Romania is in the process of excessive deficit, according to the European Commission’s report released a day before the investment of the Ciuca Government on the country’s budgetary situation.
The report says that there are certain things and measures that the Government must take and do to reduce the budget deficit to below 3% of GDP by 2024.
“Romania was recommended to reduce the general government 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. Based on the Commission 2021 spring forecast underpinning the Council recommendation, this was considered consistent with 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, and 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 2024.1 The Council recommended that Romania fully implement the measures already adopted for 2021 and specify and implement the additional measures that are necessary to achieve the correction of the excessive deficit by 2024. The Council also recommended that Romania use any windfall gains to reduce the general government deficit and that budgetary consolidation measures secure a sustainable correction in a growth–friendly manner. Furthermore, the Council recommended that Romania ensure the full and effective application of the national fiscal framework and to support the fiscal consolidation with comprehensive reforms,” the EC notes.
The report points out that since 5 October 2021, Romania has had a caretaker government with limited competences.
Therefore, the report on action taken submitted by Romania on 14 October 2021 focuses on measures adopted with the aim of ensuring compliance with the intermediate budgetary target for 2021. The report also recalls the budgetary targets from the May 2021 Convergence programme for the period 2021–2024, and confirms the commitment therein to bring the deficit below 3% of GDP by 2024, without presenting any new fiscal policy measures for 2022–2024, which would be necessary to ensure compliance with the respective budgetary targets.
The general government deficit for the period January–August 2021 stood at 3.4% of GDP in cash terms, lower by 1.8 pps. of GDP compared to the same period last year. According to the report the deficit in cash terms for 2021 is expected to be around 7.1% of GDP (RON 83.8 bn), instead of 7.2% of GDP (RON 80 bn) originally planned in the 2021 budget. This cash deficit would correspond to an ESA deficit of around 8% of GDP, in line with the budgetary target for 2021 in the EDP recommendation.
With respect to 2021, no changes to the tax system are reported, except for slight increases in the level of excise duty on tobacco starting on 1 January 2021, with a budgetary impact close to 0.1% of GDP. Concerning general government expenditure, the report lists the following measures implemented throughout 2021.
-maintenance of gross wages in the public sector, including bonuses, allowances and premiums (insofar as the staff hold the same position and work under the same conditions) at the level granted for December 2020;
-maintenance of the pension point (the value used to convert the points accumulated throughout years based on earnings into regular pension payments) at RON 1 442 from September 2020; return, as of 2022, to the existing transparent mechanism for establishing the value of the pension point consisting of raising the pension point, starting 1 January of each year, by the average annual inflation rate, to which is added at most 50% of the increase in the realised real average gross wages, as approved by Government Emergency Ordinance (GEO) no. 8/2021;
-maintenance of the food allowance at the level set for 2020;
-non–awarding of prizes and holiday allowance provided by Law no. 153/2017;
-compensation of overtime work for public sector employees with free time only;
-extension of the use of holiday vouchers issued in 2019 and 2020 until the end of 2021 and suspension of the issuance of holiday vouchers for 2021 by public authorities and institutions;
– increase of the minimum gross salary by 3.1% as compared to December 2020, at RON 2 300 per month, starting 13 January 2021;
– increase of the state allowance for children by 16% compared to the value in December 2020, starting January 2021, and by further 14% from 1 January 2022 and establishment, from 2023, of a transparent indexation mechanism by GEO no. 56/2021;
– reduction of the tariffs offered to students for means of transport.
The Commission says that, according to the report, measures aimed at strengthening tax collection will continue during the rest of 2021, also in the context of the Operational Revenue Recovery Plan and National Agency for Fiscal Administration (NAFA) Strategy 2021–2024 and the Recovery and Resilience Plan (RRP). The measures aim at supporting tax compliance by improving business processes and services to taxpayers, digitalising NAFA, and preventing tax evasion.
The authorities expect that these reforms will increase the revenue–to–GDP ratio by 2.5 percentage points by 2026 as compared to the 2019 value of the ratio.
In 2021, the government maintained the measures to support households and businesses introduced in 2020, including state guarantees, financing programmes, the easing of some tax obligations, grants to support employment and to preserve the link between employers and employees in case of temporary interruption of activity due to the COVID–19 pandemic, the purchase and administration of COVID–19 vaccines, expenditure for purchasing of medical equipment and to cover the extra cost for public health personnel, and IT equipment for students. The budget revision adopted in September 2021 contains additional allocations to support the health sector and further investment projects at central and local levels. According to the report, the impact of temporary measures related to the COVID–19 pandemic as part of the 2021 budget, including the September revision, amounts to RON 7.33 billion (0.6% of GDP).
“The report does not include the measures to support households and enterprises against energy price increases, which were adopted on 16 September 2021 (see section 2.2), and which will have effect for 5 months starting on 1 November 2021.
The report submitted by Romania on 14 October mentions that the further reduction of the deficit planned over the medium term will occur mainly on the expenditure side, while tax revenues as a share of GDP will remain relatively constant, not yet taking into account the impact of reforms and investments contained in Romania’s RRP. However, the report does not specify any further details of the consolidation strategy for 2022 and beyond. Related to this, it should be noted that the medium–term fiscal strategy for 2022–2025, which, according to the national fiscal rules, the government has to prepare and adopt in August, is
The EU Executive acknowledges that the Romanian authorities have confirmed their commitment to ensuring a correction of the excessive deficit as required by the Council. “However, given the caretaker
nature of the government, the report on action taken contains only the measures adopted with the aim of delivering compliance with the 2021 intermediate deficit target. “
According to the Commission 2021 autumn forecast, the headline deficit is expected to amount to 8.0% of GDP in 2021, in line with the recommended target, while the fiscal effort is expected to fall short of the requirements. At the same time, the targets for 2022–2024 are currently not projected to be met on a no–policy–change basis, indicating the need for a medium–term consolidation strategy and corresponding corrective measures. On the basis of the projected achievement of the required headline deficit target in 2021, the excessive deficit procedure should be kept in abeyance at this stage.
“The Commission expects the Romanian government, when formed, to present a budget for 2022 and a medium–term fiscal strategy in line with the June 2021 Council recommendation as a matter of urgency. The Commission will re–examine compliance with the requirements set out in the Council recommendation on the basis of the information in the budget and the medium–term fiscal strategy.”