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.1 -5.2 -3.8 -7.5 n.a. Gross debt ratio 35.2 46.2 40.9 54.7 n.a. Notes: 1 Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by Commission on the basis of the programme scenario using the commonly agreed methodology. 2 Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures. Source : Convergence Programme (CP); Commission 2020 spring forecasts (COM); Commission calculations. 8 3.2. MEASURES UNDERPINNING THE PROGRAMME In order to support employment, the government introduced a technical unemployment benefit scheme for companies that send their employees home and suspend activity due to the COVID-19 crisis. The authorities introduced similar benefits for those who cannot claim technical unemployment, such as the self- employed. Finally, the government introduced a benefit for parents who cannot work remotely and have to stay home with children. In order to support the liquidity of companies, the government sped up VAT reimbursements, deferred payment of local taxes and temporarily suspended forced execution of tax obligations due to the state budget. These measures should have no significant budgetary impact on the whole 2020 but can help address temporary liquidity problems. The government also introduced a rebate for taxpayers who nevertheless paid their corporate income tax by the statutory April 25 deadline The authorities also established guarantees of up to RON 15 billion to SMEs for contracting loans for financing investment and working capital. The government also approved laws allowing loan payment deferral by up to 9 months for debtors affected by the coronavirus crisis and a deferral of rent and utility bills for SMEs. Overall, the measures taken by the government of Romania are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak.3 They are timely, temporary and targeted. The full implementation of those measures, followed by a refocusing of fiscal policies towards achieving prudent medium term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term. They are included in the Commission 2020 spring forecast with a broadly similar fiscal impact. However, their potential scope is constrained by limited budgetary space, given that the general government deficit was already high before the COVID-19 outbreak. Moreover, there are concerns regarding the predictability and regulatory clarity of the measures. For example, the government and the parliament passed competing measure packages. The parliament package, initiated by the opposition, has been challenged at the Constitutional Court on procedural grounds. There are also concerns related to the administrative capacity of implementing the measures. The Programme also incorporates significant pension increases beyond the standard pension indexation mechanism, adopted in summer 2019. Pensions are due to increase by 40 % in September 2020 and be additionally recalculated upward in September 2021, to match a new formula of calculation of new pensions. Due to this implementation schedule, the pension law is set to significantly increase public spending and thus fiscal deficits. Based on the long-term projections in the Programme, spending on public pensions is set to increase from 8.0% of GDP in 2016 to 8.9% of GDP in 2020 and 11.8% in 2025. 3 https://ec.europa.eu/info/sites/info/files/communication-coordinated-economic-response-covid19- march-2020_en.pdf 9 Table 3: Discretionary measures adopted or announced in response to COVID- 19 outbreak ESA Code (Expenditure / Budgetary impact List of Adoption Description Revenue in 2020 measures Status component) (% of GDP) Risk incentive for employees D.1: 0.05 in the health sector working compensation with patients infected with of employees adopted COVID-19 Unemployment benefits for 0.1 parents that stay at home with their children because D.3: Subsidies adopted the schools are closed due to government decision Technical unemployment D.3: Subsidies 0.6 benefit adopted Benefits for those who cannot 0.2 claim technical D.3: Subsidies adopted unemployment, such as the self-employed. Medical equipment and other P.51: Gross 0.1 expenditures to help fight fixed capital adopted COVID-19 formation Medical equipment and other P.2: 0.2 expenditures to help fight Intermediate adopted COVID-19 consumption Total 1.2 Source: 2020 Convergence Programme. The budgetary impact reported in RON in the Programme converted into % of GDP based on the nominal GDP projections in the Programme. Table 4: Guarantees adopted or announced in response to COVID-19 outbreak List of Adoption Maximum amount of contingent Description liability* measures Status (% of GDP) IMM invest – loan guarantees to adopted 1.4 SMEs Source: 2020 Convergence Programme. The maximum amount of contingent liability reported in RON in the Programme converted into % of GDP based on the nominal GDP projections in the Programme. 10 3.3. RISK ASSESSMENT The macroeconomic and fiscal outlook are affected by high uncertainty due to the outbreak of the COVID-19 pandemic. The pandemic could become more severe and last longer than assumed, requiring more stringent and longer lasting containment measures. This would result in worse economic and fiscal outcomes. It could also require further fiscal policy measures. That would result in worse fiscal outcomes but help to mitigate the economic impact. An additional risk stems from the considerable size of public guarantees issued in response to the crisis. Moreover, further downward risks to the achievement of the Programme targets stem from the underlying favourable macroeconomic projections and the possible overestimation of some revenues and underestimation of some current expenditure items. The Romanian Fiscal Council, in its opinion on the 2020 budget amendment of 17 April, considers that the underlying macroeconomic scenario, based on -1.9% real GDP growth, is very optimistic (see Section 2 above). Even so, based on this scenario, the Fiscal Council evaluates the 2020 budget deficit at about 7.3%-7.45% of GDP (as opposed to the 6.7% deficit estimated by the government), due to overestimated revenues and underestimated expenditures in the budget amendment. 4. COMPLIANCE WITH THE PROVISIONS OF THE STABILITY AND GROWTH PACT 4.1. Compliance with the deficit criterion On 3 April 2020, the Council decided that an excessive deficit existed in Romania due to non-compliance with the deficit criterion in 2019. The decision was based on the updated fiscal targets by the government, which reflected the budget execution data for the year to–date. The 2019 general government deficit outturn of 4.3% of GDP confirmed the breach. The breach was the result of an expansionary fiscal policy since 2016, in the period of strong economic growth. The Council issued a recommendation with a view to bringing an end to the situation of an excessive deficit by 2022 at the latest. The recommendation set a deadline of 15 September 2020 to take effective action. To date, the authorities have taken fiscal policy measures to contain the negative socio-economic effects of the COVID-19 outbreak but have not yet started to address the unfavourable structural trends in Romania’s public finances that preceded the COVID crisis. In particular, the 2020 budget amendment adopted in April has retained the allocation for the 40% permanent pension increase scheduled to enter into force in September 2020. 11