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Autumn 2020 Economic Forecast: Romania needs new structural measures to correct the excessive deficit
Based on the Commission 2020 autumn forecast and the analysis of recent macroeconomic and budgetary developments, Romania is not set to make the adjustments that would be necessary in order to ensure that the excessive deficit is corrected in the foreseeable future, reads the latest European Commission’s report on “Romania Fiscal Situation”.
The European Commission argues that the excessive deficit position was the result of policy decisions adopted by Romania before the COVID-19 outbreak. Those decisions included in particular major pension increases forecast to lead to a very large and persistent deterioration in the budget balance.
The deterioration of the economic outlook and the introduction of emergency measures to combat the COVID-19 pandemic and its economic and social consequences can only partly explain the projected rise in the deficit, the EC considers. “Important underlying drivers of the fiscal situation that were already present before the pandemic struck in 2020, have not been modified. These include unfunded large pension increases, a higher child allowance, reductions in indirect taxes and cuts in social security contributions for some categories of workers.”
The EC officials said that the attempts by the government to moderate the impact of some of these measures have been rejected by the Parliament and the outcome is unknown. “However, even if the proposals to moderate the increases in pension expenditures and the child allowance are ultimately adopted, the fiscal outlook will remain very unfavourable as expenditure on those items would still increase and there is no provision for financing the higher expenditure from additional resources or cost savings. The authorities would thus need to consider substantial further structural actions on both the revenue and expenditure sides in order to set the deficit on a declining path and prevent a steep increase in the debt-to-GDP ratio.”
Due to the current high uncertainty, fiscal sustainability risks will be reassessed in spring 2021. Given the high prevailing uncertainty regarding the development of the pandemic and its socio-economic consequences, the general escape clause will remain active in 2021. Depending on the evolution of the pandemic, emergency measures might need to be adjusted and combined with measures to support the recovery.
The measures to support the recovery throughout 2021, as suggested in the letter sent by Executive Vice-President Dombrovskis and Commissioner Gentiloni to the Romanian Minister of Public Finance Cîtu on 19 September 2020, should be tailored to the country’s specific situation and should be welltargeted and temporary. Member States should, therefore, avoid introducing measures with a permanent negative impact on budget balances. Indeed, it is important to note that the general escape clause is subject to the preservation of fiscal sustainability in the medium term.
Sound macroeconomic policies, including sustainable public finances, are a prerequisite for ensuring an environment conducive to productive public investment and effective use of the EU Funds, including substantial grants and loans available in the context of the Recovery and Resilience Facility.
“Overall, even correcting for the effect of the COVID-19 crisis, the projected budget deficit deviates from the adjustment that would have been expected according to the Recommendation, though the size of the deviation cannot be precisely assessed at this stage. The exceptional uncertainty surrounding the macroeconomic forecasts related to the evolution of the pandemic and its socio-economic consequences would not allow to credibly establish a new robust adjustment path at this point in time. However, it is clear that the correction of the excessive deficit will require a substantial and continued structural fiscal effort in the coming years. The measures proposed by the government in August 2020 and rejected by the Parliament would not be sufficient in that regard,” the EC says.
(Read more on : https://ec.europa.eu/info/files/communication-fiscal-situation-romania_en)