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Brussels offers Romania four months to take measures to correct significant deviation of structural deficit

de Razvan Diaconu , 11.12.2017

The European Council issued on Tuesday a new recommendation, at the request of the European Commission, based on the significant deviation procedure, with Romania being warned to operate a correction of 0.8% of GDP, according to the European Council’s decision.

Important: The Council set the deadline of April 15, 2018, for Romania to present a report on the actions taken in response to the revised recommendation.

The European institution adopted on Tuesday the decision that penalises the fact that “Romania did not act, in fact, to correct the significant deviation” from the structural budget deficit, according to a release issued by the Council.

It should be noted that the draft of the Law on 2018 state budget does not take into account the European request, which has also been notified by the Fiscal Council in the preliminary opinion on the draft budget sent for analysis on November 29 and approved on Wednesday by the Government.

The medium-term budgetary objective and the significant deviation procedure are part of the so-called “preventive component” of the Growth and Stability Pact, the EU’s fiscal regulatory framework. The preventive component focuses on the structural balances and therefore isolates the impact of the discretionary government actions and the interest expenses.

According to the European Commission’s autumn forecasts, Romania’s structural balance is to deteriorate by 1.1% of GDP in 2017 – contrary to the EU Council’s recommendation issued in July 2017 that aims at improving the balance by 0.5% of GDP.

The risk is that this deterioration will generate an estimated deficit of 3.3% of GDP in 2017, above the EU threshold, which will require for Romania to be included in the excessive deficit procedure, in line with the regulations of the Growth and Stability Pact.

Moreover, the increase in Romania’s net primary government expenditures amounted to 4.9% of GDP in 2017, well above the 3.3% threshold set by the Council, which asks for measures to ensure a nominal increase in the net primary government expenditure of no more than 3.3% in 2018, representing a structural adjustment of at least 0.8% of GDP.

The Council recommends for any unexpected gains to be used for reducing the deficit and measures for budget consolidation to provide a lasting improvement in the structural balance of the government spending.

In the summer of 2008, the European Commission sent a warning to Romania of a significant deviation in 2016 from the adjustment path towards the medium-term budgetary objective and recommended the Council to adopt a document imposing Romania to take the necessary steps in 2017 to correct this significant deviation.

According to the document communicated by the EC, in 2018, considering the fiscal situation, Romania is to make further adjustments to reach its medium-term budget objective of achieving a structural deficit of 1% of GDP. Under the Growth and Stability Pact, the adjustment will be translated into the requirement of a nominal growth rate in the primary government expenditure that would not exceed 4.3%, which would correspond to a structural adjustment of 0.5% of GDP.

According to the autumn economic forecasts published by the Commission, in Romania, the public deficit is to reach 3% of GDP in 2017, to further worsen and reach 3.9% of GDP in 2018 and 4.1% in 2019.

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