COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Romania following the adoption of the COUNCIL RECOMMENDATION to Romania of 3 April 2020 with the view to bringing to an end to the situation of an excessive government deficit 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: 2021-06-02
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, 2.6.2021  SWD(2021) 530 final  COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Romania following  the adoption of the COUNCIL RECOMMENDATION to Romania of 3 April 2020 with the view to bringing to an end to the situation of an excessive government deficit 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(2021) 530 final}  
 
 
Analysis by the Commission services of the budgetary situation in Romania following 
the adoption of the COUNCIL RECOMMENDATION to Romania of 3 April 2020 with 
the view to bringing to an end to the situation of an excessive government deficit 

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 

1. 

INTRODUCTION  

Following  a  recommendation  from  the  Commission  of  4  March  2020  on  the  basis  of  an 
excessive deficit planned in 2019, the Council, on 3 April 2020, decided in accordance with 
Article  126(6)  Treaty  of  the  Functioning  of  the  European  Union  (Treaty)  that  an  excessive 
deficit  existed  in  Romania  and  issued  a  recommendation  to  correct  the  excessive  deficit  by 
2022 at  the latest,  in  accordance with  Article 126(7) of the Treaty  and  Article 3 of Council 
Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation 
of the excessive deficit procedure1. 

On  15  September  2020,  Romania  submitted  its  report  on  action  taken  in  response  to  the 
Recommendation. That report highlighted the deterioration of the economic and fiscal outlook 
due to the COVID-19 pandemic. 

On  18  November  2020,  the  Commision  presented  a  Communication  on  Romania’s  fiscal 
situation.  In  the  light  of  the  continued  exceptional  uncertainty  created  by  the  COVID-19 
pandemic and its extraordinary macroeconomic and fiscal impact, the Commission considered 
that no decision on further steps in the Romania’s excessive deficit procedure (EDP) could be 
taken  at  that  juncture.  Moreover,  the  exceptional  uncertainty,  including  for  designing  a 
credible  path  for  fiscal  policy,  did  not  allow  the  Commission  to  put  forward  a 
recommendation  for  a  Council  recommendation  under  Article  126(7)  of  the  Treaty  at  that 
stage.  

This  document  presents  the  analysis  of  Romania’s  budgetary  situation  based  on  the  2020 
outturn  data,  2021  budget  and  updated  convergence  programme  and  the  Commission  2021 
spring forecast carried out by the Commission services. In particular, the document examines 
budgetary  developments  since  the  Article  126(7)  recommendation  of  3  April  2020  and 
suggests  a  new  adjustment  path  that  would  durably  bring  the  general  government  deficit 
below the 3% of GDP threshold.  

2. 

MACROECONOMIC DEVELOPMENTS AND OUTLOOK 

In  2020,  Romania’s  economy  contracted  by  3.9%  in  real  terms,  with  private  consumption 
suffering a sharp decline during the spring lockdown, and external demand shocks and supply 
chain disruptions hurting exports. The strict lockdown measures introduced in the first half of 
2020 to contain the COVID-19 pandemic were particularly damaging for consumer spending, 
which has been the economy’s main growth driver in previous years. Investment, by contrast, 
made a significant contribution to GDP growth, due to the strong performance of construction 
activity. A smaller decline in imports than in exports resulted in a further deterioration of the 
trade balance. This also led to worsening of the current account deficit, albeit only marginally 
from  4.7%  of  GDP  in  2019  to  an  estimated  5%  of  GDP  in  2020.  The  unemployment  rate 

1  

OJ L 209, 2.8.1997, p.6. 

1 

 
 
                                                 
increased from 3.9% in 2019 to 5% in 2020, with government policy measures cushioning the 
impact of the lockdown on the labour market. 

Real GDP growth is forecast by the Commission 2021 spring forecast to rebound to 5.1% in 
2021  and  then  to  moderate  slightly  to  4.9%  in  2022.  Private  consumption  is  expected  to 
recover  as  the  vaccination  roll-out  progresses  and  social  distancing  measures  are  gradually 
lifted. At the same time, robust wage growth is expected to support consumption. The phasing 
in  of  projects  under  Romania’s  Recovery  and  Resilience  Plan  (RRP)  is  set  to  lend  new 
impetus to investment growth. The contribution of net exports is expected to remain negative 
over  the  forecast  horizon,  with  imports  expected  to  be  spurred  by  the  recovery  of  private 
consumption as well as by growing investments, while exports are expected to be supported 
by  a  recovery  in  external  demand  but  remain  less  dynamic  than  imports.  The  high  current 
account deficit is expected to decrease only slightly over the forecast horizon on the back of 
improved  primary  and  secondary  income  balances.  Unemployment  is  projected  to  slightly 
increase  in  2021  as  the  level  of  employment  looks  likely  to  be  almost  stagnant  while  the 
labour force is projected to grow. In 2022, the unemployment rate is expected to decline on 
the back of a rise in employment. 

The  growth  outlook  is  subject  to  balanced  risks.  On  the  one  hand,  a  credible  medium-term 
fiscal  strategy  can  help  dispel  concerns  about  fiscal  sustainability,  in  particular  when 
combined  with  ambitious  reforms  (including  those  contained  in  the  RRP).  This  would  help 
address  Romania’s  macroeconomic  imbalances,  mitigate  financial  stability  risks  and 
contribute to sustainable growth, including by improving the investment climate. On the other 
hand, uncertainty on public policy-making and delays or inefficiencies in the implementation 
of the RRP could result in negative confidence effects. 

According to the Commission’s estimates, potential GDP growth is projected to have declined 
from 4.3% in 2019 to 3.2% in 2020 and to slightly increase to 3.3% in 2022. The contribution 
of  capital  accumulation  is  projected  to  increase  and  slightly  exceed  that  of  total  factor 
productivity, until recently the main contributor to potential GDP growth. At the same time, 
the contribution of labour is forecast to remain negative, mainly due to the trend decrease in 
the working age population.  

The  difference  between  the  actual  and  potential  output,  as  estimated  by  the  output  gap, 
estimated  based  on  the  commonly  agreed  methodology,  is  expected  to  have  decreased  to  -
5.3% of potential GDP in 2020, from 1.6% in 2019. It is projected to gradually increase over 
the  forecast  horizon  and  reach  -2.1%  in  2022.  Estimates  of  the  output  gap  are  subject  to  a 
particularly high degree of uncertainty at the current juncture, in light of the economic impact 
of the ongoing COVID-19 pandemic. 

BUDGETARY DEVELOPMENTS AND OUTLOOK 

3. 
According  to  the  EDP  notification  of  19  April  20212,  validated  by  Eurostat,  the  general 
government deficit in Romania was 9.2% of GDP in 2020, while debt stood at 47.3% of GDP. 
The Commission 2021 spring forecast projects a general government deficit of 8% of GDP in 
2021  and  7.1%  of  GDP  in  2022.  The  structural  deficit,  which  was  around  7.5%  of  GDP  in 

2  

Pursuant to Regulation (EC) No 479/2009 as amended by Council Regulation (EU) No 679/2010 and 
by Commission Regulation (EU) No 220/2014, 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 

2 

 
 
                                                 
2020,  increased  by  2.8  pps  of  GDP  compared  to  the  previous  year.  It  is  projected  by  the 
Commission to decrease by 0.7 pps of GDP in 2021 and 0.5 pps of GDP in 2022.  

The significant budgetary deterioration in 2020 was partly driven by COVID-19 related fiscal 
measures  and  the  economic  downturn.  However,  the  deterioration  was  also  driven  by  pre-
existing  expansionary  measures.  The  total  cost  of  COVID-19  related  support  measures  was 
around  1.6%  of  GDP  in  2020  (see  Table 2  below),  of  which  0.1  pps  was  financed  by 
European Union (EU) funds. The pandemic-related measures included additional spending on 
employment  support  schemes,  support  to  the  health  sector  and  some  tax  incentives. 
Expansionary  measures  adopted  before  the  pandemic  included  increases  in  social  and  other 
expenditure  and  tax  cuts.  In  particular,  expenditure  on  old-age  pensions  increased 
considerably, driven by the full-year effect of a 15% pension increase that came into effect in 
September 2019 and a further increase of 14% in September 2020. As a result, expenditure on 
old-age pensions increased by 1.8 pps of GDP in 2020. Social expenditure was also affected 
by  an  increase  in  child  allowance  by  19%  in  2020.  On  the  revenue  side,  the  authorities 
enacted some tax changes in December 2019, including the reduction of excise duties on fuel 
and a lowering of social security contributions on part-time workers, with an overall estimated 
revenue loss of 0.3% of GDP in 2020.  

Table 1: Comparison of macroeconomic developments and forecasts 

2020 

2021 

2022 

2023 

2024 

Real GDP (% change) 

Private consumption (% change) 

Gross fixed capital formation (% change) 

Exports of goods and services (% change) 

Imports of goods and services (% change) 

Contributions to real GDP growth: 

- Final domestic demand 

- Change in inventories 

- Net exports 
Output gap1 

Employment (% change) 

Unemployment rate (%) 

Labour productivity (% change) 

HICP inflation (%) 

GDP deflator (% change) 
Comp. of employees (per head, % 
change) 
Net lending/borrowing vis-à-vis the rest 
of the world (% of GDP) 

General government balance (% of GDP) 

General government debt (% of GDP) 

-3,9 

-5,2 

6,8 

-9,7 

-5,1 

-1,3 

-0,9 

-1,6 

-5,3 

-1,8 

5,0 

-2,1 

2,3 

3,8 

7,3 

-3,4 

-9,2 

47,3 

COM 

5,1 

6,1 

5,8 

9,8 

CP 

5,0 

5,1 

7,0 

8,3 

COM 

4,9 

5,9 

7,4 

8,7 

11,4 

10,1 

10,1 

5,8 

0,4 

-1,1 

-3,6 

0,2 

5,2 

4,9 

2,9 

3,2 

5,8 

-3,2 

-8,0 

49,7 

5,2 

0,9 

-1,1 

-3,7 

1,1 

4,8 

3,9 

2,6 

3,2 

5,0 

-2,6 

-8,0 

50,8 

5,9 

0,0 

-1,0 

-2,1 

0,7 

4,8 

4,1 

2,7 

2,7 

6,1 

-3,0 

-7,1 

52,7 

CP 

4,8 

4,9 

8,8 

5,7 

7,2 

5,6 

0,0 

-0,9 

-2,5 

0,9 

4,0 

3,8 

2,9 

3,0 

6,1 

-1,8 

-6,2 

52,9 

CP 

5,0 

4,9 

9,4 

6,0 

7,3 

5,8 

0,0 

-0,8 

-1,1 

0,6 

3,5 

4,4 

2,6 

2,9 

6,7 

-1,4 

-4,4 

53,3 

CP 

4,9 

4,7 

8,6 

5,6 

6,7 

5,5 

0,0 

-0,7 

0,2 

0,5 

3,2 

4,4 

2,5 

2,8 

6,5 

-0,8 

-2,9 

52,4 

Note: 
1In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme 
scenario using the commonly agreed methodology. 

Source: Commission 2021 spring forecast (COM); 2021 Convergence Programme of Romania (CP) 

3 

 
 
 
  
 
  
  
  
  
  
  
  
  
  
 
The projected improvement in the headline deficit in 2021 is mainly due to postponement of 
increases  in  pensions  and  public  sector  wages,  additional  cuts  to  some  bonuses  and  other 
remunerations,  and  the  partial  expiration  of  COVID-19  related  emergency  measures  (see 
Table  2).  Additional  emergency  expenditure  for  the  purchase  of  vaccines  and  support  to 
companies is set to be offset by the lower cost of measures to support employment and wages. 
EU  funds  are  also  expected  to  cover  part  of  costs  of  the  emergency  measures  in  2021.  The 
fiscal  position  is  also  forecast  to  benefit  from  higher  revenues  thanks  to  the  economic 
recovery.  The  positive  impact  of  an  improved  macroeconomic  environment  on  the  headline 
fiscal  deficit  is  shown  by  the  relatively  small  improvement  of  the  structural  deficit.  This  is 
also the case for 2022, when the economic recovery is expected to play a key role in further 
reducing  the  headline  government  deficit.  In  2022,  the  remaining  emergency  support 
measures  are  expected  to  end,  the  suspension  of  increases  in  public  sector  wages  is  set  to 
continue,  while  pensions  are  planned  to  increase  by  around  5%,  following  the  standard 
indexation rule. 

On  5  May  2021,  the  government  adopted  the  convergence  programme  for  the  period  2021-
2024. The programme confirms the government fiscal target, originally set out in the medium-
term  fiscal  strategy  adopted  on  2  March  2021,  for  a  deficit  below  3%  of  GDP  by  2024.  It 
presents the following deficit targets (in ESA terms): 8.0% of GDP in 2021, 6.2% of GDP in 
2022, 4.4% of GDP in 2023 and 2.9% of GDP in 2024. Based on government estimates, this 
would lead to a structural balance improvement of 0.6 pps of GDP in 2021, 0.0 pps of GDP in 
2022, 1.4 pps of GDP in 2023 and 1.2 pps of GDP in 2024. 

The planned adjustment consists mainly of expenditure measures. At the end of the projection 
period in 2024, general government expenditure is projected at 37.2% of GDP, down by 5.2 
pps compared to 2020, but still above the 2019 ratio of 36.2% of GDP and the average of 35% 
of GDP of the five years before the crisis. Expenditure control (reductions of expenditure as a 
percentage  of  GDP)  is  envisaged  in  particular  for  public  sector  wages  (down  by  1.4  pps 
between  2022  and  2024)  and  social  transfers  (down  by  0.9  pps  between  2022  and  2024). 
Government gross fixed capital formation is projected to increase from 5% of GDP in 2021 to 
5.3%  in  2023  and  2024.  The  general  government  revenue-to-GDP  ratio  is  projected  to 
improve  by  1.2  pps  between  2020  and  2024,  from  33.1%  to  34.3%  of  GDP.  All  revenue 
categories are estimated to remain broadly constant as a percentage of GDP except transfers 
from the European Union, due to projected transfers from the EU funds and the Recovery and 
Resilience Facility (Facility). 

General  government  debt  stood  at  35.3%  of  GDP  at  end-2019  and  47.3%  of  GDP  at  end-
2020. According to the Commission 2021 spring forecast, it is projected to increase to 49.7% 
of  GDP  at  end-2021,  52.7%  of  GDP  at  end-2022  and  59.5%  of  GDP  at  end-2024,  3  thus 
approaching  for  the  first  time  the  60%  of  GDP  Treaty  reference  value  in  the  absence  of 
additional corrective measures than those already enacted or as yet credibly announced.  

The analysis of medium to long-term debt sustainability confirms that risks to sustainability 
are  high  in  the  medium  term.  According  to  a  baseline  10-year  projection,  the  general 
government debt-to-GDP ratio would continue increasing over the projection period and reach 
a level  close to 90% of GDP. Risks to debt sustainability are driven by large fiscal deficits, 
costs  of  ageing,  and  vulnerability  of  the  debt  path  to  macro-fiscal  shocks.  The  latter  is  also 
visible from the significant probability of debt being higher in 2025 than 2020, according to a 
stochastic extension of the baseline projection. Pension increases legislated in summer 2019, 

3  

This figure is based on an update of the Debt Sustainability Monitor 2020, notably reflecting the latest 
Commission 2021 spring forecast.  

4 

 
 
                                                 
and for the time being postponed until the end of 2022, are the predominant source of the debt 
sustainability risks. The debt structure, with a high share of foreign denominated debt and a 
significant  share  of  debt  held  by  non-residents  further  adds  to  debt  sustainability  risks, 
although interventions by the National Bank of Romania on the secondary market have helped 
keep  government  borrowing  costs  at  favourable  levels  in  2020.  Moreover,  there  are  risks 
linked to contingent liabilities stemming from state guarantees (of 1.4% of GDP) granted to 
firms and the self-employed during the COVID-19 crisis. Gross financing needs are projected 
to  increase.  Conversely,  reforms  and  investments  under  Next  Generation  EU  if  effectively 
implemented,  are  expected  to  have  a  positive  impact  on  GDP  growth  in  the  coming  years, 
thereby contributing to debt sustainability.  

Table 2: Measures affecting budgetary projections 

Discounts for the advance payment of corporate 
income taxes 

D.5: Current taxes on 
income, wealth, etc. 

ESA coding 

Budgetary impact, % of GDP 
(change compared to the previous 
year) 
2021 

2020 

2022 

-0,10 

0,76 

0,03 

0,14 

0,40 

0,08 

0,01 

0,00 

0,10 

-0,53 

-0,02 

0,00 

-0,15 

-0,01 

-0,04 

-0,09 

-0,23 

-0,14 

-0,03 

-0,04 

0,00 

0,12 

-0,01 

-0,11 

D.3: Subsidies 
D.1: Compensation of 
employees 
D.1: Compensation of 
employees 
P.2: Intermediate 
consumption 
P.51: Gross fixed capital 
formation 
P.51: Gross fixed capital 
formation 
P.2: Intermediate 
consumption 

D.3: Subsidies 

0,01 

0,05 

-0,05 

D.3: Subsidies 

0,09 

0,31 

-0,36 

D.3: Subsidies 

0,00 

0,22 

-0,20 

D99p: Other capital 
transfers 

0,01 

1,63 

0,09 

1,54 

0,00 

-0,01 

-0,25 

0,31 

-0,56 

-1,17 

-0,36 

-0,81 

Employment support measures 
Risk incentive (bonuses) for staff at the front line of 
the fight of the pandemic 
Other bonuses awarded in the public administration 
during the pandemic 
Purchase of medical material for COVID-19 
treatments 
Purchase of medical equipment, mobile hospitals and 
other capital expenditure in health 
Information technology equipment -mobile IT and 
tablets with access to the internet for students 
Purchase of anti-COVID-19 vaccine and operation of 
vaccination centres 
State aid scheme in the form of grant for the 
establishment of state guaranteed facilities for loans 
granted to enterprises by credit institutions 

Investment grants to companies affected by the 
COVID-19 pandemic (financed by Competitiveness 
Operational Programme 2014-2020) 
Financial support to tourism enterprises, 
accommodation facilities, restaurants and tourism 
agencies affected in the context of the COVID-19 
pandemic as well as on fiscal measures (commitment 
appropriations) 
Provisions related to guarantees issued in 2020 for 
COVID-19 measures (mainly related to SME Invest 
Romania) 
Sub-total (1) 

of which from EU funds (2) 

Impact on budget deficit (3)=(1)-(2) 

Source: Convergence Programme of Romania, 2021 

The  Commission  forecast  and  the  convergence  programme  projections  include  the  same 
assumption on the allocation of non-repayable financial support (grants) and loans under the 

5 

 
 
 
  
  
  
  
 
Facility.  Romania  is  expected  to  benefit  from  substantial  grants  (6.3%  of  2019  GDP)  and 
loans  (6.8%  of  2019  GNI)  under  the  Facility  over  the  period  2021-2026.  The  government 
intends  to  make  use  of  the  entire  amount  of  grants  and  loans  during  that  implementation 
period. Table 3 below presents the allocation of grants and loans based on information from 
Romania’s  convergence  programme  and  additional  updated  information  from  the  Romanian 
authorities. According to this allocation, Facility-financed spending, which is expected to start 
in  2021,  is  set  to  be  of  sizable  magnitude  starting  from  2022,  thereby  provide  a  significant 
fiscal impulse to the Romanian economy. Romania’s RRP was not yet assessed and approved 
by the time of the publication of this staff working document and grant and loan allocations 
are still provisional.  

Table  3:  Recovery  and  Resilience  Fund  projected  allocation  of  grants  and  loans  financed 
expenditure 

Grants 
RON billion 
EUR billion 
% of annual GPD 
% of total  
% of total (cumulative) 

Loans 
RON billion 
EUR billion 
% of annual GPD 
% of total  
% of total (cumulative) 

2021 
1,4 
0,3 
0,1% 
2% 
2% 

2021 
0,0 
0,0 
0,0% 
0% 
0% 

2022 
7,5 
1,5 
0,6% 
11% 
13% 

2022 
4,9 
1,0 
0,4% 
7% 
7% 

2023 
16,0 
3,3 
1,2% 
23% 
36% 

2023 
9,8 
2,0 
0,7% 
13% 
20% 

2024 
17,9 
3,7 
1,3% 
26% 
61% 

2024 
9,8 
2,0 
0,7% 
13% 
34% 

2025 
13,4 
2,7 
0,9% 
19% 
81% 

2025 
24,5 
5,0 
1,7% 
34% 
67% 

TOTAL 
69,6 
14,2 

100% 

TOTAL 
73,0 
14,9 

100% 

2026 
13,4 
2,7 
0,9% 
19% 
100% 

2026 
24,0 
4,9 
1,6% 
33% 
100% 

Source: Convergence Programme of Romania, 2021 and Ministry of Investments and European Projects 

4. 

POLICY DEVELOPMENTS SINCE THE EDP RECOMMENDATION 

The Article 126(7) recommendation to Romania of 3 April 2020 was prepared in the context 
of a very different macroeconomic environment. It was based on the Commission 2020 winter 
forecast extended with fiscal variables until 2022 (baseline scenario). Thus, the impact of the 
COVID-19  pandemic  was  not  taken  into  account.  An  analysis  of  Romania’s  budgetary 
decisions  in  response  to  the  Council  Recommendation  has  to  take  into  account  the 
deterioration of the macroeconomic outlook and the impact of the emergency fiscal measures 
to  deal  with  the  pandemic  and  its  economic  and  social  consequences,  as  well  as  any  other 
measures or actions by the authorities. Real GDP growth in 2020 was 7.7 pps lower than in 
the  baseline  scenario  underlying  the  Article  126(7)  recommendation  of  3  April  2020.  The 
deterioration of the structural balance, which was projected in the baseline scenario at around 
1 pp. of GDP in 2020, turned out to be 2.8 pps of GDP. The headline deficit was projected to 
increase  by  0.9  pps  of  GDP  in  2020  while  it  in  fact  it  increased  by  4.6  pps.  Table 4 
summarises  the  main  differences  of  the  key  macroeconomic  and  budgetary  variables  under 
the  Commission’s  2020  winter  forecast  extended  to  2022  with  fiscal  variables,  the 
recommended adjustment path of April 2020 and the Commission 2021 spring forecast. 

6 

 
 
 
  
  
 
 
 
 
 
 
 
 
  
  
 
On 15 September 2020, the Romanian authorities sent a report on action taken in response to 
the Article 126(7) recommendation. That report highlighted the deterioration of the economic 
and fiscal outlook due to the pandemic. It presented the fiscal targets and measures from the 
draft  2020  budget  amendment  of  August  2020  but  no  details  on  the  medium-term  fiscal 
targets nor on measures by the government, as the Romanian authorities had not yet presented 
the  2021  draft  budget  nor  the  2021-2023  fiscal  strategy.  The  amended  2020  fiscal  targets 
incorporated the measures that the government had taken in order to address the consequences 
of the COVID-19 outbreak on the health system and the economy, with a net impact on the 
deficit of around 1.5% of GDP (Table 2).  

Table 4: Comparison of key macroeconomic and budgetary variables under the Commission’s 
forecasts and the recommended adjustment path in the Council recommendation of 3 April 2020 

Commission 2020 winter forecast (extended) – 
baseline scenario 

Real GDP growth 

Headline general government balance 

Structural balance 

Change in structural balance 

Net expenditure growth corrected for one-offs (nominal) 

Output gap 

April 2020 Article 126(7) Recommendation 

Real GDP growth 

Headline general government balance 

Structural balance 

Change in structural balance 

Net expenditure growth corrected for one-offs (nominal) 

Output gap 

Commission 2021 spring forecast 

Real GDP growth 

Headline general government balance 

Structural balance 

Change in structural balance 

Net expenditure growth corrected for one-offs (nominal) 

Output gap 

% 

% of GDP 

% of GDP 

% of GDP 

% 

% 

% 

% of GDP 

% of GDP 

% of GDP 

% 

% 

% 

% of GDP 

% of GDP 

% of GDP 

% 

% 

2019 

2020 

2021 

2022 

3,9 

-4 

-3,9 

-1,1 

13,2 

0,1 

3,8 

-4,9 

-4,9 

-1 

12,9 

0 

3,5 

-6,9 

-6,8 

-1,9 

13,7 

-0,3 

3,5 

-7,7 

-7,6 

-0,8 

10,3 

-0,5 

2019 

2020 

2021 

2022 

3,9 

-4 

-3,9 

-1,1 

13,2 

0,1 

3,3 

-3,6 

-3,4 

0,5 

8,2 

-0,6 

2,4 

-3,4 

-2,7 

0,8 

5,5 

-1,9 

2,7 

-2,8 

-1,8 

0,8 

5,5 

-2,8 

2019 

2020 

2021 

2022 

4,1 

-4,4 

-4,7 

-1,6 

14,0 

1,6 

-3,9 

-9,2 

-7,5 

-2,8 

16,2 

-5,3 

5,1 

-8,0 

-6,9 

0,7 

3,4 

-3,6 

4,9 

-7,1 

-6,4 

0,5 

5,5 

-2,1 

Through  its  August  2020  budget  amendment,  the  government  attempted  to  limit  the  fiscal 
deterioration  in  2020  owed  to  pre-existing  measures  and  initiatives,  by  limiting  the  planned 
increases in social expenditures and in public sector wages. More precisely, the government 
limited  the  increase  in  old-age  pensions  from  September  2020  to  14%,  instead  of  the 
originally planned increase of 40%. The government also proposed to phase in the doubling 
of  the  child  allowance.  Rather  than  an  immediate  doubling  in  February  2020,  it  enacted  an 
increase by 19% as of August 2020, followed by increases twice a year until the doubling is 
reached by July 2022. The government also postponed the wage increases of education staff 

7 

 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
  
 
from September 2020 to September 2021.4 The estimated fiscal impact of those measures was 
around 1.3% of GDP in 2020.  

After  the  December  2020  parliamentary  elections,  the  new  government  put  forward  an 
ambitious fiscal consolidation target to bring the deficit below 3% of GDP by 2024, starting 
from  2021.  This  target  was  included  in  the  medium-term  fiscal  strategy  of  the  government 
accompanying the 2021 budget adopted by the Parliament on 2 March 2021. The government 
adopted several measures to achieve the 2021 target. Measures enacted in 2021 include lower 
expenditure  ceilings  for  line  ministries,  a  freeze  in  public  sector  wages  and  social  benefits, 
cuts in some of the additional remunerations in the public sector, such as overtime payments 
and vouchers, and a postponement of all pension increases. Moreover, in 2021, the authorities 
expect a partial withdrawal of COVID-19 emergency measures, while the improved economic 
outlook  is  expected  to  have  a  positive  impact  on  tax  receipts.  For  2022,  there  will  be  no 
increases  in  public  sector  wages,  while  pensions  are  expected  to  increase  with  the  existing 
indexation system (inflation plus 50% of the increase in average real wage). This indexation is 
expected  to  lead  to  an  estimated  increase  of  pension  expenditure  of  around  5%,  which  is 
below  the  projected  increase  of  nominal  GDP.  The  remaining  COVID-19  measures  (with  a 
budgetary impact of close to 1% of GDP in 2021) are set to expire in 2022. The government 
has  not  yet  presented  a  full,  detailed  list  of  fiscal  policy  measures  to  support  the  planned 
adjustment in 2022-2024 period. 

5. 

PROPOSED ADJUSTMENT PATH 

According  to  the  Commission  2021  spring  forecast,  Romania  is  not  projected  to  correct  its 
excessive  deficit  by  the  deadline  of  2022  established  in  the  Council  recommendation  of  3 
April 2020. Despite the reversal of some of the pre-existing expenditure-increasing measures 
in the 2020 budget amendment of August 2020 and the 2021 budget adopted in March 2021, 
the excessive deficit is not expected to be corrected in 2022. This is partly due to the severe 
economic downturn, which has led to a significant deviation from the economic assumptions 
on which the Council Article 126(7) recommendation of 3 April 2020 was based. In such a 
context, the recommended adjustment path of 3 April 2020 does no longer provide a relevant 
basis for fiscal policy guidance and for the assessment of the action taken by the government 
in response to the recommendation to bring to an end its excessive deficit. 

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general escape clause of the Stability and Growth Pact due to the severe economic downturn 
in  the  European  Union  as  a  whole.5  On  23  March  2020,  the  Ministers  of  Finance  of  the 
Member States agreed with the assessment of the Commission. According to the last sentence 
of  Article  3(5)  of  Regulation  (EC)  No  1467/97,  the  Council  may  decide,  on  a 
recommendation  from  the  Commission,  to  adopt  a  revised  recommendation  under  Article 
126(7)  of  the  Treaty  in  the  event  of  a  severe  economic  downturn  in  the  Union  as  a  whole, 
provided  that  this  does  not  endanger  fiscal  sustainability  in  the  medium  term.  The  new 
recommendation  needs  also  to  take  into  account  the  changed  economic  and  fiscal  situation, 
including the budgetary performance in 2020, the adopted 2021 budget and the new budgetary 
strategy put in place by the government.  

4  

5  

According to a previous decision of the  Romanian authorities,  wages of educational staff  would have 
increased as of 1 September 2021 in order to reach the level provided for in the unified wage grade for 
2022. The impact of this increase was estimated at 0.05% of GDP in 2020. 
COM/2020/123 final 

8 

 
 
                                                 
Under Article 3(4) of Regulation (EC) No 1467/97, the correction of the excessive deficit is to 
be completed in the year following its identification  unless there are special circumstances. 
Moreover,  the  adjustment  path  should  be  determined  in  line  with  Regulation  (EC)  No 
1467/97,  taking  into  account  the  economic  and  fiscal  position  of  the  Member  State.  In  the 
present  situation,  such  special  circumstances  exist  in  Romania.  However,  extending  the 
deadline for the correction of the excessive deficit by only one year as compared to the Article 
126(7)  recommendation  of  3  April  2020,  namely  setting  an  EDP  deadline  of  2023,  would 
require  a  very  sharp  fiscal  adjustment,  thus  risking  compromising  the  recovery  after  the 
COVID-19  pandemic.  A  longer  adjustment  path,  while  still  requiring  substantial  annual 
adjustments,  would  imply  a  more  gradual  effort  and  strike  a  good  balance  between  fiscal 
consolidaton and supporting the economic recovery. It would also take into account that the 
budgetary year 2021 has already started and includes an adjustment effort by the government 
despite  the  ongoing  pandemic.  Reforms,  including  those  that  improve  the  management  of 
public  finances  would  be  instrumental  in  ensuring  a  durable  correction  of  the  excessive 
deficit.  In light of these considerations, and consistent with the fiscal policy orientations set 
out  in  the  Commision  Communication  of  3  March  2021,  setting  a  deadline  to  correct  the 
excessive deficit by 2024 is justified. 

Table 5 – Forecast of key macroeconomic and budgetary variables under the baseline scenario6 

Commission baseline scenario with Facility 

2020 

2021 

2022 

2023 

2024 

Real GDP growth 

Headline general government balance 

Structural balance 

Change in structural balance 

% 

% of GDP 

% of GDP 

% of GDP 

Net expenditure growth corrected for one-offs (nominal) 

% 

Fiscal stance (including EU-financed expenditure, 
excluding crisis-related temporary measures)  
Output gap 

% of GDP 

-3,9 

-9,2 

-7,5 

-2,8 

16,2 
-2,2 

5,1 

-8,0 

-6,9 

0,7 

3,4 
0,5 

4,9 

-7,1 

-6,4 

0,5 

5,5 
-0,5 

4,5 

-6,8 

-6,5 

-0,1 

6,5 
-0,1 

3,8 

-6,8 

-6,9 

-0,4 

5,7 
0,2 

% 

-5,3 

-3,6 

-2,1 

-1,4 

-0,7 

The proposed EDP scenario is based on the Commission 2021 spring forecast, extended until 
2024  and  taking  into  account  the  expected  Facility  allocation  of  grants  and  loans.  Table  6 
summarises  the  key  macroeconomic  and  budgetary  variables  under  the  EDP  scenario,  in 
which the excessive deficit is corrected by 2024. The recommended fiscal effort is assumed to 
impact  real  GDP  growth  with  a  multiplier  of  0.7.  That  multiplier  also  reflects  the  growth 
impact that the Commission assumes for the fiscal stimulus from the  in the baseline scenario. 
In line with the assumptions used in the Commission 2021 spring forecast and the Romanian 
convergence programme, the measures financed from the Facility are assumed to create new 
investment of an equal amount in 2021 and 2022, i.e. to be fully additional to what the public 
investment would be in the absence of the Facility (or additionality of 100%). As of 2023, the 

6  

The table also presents an indicator of the overall fiscal stance. The overall fiscal stance is measured by 
comparing  the  change  in  primary  expenditure  (net  of  discretionary  revenue  measures  but  including 
changes  in  expenditure  financed  by  the  RRF  and  other  non-repayable  financial  support  from  the 
European Union) to the 10-year average potential growth rate. However, this estimate does not include 
the impact of the reforms that are part of the Recovery and  Resilience Plan and can boost Romania’s 
economic potential growth. A negative sign of the indicator (e.g. in 2020) corresponds to an excess of 
the  primary  expenditure  growth  compared  with  medium-term  economic  growth,  which  indicates  an 
expansionary fiscal policy. By contrast, a positive sign points to a contractionary fiscal policy. 

9 

 
 
 
  
 
                                                 
Facility  average  additionality  assumption  is  60%,  as  it  is  assumed  that  the  Facility,  notably 
Facility loans, will partly finance projects that would have been financed from other sources. 
The potential GDP remains the same in baseline and EDP scenarios. 

In  the  proposed  EDP  scenario,  Romania's  headline  general  government  deficit  is  set  to 
decrease to 8.0% of GDP in 2021, 6.2% of GDP in 2022, 4.4% of GDP in 2023, and 2.9% of 
GDP  in  2024,  in  line  with  the  government’s  own  targets.  This,  based  on  the  Commission 
forecast, is consistent with a nominal growth rate of net primary government expenditure of 
3.4%  in  2021,  1.3%  in  2022,  0.9%  in  2023  and  0.0%  in  2024.7  Such  growth  rates  of  net 
primary government expenditure will be the primary indicator used to assess the fiscal effort 
if a careful analysis is needed. The corresponding annual adjustment in the structural balance 
is 0.7% of GDP in 2021, 1.8% of GDP in 2022, 1.7% of GDP in 2023 and 1.5% of GDP in 
2024.  

Table 6 – Forecast of key macroeconomic and budgetary variables under the EDP scenario 

Revised Article 126(7) recommendation 

2020 

2021 

2022 

2023 

2024 

Real GDP growth 

Headline general government balance 

Structural balance 

Change in structural balance 

% 

% of GDP 

% of GDP 

% of GDP 

Net expenditure growth corrected for one-offs (nominal) 

% 

Fiscal stance (including EU-financed expenditure, 
excluding crisis-related temporary measures)  
Output gap 

% of GDP 

-3,9 

-9,2 

-7,5 

-2,8 

16,2 
-2,2 

5,1 

-8,0 

-6,9 

0,7 

3,4 
0,5 

3,4 

-6,2 

-5,0 

1,8 

1,3 
1,0 

3,2 

-4,4 

-3,3 

1,7 

0,9 
1,8 

2,9 

-2,9 

-1,9 

1,5 

0,0 
2,0 

% 

-5,3 

-3,6 

-3,5 

-3,3 

-3,2 

To assess the potential impact  of overall fiscal  policy on output, at  the current  juncture, the 
sizeable payments from the budget of the European Union, such as those from the Facility and 
other EU funds, should be duly considered. Indeed, as discussed above, Romania will receive 
substantial  grants  under  the  Facility  in  the  coming  years.  On  this  basis,  the  overall  fiscal 
stance under the recommended adjustment path, is estimated at 0.5% of GDP in 2021, 1% of 
GDP in 2022, 1.8% of GDP in 2023 and 2% of GDP in 2024.8 While this points to an overall 
contractionary stance in the years of the EDP adjustment, this contractionary stance would be 
substantially larger in the absence of Facility grants. In other words, investments and reforms 
supported by the Facility provide an opportunity for Romania to improve its underlying fiscal 
position  in  the  medium  term  while  still  supporting  growth  and  job  creation.  This  highlights 
the significant  positive impact  that the Facility and other EU funds are expected to  have on 
the Romanian economy in the coming years. 

7 

8  

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. 
See footnote 5. 

10 

 
 
 
  
 
 
                                                 
6. 

CONCLUSION 

The  convergence  programme  adopted  by  the  Romanian  authorities  on  5  May  2021  sets  a 
general government deficit target of 2.9% of GDP by 2024, down from 9.2% of GDP in 2020, 
with  the  fiscal  adjustment  set  to  start  in  2021.  The  Commission  analysis  suggests  that  a 
correction  of  the  excessive  deficit  by  2024  in  the  current  economic  context  is  warranted  in 
order  to  strike  a  good  balance  between  ensuring  fiscal  sustainability  and  supporting  the 
recovery.  A  sustainable  fiscal  adjustment  needs  to  be  based  on  structural  measures  and  on 
structural reforms that will improve budgetary outcomes on a permanent basis.  

A  credible  and  sustainable  adjustment  path  to  correct  the  excessive  deficit  would  require 
Romania  to  reach  a  headline  general  government  deficit  of  8.0%  of  GDP  in  2021,  6.2%  of 
GDP  in  2022,  4.4%  of  GDP  in  2023,  and  2.9%  of  GDP  in  2024.  This,  based  on  the 
Commission  forecast,  is  consistent  with  a  nominal  growth  rate  of  net  primary  government 
expenditure  of  3.4%  in  2021,  1.3%  in  2022,  0.9%  in  2023  and  0.0%  in  2024.  Such  growth 
rates of net primary government expenditure will be the primary indicator used to assess the 
fiscal effort if a careful analysis is needed. The corresponding annual fiscal adjustment in the 
structural balance is 0.7% of GDP in 2021, 1.8% of GDP in 2022, 1.7% of GDP in 2023 and 
1.5% of GDP in 2024.  

11