May 3 (SeeNews) - Romania's gross domestic product (GDP) growth is projected to accelerate to 4.2% in 2016, driven by wage increases and fiscal relaxation, and then slow down again to 3.7% in 2017, the European Commission said on Tuesday, confirming data released in February.
Romania's budget deficit in 2016 is expected to stay within the 2.1%/GDP target, before it widens to 2.8%/GDP in 2017, the Commission said in its Spring Forecast report. In its winter forecast, the Commission said it expects the 2017 deficit to be equivalent to 2.9% of GDP.
Assuming no policy changes, the headline deficit is projected to increase to well above 3.4% of GDP in 2017, it added. In its winter forecast, the Commission said it sees the 2017 headline deficit at 3.8% of GDP.
"An additional cut in the standard VAT rate by one percentage point, the abolition of the extra excise duty on fuel and of the special construction tax are expected to have a negative impact on revenues," the Commission said.
Inflation is expected to stay negative until mid-2016, when the base effect of the food VAT cut from June 2015 will wear out and the output gap is projected to close, while the annual average inflation rate for 2017 is expected to increase to 2.5% in 2017 despite the additional 1 percentage point cut of the standard VAT rate envisaged for January 2017.
Investment rate is likely to continue growing, but at a slower pace in 2016 with the end of the 2007-2013 financing period for EU funding, but stronger implementation under the 2014-20 EU financing period and the abolition of the construction tax from January 2017 are set to support investment growth in 2017, it added.
The unemployment rate is expected to decline very slightly from 6.8% in 2015 to 6.7% in 2017.
The European Commission also said that the main downward risk to the fiscal outlook stems from additional expansionary legislative initiatives in the run-up to the local and parliamentary elections in 2016, including public sector wage policy.
Source: European Commission Spring Forecast