EC blames Romania for not taking effective action to avoid excessive government deficit

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The European Commission established today that Romania has taken no effective action in response to the Council Recommendation of 18 June 2021, to avoid excessive government deficits.

Romania had a budget deficit of over 3% of GDP in 2023 and will exceed this value in 2024 as well, according to a European Commission document.

On 18 June 2021, the Council recommended Romania to put an end to the excessive deficit situation by 2024 at the latest. Specifically, in its 18 June 2021 Recommendation, the Council recommended Romania to reduce its headline deficit 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.

This was 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. It corresponded to an annual structural adjustment of 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.

The Recommendation further stated that Romania should fully implement the measures already adopted for 2021, and to specify and implement the additional measures necessary to achieve the correction of its excessive deficit by 2024. Any windfall gains were to be used to reduce the general government deficit. In its Recommendation, the Council established a deadline of 15 October 2021 for Romania to take effective action and to report on progress made in the implementation of the Recommendation at least every six months until the excessive deficit has been corrected.

Based on the budgetary outcome data notified by Romania and validated by Eurostat, Romania’s general government deficit increased to 6.6% of GDP in 2023, much higher than the 4.4% of GDP recommended by the Council and planned by Romania in its 2023 Convergence Programme. The main reason for this deviation was that government spending continued to grow at a very high rate, mostly driven by social transfers, interest payments, expenditure in goods and services and capital spending. The 2023 headline deficit was also impacted by the statistical recording of payments of public sector wage increases (0.5% of GDP) following court decisions.

The Commission spring 2024 forecast projects the general government deficit to increase to 6.9% of GDP in 2024. The general government debt-to-GDP ratio is set to increase to 50.9% by the end of 2024, from 48.8% in 2023. As in previous years, the forecast increase of the general government deficit in 2024 reflects high growth in current government expenditure. Spending on public wages is projected to increase strongly, reflecting recent discretionary increases in wages in education, health and the defence sectors. The recalculation of pensions in the context of the pension reform will have a short-term cost in 2024 and 2025 – the reform will however subsequently generate large savings over the medium and long run, assuming the reform is fully implemented.
In 2024, government revenue growth is expected to outpace nominal GDP growth, reflecting efforts to improve tax collection through digitalisation of the tax system and the impact of a package of revenue-increasing measures adopted in autumn 2023, which is expected to boost government revenue by around 1% of GDP. The package mostly consists of an increase in corporate taxation, in particular for
micro-enterprises, an increase in taxation of individuals, coming from a partial removal of preferential tax facilities in the construction and agriculture sectors, the elimination of reduced VAT rates for selected goods and services, an increase in excise duties, and a special tax on the turnover of banks and multinationals.

“This leads to the conclusion that the response of Romania to the Council Recommendation of 18 June 2021 has been insufficient. Romania did not reach the headline deficit target in 2023 and is not forecast to put an end to its excessive deficit by 2024. The fiscal effort fell significantly short of what was recommended by the Council, and net primary expenditure grew much faster than recommended,” the European Commission concluded.

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