EC: Draft unified wage law poses a significant downward risk to the fiscal forecast

The European Commission warned Romania on Monday regarding a significant downward risk to the medium term fiscal forecast. The EU body also recommended the Council of the EU to adopt a recommendation to ask Romania to take the necessary measures in 2017 to correct this.

The EC stated it was the first time when this procedure pertaining to the EU’s economic governance framework was applied. The procedure gives authorities the possibility to implement coercitive measures to avoid the opening of procedures that apply to excess deficits.

In July 12 2016, the Council of the EU recommended Romania to limit the deviation from the medium term budgetary objective in 2016 and to achieve an annual fiscal adjustment of 0.5 percent of GDP in 2017, unless the budgetary objective on the medium term is respected by means of a reduced effort. Based on 2016 outturn data Romania was found to be in significant deviation from the medium-term budgetary objective. In line with Article 121(4) TFEU and Article 10(2) of Council Regulation (EC) No 1466/97, the Commission issued a warning to Romania on 22 May 2017 that a significant deviation from the medium-term budgetary objective was observed in 2016.

In 2018, in the light of its fiscal situation, Romania is expected to further adjust towards its medium-term budgetary objective of a structural deficit of 1 percent of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure which does not exceed 4.3%. It would correspond to a structural adjustment of 0.5 percent of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. In addition, the Commission 2017 spring forecast projected a general government deficit of 3.5 percent and 3.7 percent of GDP for 2017 and 2018, above the 3 percent-of-GDP reference value of the Treaty.

For 2017 and 2018 the recommendations are as follows: In 2017, Romania should ensure compliance with the Council recommendation with a view to correcting the significant deviation from the adjustment path toward the medium- term budgetary objective. In 2018, the country should pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which translates into a substantial fiscal effort for 2018. Moreover, it should ensure the full application of the fiscal framework as well as strengthen tax compliance and collection. Not least, it should fight undeclared work, including by ensuring the systematic use of integrated controls.

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Romania should also strengthen targeted activation policies and integrated public services, focusing on those furthest away from the labour market. Next, the country should adopt legislation equalising the pension age for men and women. Also, it should establish a transparent mechanism for minimum wage- setting, in consultation with social partners and improve access to quality mainstream education, in particular for Roma and children in rural areas. In healthcare, the public system should shift to outpatient care, and curb informal payments.

Not least, Romania should adopt legislation to ensure a professional and independent civil service, applying objective criteria and strengthen project prioritisation and preparation in public investment. Also, the country should ensure the timely full and sustainable implementation of the national public procurement strategy.