February 28 (SeeNews) - Romania's finance ministry said on Tuesday that the country will fit in the 3% budget deficit threshold agreed with the EU, responding to a letter of concern from Brussels.
"Although our views on the economic forecast for 2017 differ, the Romanian government is committed to implement a government programme designed to lead to sustainable development, infrastructure investment and the creation of new jobs, meeting the 3% of gross domestic product (GDP) deficit target," the finance ministry said in a press release.
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.
Earlier this month Romania's parliament approved the 2017 budget, which is built on projections for 5.2% economic growth and deficit equivalent to 2.99% of GDP.
European Commission vice-president Valdis Dombrivskis and the European Commissioner for economic and financial affairs, Pierre Moscovici, on Tuesday sent a letter to finance minister Viorel Stefan stressing Romania's risk to exceed the deficit limit this year and next year.
The EC said that Romania should announce exactly what measures it will take to temper the deficit before the spring forecast in April, when it will reassess the country's compliance with its obligations under the medium-term budgetary objective (MTO) envisaged in the Stability Growth Pact.
Under the MTO, all EU countries are expected to reach their budgetary objectives or to be heading towards them by adjusting their structural budgetary positions at a rate of 0.5% of GDP per year as a benchmark.
In its most recent forecast, the Commission estimates Romania's budget deficit at 3.6% of GDP in 2017 and, on a no-policy-change principle, at 3.9% of GDP in 2018. Furthermore, Romania is estimated to have significantly deviated from its MTO in 2016, while the commission forecast points to further deterioration of the structural balance in 2017 and 2018.
Romania's consolidated budget showed a deficit equivalent to 2.41% of the projected GDP last year, compared to 10.3 billion lei shortfall, or 1.47% of GDP in 2015.
"These adverse fiscal developments mainly stem from fiscal easing that includes a number of tax cuts combined with increased wages and pensions," the two European officials said.
At the beginning of January, the World Bank projected that Romania's economy will expand in 2017 and 2018 at 3.7% and 3.4%, respectively, and also warned on the possible negative effects of the fiscal loosening.
Among the fiscal easing measures that entered into force so far this year is a law a bill doing away with health and social insurance tax on all pensions and scrapping revenue tax on pensions under 2,000 lei ($469/443 euro), a bill eliminating 102 fees and charges and the 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 VAT rate from 24% to 20% in 2016.
(1 euro =4.5160 lei)