May 22 (SeeNews) - The European Commission (EC) on Monday warned Romania that it may not meet its budget deficit target and urged the government to take action to avoid the opening of an excessive deficit procedure.
"Based on 2016 outturn data validated by Eurostat and the Commission 2017 Spring Forecast, in 2016 Romania's structural balance deteriorated from a deficit of 0.6% of GDP (i.e. above the medium-term budgetary objective (MTO) of a structural deficit of 1 % of GDP) to a deficit of 2.6% of GDP, pointing to a significant deviation from the MTO," the European Commission said in a press release.
The growth of government expenditure, net of discretionary revenue measures and one-off measures, was well above the expenditure benchmark, also pointing to a significant deviation, the EU executive body added.
Based on the 2017 spring forecast, Romania's headline general government balance is projected to reach a deficit of 3.5% of GDP in 2017 and deteriorate further to 3.7% of GDP in 2018, thereby breaching the Maastricht Treaty reference value of 3% of GDP.
According to the Maastricht Treaty signed in 1992, the ratio of the annual general government deficit relative to GDP at market prices must not exceed 3% at the end of the preceding fiscal year.
The Commission also said it proposes to the Council to recommend to Romania to take appropriate measures in 2017 with a view of ensuring that the nominal growth rate of net primary government expenditure does not exceed 3.3% in 2017, corresponding to an annual structural adjustment of 0.5% of GDP.
Within one month from the Commission warning, the Council should send a recommendation to the member state concerned to take the necessary policy measures to correct the significant observed deviation. The regulation foresees that the recommendation will set a deadline of five months for the state to address the deviation. Within that deadline, the state should report to the Council on action taken in response to this recommendation.
It is the first time that the Commission applies the significant deviation procedure of the EU economic governance framework. "It is an early warning and gives the authorities the opportunity to take corrective action in order to avoid the opening of an excessive deficit procedure," the Commission said.
Romania's 2017 budget is built on projections for 5.2% economic growth and deficit equivalent to 2.99% of GDP.
In 2016, the country's consolidated budget showed a deficit equivalent to 2.41% of the projected GDP, compared to 10.3 billion lei shortfall, or 1.47% of GDP in 2015.
In February, Romania's finance ministry said that the country will fit into the 3% budget deficit limit agreed with the EU, responding to a letter of concern from Brussels.
In its most recent forecast, the Commission lowered its projection for Romania’s economic expansion in 2017 to a real 4.3% from 4.4% forecast in February due to the fiscal easing measures of the social democratic government.
Earlier in May, the European Bank for Reconstruction and Development (EBRD) increased its forecast for Romania's economic growth to 4% in 2017 but it too has warned that the government may miss its budget deficit target.
In April, the International Monetary Fund (IMF) said that Romania's real GDP growth is projected to reach 4.2% in 2017 before it decelerates to 3.4% in 2018.
Among the fiscal easing measures that have entered into force since the beginning of the year is a law doing away with health and social insurance contributions paid by pensioners and scrapping income tax on pensions under 2,000 lei ($469/443 euro), a bill eliminating 102 fees and charges, and a hike of the minimum wage by 16% to 1,450 lei.
Romania also reduced its VAT rate from 20% to 19% as of January 1. This cut follows a reduction in the VAT rate from 24% to 20% in 2016.
(1 euro =4.5160 lei)