European Commision: Romania doesn't comply with deficit criterion and launch of excessive deficit procedure is warranted

The fiscal budgetary strategy for 2020-2022, adopted by the Government on 10 December 2019 and sent to Parliament, stipulates a deficit target of 3.8 percent of the GDP in 2019, a figure which, according to the European Commission, provides prima facie evidence of the existence of an excessive deficit in Romania, according to a report adopted by the European Commission on Friday.

The report mentions that Romania doesn't comply with the deficit criterion as set by the Treaty and the launch of an excessive deficit procedure [EDP] is, therefore, warranted.

"Based on the Fiscal Strategy, Romania's general government deficit is planned to have increased to 3.8 percent of GDP in 2019. This is well above and not close to the Treaty reference value of 3 percent of GDP. 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," according to the EC report.

According to the Commission 2020 winter forecast, Romania's government deficit reached 4 percent of the GDP in 2019, following to climb to 4.9 percent in 2020 and 6.9 percent in 2021. The projected increase in the deficit is mostly driven by significant pension increases enacted in summer 2019, especially an increase in pensions of 40 percent scheduled for September 2020 and a further upward recalculation of pensions scheduled for September 2021. In addition, between December 2019 and January 2020, the authorities adopted new tax cuts and doubled child allowances.

In respect to the new Pension Law, the EC report underscores that due to its implementation schedule, this law will significantly increase public spending on pensions in a short period of time. The pension law is "the main driver of the projected rapid increase of the general government deficit and of high fiscal sustainability risks," according to the EC report.

The EC mentions that on 6 February 2020, the Romanian authorities sent a letter presenting a series of relevant factors for the Commission to consider in its assessment.

The authorities in Bucharest argue that the deterioration of the budget deficit in 2019 is mainly explained by the increase in personnel spending, social assistance and investments, whereas revenues remained mostly unchanged as a share of GDP. Moreover, the Romanian authorities underscored that the fiscal-budgetary strategy for 2020-2022 shows a gradual adjustment of the medium-term budget deficit while remaining above the reference value of 3 percent of GDP until 2021. The authorities explained the fact that the pace of the envisaged fiscal consolidation is limited by the legal framework in place, especially the provisions of the new pension law adopted by Parliament in 2019.

"Overall, the analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as not complied with, and that an EDP is thus warranted," the EC concluded.

In the next stage, the Economic and Fiscal Committee will issue an opinion regarding the report within the next two weeks.