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European Semester Autumn Package: Communication on the fiscal situation in Romania

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BUDGETARY DEVELOPMENTS AND OUTLOOK

 

According to the notification of 14 October 20208 , validated by Eurostat, the general government deficit in Romania was 4.4% of GDP in 2019, while debt stood at 35.3% of GDP. The Commission 2020 autumn forecast projects a general government deficit of around 10¼% in 2020, 11¼% in 2021 and 12½% in 2022 under a no-policy change assumption.

 

The structural deficit, which was around 5% of GDP in 2019, is expected to deteriorate by 3.6 pps. of GDP in 2020, 1.4 pps. of GDP in 2021, and 1.6 pps. of GDP in 2022. These large and growing budget deficits partly result from the combined effect of the severe economic downturn, and the measures to combat the COVID-19 pandemic and its economic and social consequences. These include additional spending on employment support schemes and support to the health sector, as well as some tax incentives.

 

The total cost of COVID-19 related support measures is 1.3% of GDP, out of which 0.4 pps. is financed by EU funds (see Table 2 below). In the absence of a budget for 2021 (given also the forthcoming general elections, expected on 6 December), the Commission 2020 autumn forecast assumes the expiry of the employment support measures and wages bonuses in 2021.

 

However, the large and growing projected deficits are mainly driven by pre-existing expansionary measures, as evidenced by the sizeable structural deficit in 2019. This notably includes significant increases in social and other expenditure that were adopted before the pandemic and are thus unrelated to it.

 

More precisely, expenditure on old-age pensions is set to rise considerably, driven by the full-year effect of a 15% pension increase that came into effect in September 2019 and a further increase of 40% from September 2020. Consequently, expenditure on old-age pensions is projected by the Commission to increase by 1.9 pps. of GDP in 2020.

 

Pension increases alone will also contribute to a deterioration in the budget deficit by 2.2 pps. of GDP in 2021 and a further 1.1 pps. of GDP in 2022. The parliament also doubled the child allowance from February 2020, with an annualised budgetary cost of 0.6% of GDP. The reason for this budgetary impact is that, in both cases, the legislators did not provided for a source of financing of the measures.

 

On the revenue side, the authorities enacted in December 2019 some tax changes, including the reduction of excise duties on fuel and a lowering of social security contributions on parttime workers with an overall estimated revenue loss of 0.3% of GDP in 2020.

 

Tax revenues are also set to be negatively affected by the recession and some tax incentives as part of the COVID-19 support measures (0.1% of GDP). The general government deficit for 2021 and 2022 could turn out lower than expected in the Commission 2020 autumn forecast as the government has proposed to reduce the planned increases in pensions and child allowances.

 

The related amendments, however, have been rejected by the Parliament, and the government has challenged the parliamentary decisions at the Constitutional Court, whose final decisions are pending (see also Section 4).

 

The Commission 2020 autumn forecast, in line with the standard no-policy-change assumption, takes account of the parliamentary vote. For 2020 and for 2021 onwards, therefore, it incorporates the increases mandated by the pension law currently in force. The forecast does not include any expenditure related to the RRF, as the government has not yet indicated expenditure to be financed under the RRF in 2021.

The evolution of the deficit in 2021 could also turn out to be more favourable than forecast as a result of higher economic growth from the swift implementation of measures financed by the RRF.

 

In order to assess medium-term sustainability risks, the Commission has conducted an ad-hoc debt sustainability assessment based on its standard approach. 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.

 

Based on the Commission’s assessment, overall risks to debt sustainability appear high over the medium term. This risk level indicates that there are significant fiscal vulnerabilities that need to be addressed by appropriate policy measures. This risk assessment will be updated and further complemented, when the Commission reassesses Romania’s budgetary situation in spring 2021.

 

At this stage, the debt projections are also subject to a much greater level of uncertainty than usual. If the lower increases in pensions and child allowance proposed by the government for 2020 were adopted, this would mitigate expenditure in the short term but would not fundamentally affect the longer term risks to debt sustainability in the absence of further measures for 2021 and beyond.

(Full text on;https://ec.europa.eu/info/sites/info/files/economy-finance/fiscal_situation_in_romania_2020.pdf)

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