EC wants to discuss with the Romanian Gov’t on the 2021 budget

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The new minister of Finance, Alexandru Nazare has received a letter from the European Commission on December 29, 2020, with the authorities in Brussels voicing intention to discuss and collaborate with the Government in Bucharest on the issue of the 2021 state draft budget.

The purpose of the document is to recall the Romanian authorities over the EC’s stance on Romania’s fiscal situation and on the ongoing excessive deficit procedure.

“As a matter of priority, the purpose of this letter is to recall the view of the European
Commission on Romania’s fiscal situation and inform you about the current state of play of our
fiscal surveillance processes, in particular in relation to the ongoing excessive deficit procedure
(EDP) of Romania. We propose to engage at your earliest convenience in a policy dialogue
about Romania’s fiscal situation and the forthcoming 2021 budget, which will be of key
importance in this regard,” reads the letter.

The European Commission warns that “following years of fiscal slippage, the fiscal situation in Romania continued to deteriorate  substantially in 2020.”

According to a recent EC’s analysis on Romania’s fiscal situation, the large general government deficit and
rapidly growing debt ratio are largely the result of policy decisions adopted by Romania before
the COVID-19 outbreak.

“These decisions include the pro-cyclical fiscal policy between 2016 and 2018, when the government deficit was close to 3% of GDP notwithstanding a favourable economic situation, as well as the large unfunded pension increases that lead to a permanent increase in the budget deficit. The deterioration in the fiscal position is therefore only to a limited extent due to the necessary fiscal measures taken by Romania to combat the COVID-19 pandemic.”

The Commission will reassess Romania’s budgetary situation in spring 2021, with the assessment to take into account 2020 budgetary outturn data, the upcoming 2021 budget, the Commission 2021 spring forecast as well as the medium-term setting of fiscal policy that the Government will lay down in its
political programme and your forthcoming convergence programme.
“Against this background, we would like to engage with the Romanian Government to discuss
the necessary action, both immediately and in the medium-term, to bring Romania’s fiscal
situation onto a sustainable path. This corrective action need not and should not undermine the
necessary efforts to support the health system and the economy in order to effectively combat
the pandemic and its economic and social consequences. As highlighted in our previous letter
to Minister of Public Finance Cîtu of 19 September 2020, the measures to support the recovery
throughout 2021 should be tailored to Romania’s specific situation and should be well-targeted
and temporary.”

The EC says that it would welcome further efforts by the Government to limit any structural negative budgetary impact of the measures taken.
“Romania should avoid introducing new measures with a permanent negative impact on the
budget balance. Given the seriousness of the fiscal situation, we would also strongly encourage
you to consider further fiscal policy initiatives already as of 2021 and on both the revenue and
expenditure sides. These initiatives should, as part of a concerted medium-term fiscal strategy,
set the deficit on a declining path and prevent a steep increase in the debt-to-GDP ratio.”

The Commission also notes that Romania is expected to benefit from substantial amounts of grants and loans under the Recovery and Resilience Facility (RRF), which will provide a significant boost to the
economy.

“We would like to underline that effective action in the context of an EDP and overall sound macroeconomic policies are conducive to productive public investment and the effective use of the available EU financing, including in the context of the RRF. In addition, the recovery and resilience plan of Romania is expected to contribute to effectively addressing the challenges identified in the relevant country-specific recommendations.

Overall, Romania’s policy strategy for the coming years should pay due attention to implementing the country specific recommendations as an integral part of the Government’s commitment to preserve
current and future growth and ensure fiscal sustainability.
We are confident that such a policy strategy will allow Romania to fully reap the benefits of
the available EU financing, while restoring sound public finances. We look forward to
engaging in fruitful cooperation with the Romanian authorities and to supporting you in this
process through exchanges at both political and technical level, including in the near future in
context of the preparation of the 2021 budget.”

According to the EC, due to a high primary deficit and relatively high interest rates compared to other sovereigns, the debt-to-GDP ratio is set on a steep upward path. Under a no-policy-change scenario, debt is projected by the Commission to exceed 60% in 2022 and go beyond 100% of GDP in 2027, remaining above that level until the end of the projection period in 2031.

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