EC warns Romania of highest deficit in the EU, requests 1% annual structural adjustment

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The European Commission said on Wednesday that Romania has not adopted no decision as reaction to the recommendation of the EU Council in June and, consequently, has proposed to the EU Council to adopt a review on the recommendation so that Romania corrects the significant deviation from the adjustment direction towards the Medium Term Objective (MTO), a EC release informs, quoted by

In June 2018, the EU Council adopted a recommendation to Romania for an annual structural adjustment of 0.8% of GDP, both in 2018 and in 2019.

Considering the development since then and following the lack of decisions in Romania to correct the significant deviation, the Commission proposes a reviewed recommendation on the annual structural adjustment of at least 1% of GDP, the European Commission says.

The Commission underlines that Romania’s public deficit has grown from 0.5% of GDP in 2015 to 2.9% of GDP in 2016 and is expected to reach 3.3% of GDP in 2018, then 3.4% of GDP in 2019 and 4.7% of GDP in 2020, the highest deficit in the EU.

The European Commission requests the EU Council (Romania is to take over the EU Council presidency as of January 1, 2019) to adopt the specific country recommendations and the Member States to implement them in full and in due time. The EU ministers would discuss the specific country recommendations before the heads of state and governments support them. It is up to the Member States to implement the recommendations through economic and budgetary policies during 2018-2019.

The European Commission recommended Romania in June to correct the significant deviation from the adjustment trajectory regarding the MTO, to ensure the full implementation of the fiscal framework and to improve the voluntary payment and tax collection.

Romania should have sent a written answer, officially, until October 15.

Letter from Finance Ministry

In this context, the European Commission has also released the letter sent on October 17 by the Minister of Public Finances, Eugen Teodorovici, regarding the actions to be completed by Romania as answer to the EU Council recommendation on June 18. 2018.

Main issues:

  • In order to reach 2.58% of GDP cash deficit in 2019 and to correct the significant deviation from the MTO budgetary objective, by reducing the structural deficit from 3.71% of GDP in 2018 to 2.71% of GDP in 2019, the Bucharest authorities envisage, in 2019, the freezing of all state employees at the level in December 2018 and the freezing of holiday vouchers value for state employees at the level of 2018;
  • The number of public employees will be maintained at the level of 2018, investment expenditures will have the same estimated level of 4% of GDP;
  • For revenues – the distribution of at least 90% of the state companies profit to the state budget or to local budgets as dividends, the selling of 5G licenses in 2019 with an estimated impact of RON 1.3 billion, keeping the Government Ordinance 5/2013 in force on special measures of taxation of activities of natural monopoly in the energy and natural gas sectors;
  • introduction of electronic cash registers, adoption of Emergency Ordinance no. 88/2018 for amending and supplementing normative acts in the area of insolvency and other normative acts, modernizing border crossing points to reduce tax evasion and smuggling by introducing scanning equipment at all border crossing points;
  • Thanks to these measures, the Bucharest authorities argue that in 2018 both the ESA and cash deficits will be in line with the Treaty on the Functioning of the European Union (TFEU), respectively a deficit below the threshold of 3% of GDP and a significant adjustment the budget deficit is scheduled to start in 2019, when the ESA deficit is expected to improve by more than 0.5 percentage points, a rate that will also be maintained in 2020. Thus, the ESA deficit will fall from 2.96% of GDP 2018 to 2.38% of GDP in 2019, to 1.82% of GDP in 2020 and to 1.35% of GDP in 2021.

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