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April 21, 2021

European Commission proposes Romania annual structural adjustment of at least 1pct of GDP

The European Commission has established that no effective action was taken by Romania in response to the council recommendation of June and proposes that the council adopts a revised recommendation to Romania to correct its significant deviation from the adjustment path towards the medium-term budgetary objective.

In June 2018, the council issued a recommendation of an annual structural adjustment of 0.8 percent of GDP in both 2018 and 2019 to Romania under the Significant Deviation Procedure (SDP), according to a press statement released by the European Commission on Wednesday.

“In light of developments since and following the lack of effective action by Romania to correct its significant deviation, the Commission now proposes a revised recommendation of an annual structural adjustment of at least 1 percent of GDP in 2019.”

The public deficit has increased in Romania from 0.5 percent in 2015 to 2.9 percent in 2016 and is forecast to reach 3.3 percent in 2018, 3.4 percent in 2019 and 4.7 percent in 2020: this is the highest deficit in the EU.

The European Commission asks the Council of the European Union to adopt specific country recommendations and the member states to fully implement them on time. The EU ministers would discuss specific country recommendations before EU heads of state or government support them. It is up to the member states to implement the recommendations through their economic and budgetary policies in 2018-2019.

In June, the European Commission recommended Romania to correct a significant observed deviation from the adjustment path toward the medium-term budgetary objective (MTO), to ensure full implementation of the tax framework and to improve voluntary payment and tax collection.

Romania had until October 15 to respond formally in writing to the recommendations of the European Commission.

In the same context, the European Commission on Wednesday published a report drawn up by Romania’s Minister of Public Finance Eugen Orlando Teodorovici on the recommendation of the Council of the European Union for correction of the significant deviation found in Romania from the adjustment trajectory towards reaching the medium-term budgetary objective.

The following measures are provided in order to ensure a cash deficit of 2.58 percent of GDP in 2019 and to implicitly correct the deviation from the medium-term objective (by reducing the structural balance from 3.17 percent of GDP in 2018 to 2.71 percent of GDP in 2019): freezing the gross salary for public employees at the level of December 2018 and giving holiday vouchers at the same level as in 2018.

Likewise, the average number of employees in the public sector will be kept at the same level as in 2018, while investment expenditure is estimated at around 4 percent of GDP, similarly to the level planned for 2018.

Revenue wise, the main measures are: distributing of at least 90 percent of the net profits to dividends for the state or local budgets from the state owned enterprises; the selling of licenses for 5G technology (currently planned for 2019; estimated impact of 1.3 billion lei); and maintaining the provisions of Government Ordinance 5/2013 regarding the establishment of special measures for the taxation of the natural monopoly activities in the electricity and natural gas sector.

The following measures were also mentioned that were designed to have a positive impact on the improvement of revenue collection, especially from VAT and excise duties: the introduction of electronic cash registers; passing Government Emergency Ordinance no 88/2018 amending and supplementing legislation in the field of insolvency; modernising border crossing points in order to reduce tax evasion and detect contraband goods through the introduction of operational scanning equipment in all border crossing points.

Both cash and ESA deficit are planned for 2018 to be in line with the limit required by the TFEU, i.e. 3 percent of GDP, and a significant adjustment in the budget deficit is planned to start in 2019, when the ESA balance will improve by over 0.5 pp, a pace to be kept in 2020 as well.

Thus, the ESA deficit will fall from 2.96 percent of GDP in 2018 to 2.38 percent of GDP in 2019, 1.82 percent of GDP in 2020 and 1.35 percent of GDP in 2021.

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