised  budgetary  cost  of 
0.6% of GDP. Government spending on compensation of employees is projected to fall as a 
share of GDP, following the Fiscal Strategy.  

In the Fiscal Strategy, the government plans a general government deficit of 3.6% of GDP in 
2020, 3.4% in 2021 and 2.8% in 2022. Based on government estimates, this would lead to a 
structural  adjustment  of  0.3%  in  2020,  0.2%  in  2021  and  0.6%  in  2022.  The  planned 
adjustment  is  mostly  expenditure  based.  In  particular,  the  expenditures  on  compensation  of 
employees, goods and services and on non-EU capital spending are projected to decrease as a 
share  of  GDP.  The  lower  deficit  projection  in  the  Fiscal  Strategy,  compared  to  the 
Commission’s  forecast,  stems, 
in  particular,  from:  (1)  more  optimistic  underlying 
macroeconomic  projections,  in  particular  concerning  labour  market  developments,  with  a 
positive effect on projected revenues; (2) the moderation of projected spending on goods and 
services is not supported by enacted or credibly announced measures and could therefore not 
be taken into account in the Commission forecast; (3) the fact that the Fiscal Strategy seems 
not  to  take  into  account  the  full  budgetary  impact  of  the  enacted  pension  increases,  in 
particular in 2021 and beyond; (4) the fact that the Fiscal Strategy does not take into account 
the impact of the tax cuts and of the doubling of the child allowance. 

Romania’s  general  government  debt  amounted  to  34.7%  of  GDP  in  2018.  Both  the  Fiscal 
Strategy  and  the  Commission  project  general  government  debt  to  remain  below  the  Treaty 
reference  value  within  their  forecast  horizons  (i.e.  until  2022).  However,  due  to  a  high 
structural primary deficit, the debt-to-GDP ratio is set on a steep upward path. Assuming no-
policy change, it is projected by the Commission to exceed 60% in 2025 and go beyond 90% 
of GDP by 20306. 

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Monitor 
Debt 
European 
https://ec.europa.eu/info/sites/info/files/economy-finance/ip120_en.pdf 

Sustainability 

Commission, 

2019, 

available 

at: 

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Table 1: Comparison of macroeconomic developments and forecasts 

4. 

PROPOSED ADJUSTMENT PATH 

Pursuant to Article 3(4) of Regulation (EC) No 1467/97, a Member State under EDP should 
be recommended a structural effort of at least 0.5% of GDP as a benchmark. The correction of 
the excessive deficit should be completed in the year following its identification (in this case 
by 2021), unless there are special circumstances.  

Building on the above-mentioned baseline scenario, different scenarios have been considered 
in order to assess the time needed for Romania to correct its excessive deficit. Those scenarios 
took  into  account  the  economic  conditions  and  the  second-round  effects  of  the  required 
additional consolidation measures. 

Simulations  conducted  by  the  Commission  indicate  that  correcting  the  excessive  deficit  by 
2021  would  require  a  too  sharp  fiscal  adjustment  and  result  in  a  significant  output  loss.  A 
longer  adjustment  path,  while  still  requiring  substantial  annual  adjustments,  would  have  a 
more  gradual  impact  on  growth  and  take  into  account  that  the  budgetary  year  2020  has 
already started. Structural reforms pursued in parallel with fiscal consolidation will contribute 
to ensure a durable correction of excessive deficit. 

A correction by 2022 would still imply an average effort above the benchmark adjustment of 
the Regulation of 0.5% of GDP. The scenario with the proposed adjustment path that should 
lead  to  a  correction  of  the  excessive  deficit  by  2022  (the  EDP  scenario)  is  based  on  the 
Commission  2020  winter  forecast,  extended  with  fiscal  variables  until  2022  (the  baseline 
scenario in Table 2).   

Table 2 – Forecast of key macroeconomic and budgetary variables under the baseline scenario 

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2018OutturnCOMFSCOMFSCOMFSCOMFSReal GDP (% change)4.43.94.03.84.13.54.23.54.2Contributions to real GDP growth:- Final domestic demand4.76.35.35.34.94.64.74.54.7- Change in inventories1.2-0.40.00.00.00.00.00.00.0- Net exports-1.4-2.0-1.3-1.5-0.7-1.1-0.5-1.0-0.5Output gap (% of potential GDP)0.70.1-0.40.0-0.6-0.3-0.6-0.5-0.5Employment (% change)0.20.20.50.10.80.10.90.21.0Unemployment rate (%)4.23.93.94.23.84.33.74.53.6Labour productivity (% change)4.23.73.73.33.2HICP inflation (%)4.13.93.43.33.3GDP deflator (% change)6.36.96.04.64.24.43.54.43.0Comp. of employees (per head, % change)13.49.08.97.16.6General government balance (% of GDP)-2.9-4.0-3.8-4.9-3.6-6.9-3.4-7.7-2.8General government debt (% of GDP)34.735.736.437.837.141.937.846.637.7Source:20212022Commission 2020 winter forecast, extended with fiscal variables until 2022 (COM), Fiscal Strategy 2020-2022 and the autumn projection of the National Commission for Strategy and Prognosis (FS)20192020Baseline scenario2019202020212022Real GDP growth%3.93.83.53.5Headline general government balance% of GDP-4.0-4.9-6.9-7.7Structural balance% of GDP-3.9-4.9-6.8-7.6Change in structural balance% of GDP-1.1-1.0-1.9-0.8Net expenditure growth corrected for one-offs (nominal)%13.212.913.710.3Output gap%0.10.0-0.3-0.5 
 
 
 
Table 3 summarises the key macroeconomic and budgetary variables under the EDP scenario, 
in which the excessive deficit is corrected by 2022. The recommended fiscal effort is assumed 
to impact real GDP growth with a multiplier of 0.3. That multiplier reflects the limited growth 
impact that the Commission assumes for the fiscal stimulus in the baseline scenario. It reflects 
the  positive  impact  of  restored  fiscal  prudence  on  the  growth  outlook  through  confidence 
effects  on  the  decisions  of  consumers  and  investors.  The  fiscal  multiplier  also  takes  into 
account the structural characteristics of the Romanian economy, such as Romania’s high trade 
openness, low labour market rigidities and small automatic stabilisers, which, according to the 
economic literature, point to low fiscal multipliers. 

On the basis of the EDP scenario, Romania's headline general government deficit is set to fall 
to  3.6%  of  GDP  in  2020,  3.4%  of  GDP  in  2021,  and  2.8%  of  GDP  in  2022,  similar  to  the 
targets set in the government’s own Fiscal Strategy. That adjustment path is consistent with 
an  expenditure  benchmark,  i.e.  a  nominal  growth  rate  of  net  primary  government 
expenditure7,  of  8.2%  in  2020,  5.5%  in  2021  and  5.5%  in  2022.  Such  growth  rate  of  net 
expenditure will be the primary indicator used to assess the fiscal effort if a careful analysis is 
needed. This corresponds to an annual structural adjustment of 0.5% of GDP in 2020, 0.8% of 
GDP in 2021 and 0.8% of GDP in 2022.  

Based  on  the  current  forecast,  those  targets  still  allow  for  annual  increases  in  real  net 
expenditure. They can, in the Commission services’ opinion, be achieved, among others, by 
reconsidering the large legislated pension increases and other recent measures, which are key 
drivers of the sharp deterioration of the deficit in the baseline scenario. 

Table 3 – Forecast of key macroeconomic and budgetary variables under the EDP scenario 

5. 

CONCLUSIONS 

The Fiscal Strategy, adopted in December 2019, revised the general government deficit target 
from  2.8%  to  3.8%  of  GDP  in  2019,  i.e.  above  the  Treaty  reference  value.  Based  on  the 
Commission  2020  winter  forecast,  extended  with  fiscal  variables  until  2022,  Romania’s 
headline general government deficit is projected to reach 4.9% of GDP in 2020, 6.9% of GDP 
in 2021 and 7.7% of GDP in 2022 under a no-policy-change assumption.  

A  credible  and  sustainable  adjustment  path  to  correct  the  excessive  deficit  would  require 
Romania  to  reach  a  headline  general  government  deficit  of  3.6%  of  GDP  in  2020,  3.4%  of 
GDP  in  2021,  and  2.8%  of  GDP  in  2022.  That  adjustment  path  is  consistent  with  an 
expenditure benchmark, i.e. a nominal growth rate of net primary government expenditure, of 
8.2%  in  2020,  5.5%  in  2021  and  5.5%  in  2022  (corresponding  to  an  annual  structural 

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Net  primary  government  expenditure  comprises  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  4-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. 

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EDP scenario2019202020212022Real GDP growth%3.93.32.42.7Headline general government balance% of GDP-4.0-3.6-3.4-2.8Structural balance% of GDP-3.9-3.4-2.7-1.8Change in structural balance% of GDP-1.10.50.80.8Net expenditure growth corrected for one-offs (nominal)%13.28.25.55.5Output gap%0.1-0.6-1.9-2.8 
 
 
                                                 
adjustment of 0.5% of GDP in 2020, 0.8% of GDP in 2021 and 0.8% of GDP in 2022). On 
that basis, Romania's excessive deficit is forecast to be corrected by 2022.  

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