The Romanian government published on October 25 the medium-term fiscal-structural plan, the document which provides a set of reforms that would eventually result in a trajectory for the adjustment of the budget deficit for a period of 7 years.

The plan, already submitted to the European Commission, must be approved by the Commission before it becomes the official document to guide Romania on its way out of the Excessive Deficit Procedure.

The budget deficit adjustment trajectory has as a starting point an estimated budget deficit of 7.9% (ESA) for the year 2024 and as an endpoint the year 2031 with a budget deficit of 2.5% of GDP. 

Technically, the plan, as a first step, caps the annual rise of the net primary expenditure, which is all public expenditure elements under direct government control, net of discretionary revenue measures and excluding interest, as well as cyclical unemployment expenditure. 

For the plan proposed by Romania, the net primary expenditure will increase next year by 5.1%, slightly faster than the 5% projected GDP deflator – to rise in the following years at annual rates slightly below the GDP deflator (which is, it will slightly decrease in real terms).

The plan assumes realistic economic growth roughly in line with the country’s potential: 2.5% next year (vs. 2.7% potential growth) and in 2026, followed by gradually slower annual rates for the coming years. This means that governments can no longer draft budget planning based on hyper-optimistic forecasts to be later revised and eventually result in fiscal slippage.

The annual correction of the primary structural budget balance, which best reflects a government’s fiscal stance not impacted by the cost of public debt or the economic cycle, will be of 1 percentage point (pp) per year from a 5.3% of GDP deficit in 2024 to a 1.7% of GDP surplus in 2031. The 1pp annual correction is steeper than the 0.74pp proposed by the European Commission – which, however, requested a smaller deficit in 2024 as a starting point (and a less ambitious 2031 surplus). 

The Romanian government thus seeks to promise tougher reforms in the future (after elections) if the EC allows it to run a slightly wider deficit this year (before elections).

iulian@romania-insider.com

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