EC recommends Romania to no longer defer fiscal correction

Concluding that Romania has not taken effective action in response to the Council Recommendation of June 18, 2021, the European Commission recommends Romania's authorities tighten fiscal policy in order to achieve a fiscal adjustment for 2024 as a whole and make use of cohesion, Resilience, and other plans available to boost competitiveness.

It is an unprecedented warning and suggests that the authorities in Bucharest should not defer, as planned, drafting the fiscal corrective package until after the elections scheduled at the end of the year. At least a draft fiscal reform strategy is expected "in a timely manner," the Commission stresses.

The former recommendation (fiscal consolidation) aims at addressing the vulnerabilities linked to the large current account and government deficits, while the latter helps to address vulnerabilities related to cost competitiveness due to wage increases in excess of labor productivity growth and non-cost competitiveness due to structural bottlenecks, the Commission explains.

The ruling coalition in Bucharest has informally agreed to defer the fiscal corrective package until after the parliamentary and presidential elections – which puts at risk its enactment as of January 2025.

Romania should submit the medium-term fiscal-structural plan "in a timely manner," the Commission recommends.

Although it is not specified, "timely manner" means well in advance of 2025. In fact, the deadline for passing fiscal adjustments enforceable as of January 2025 is the end of June, given the six-month period provisioned (not always observed) between the enactment and application of fiscal amendments.

The response of Romania to the Council Recommendation of June 18, 2021, has been insufficient, the EC notes.

The Commission concluded that Romania did not reach the headline deficit target in 2023 and is not forecast to put an end to its excessive deficit by 2024.

The Commission's spring 2024 forecast projects the general government deficit to increase to 6.9% of GDP in 2024. The general government debt-to-GDP ratio is set to rise to 50.9% by the end of 2024 from 48.8% in 2023. As in previous years, the forecast increase of the general government deficit in 2024 reflects high growth in current government expenditure.