EC urges RO to come up with "credible and sustainable" fiscal consolidation plan

The Council of the European Union establishes the deadline of October 15 2021 for Romania to take effective action and, in accordance with the Union's regulations, report the consolidation strategy that is envisaged to achieve the targets, including 3%-of-GDP public deficit by 2024.

Romania is under excessive deficit procedures since its 2019 budget deficit (4.6% of GDP) exceeded the 3% threshold. October 15 is also the approximate moment for the first disbursements under the Relaunch and Resilience Mechanism, a program expected to bring Romania EUR 29.2 bln grants and soft loans conditioned on reforms consistent with the fiscal consolidation.

However, the Resilience Plan (PNRR) draft submitted to the European Commission on May 31 remains vague in regard to the specific reforms in the fiscal policy area.

A credible and sustainable adjustment path would require Romania to achieve a headline general government deficit target of 8.0% of GDP in 2021, 6.2% of GDP in 2022, 4.4% of GDP in 2023, and 2.9% of GDP in 2024, in line with the Government's targets, the Council says. But this is not likely achievable despite the Government's visible positive actions taken in the right direction, it also says.

The Council points to the wide discrepancy between the Romanian Government's 3%-of-GDP public deficit target, planned to be reached in 2024, and the European Commission's much wider (6.8% of GDP) projection.

And it asked the Government to draft, by October 15, specific steps aimed at closing the gap. An improved economic outlook might help the Government in closing the gap as the Commission itself might revise the GDP growth projections upward (hence revise down the public deficit estimates).

But the Commission's recommendations as regards the annual fiscal adjustment diverge so much from the Council's projections (by 1.8pp p.a. in 2023 and 2024) that radical steps are needed to address the gap.

The higher deficit projection in the Commission 2021 spring forecast, compared to Romania's Convergence Program, stems from the fact that "the planned consolidation is not fully supported by enacted, or as yet credibly announced, measures and could therefore not be taken into account in the Commission forecast," the Council explains.

The structural deficit is projected by the Commission to improve by 0.7pp of GDP in 2021, by 0.5pp of GDP in 2022 and to deteriorate by 0.1pp of GDP in 2023 and 0.4pp of GDP in 2024.

In contrast, the Convergence Program is consistent with annual fiscal adjustment in the structural balance of 0.7pp of GDP in 2021, 1.8pp of GDP in 2022, 1.7pp of GDP in 2023 and 1.5pp of GDP in 2024.

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