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12.2 12.5 12.9 13.2 1.8 - Other (residual) 5.2 5.2 5.9 5.5 5.8 5.4 5.5 0.2 Expenditure 35.0 36.1 36.6 38.0 36.4 36.0 35.9 0.9 of which: - Primary expenditure 33.8 34.8 35.4 36.7 35.1 34.8 34.8 1.0 of which: Compensation of employees 11.0 11.9 11.7 11.9 11.4 11.0 10.6 -0.4 Intermediate consumption 5.1 5.1 5.0 5.1 4.9 4.8 4.7 -0.4 Social payments 11.7 11.9 11.5 13.0 12.3 12.2 12.8 1.1 Subsidies 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.0 Gross fixed capital formation 2.6 2.9 3.5 3.5 3.3 3.4 3.3 0.7 Other (residual) 3.1 2.7 3.2 2.8 2.8 2.9 2.9 -0.2 - Interest expenditure 1.2 1.2 1.2 1.3 1.3 1.2 1.1 -0.1 General government balance -3.0 -3.5 -2.8 -4.7 -2.7 -2.4 -2.0 1.0 (GGB) Primary balance -1.8 -2.3 -1.6 -3.4 -1.4 -1.2 -0.9 0.9 One-off and other temporary -0.3 -0.1 -0.1 0.0 0.0 0.0 0.0 0.3 GGB excl. one-offs -2.7 -3.4 -2.7 -4.7 -2.7 -2.4 -2.0 0.7 Output gap1 0.9 0.6 0.1 0.2 0.7 0.7 0.9 1.4 Cyclically-adjusted balance1 -3.3 -3.7 -2.8 -4.8 -2.9 -2.6 -2.3 0.6 2 Structural balance -3.0 -3.6 -2.7 -4.8 -2.9 -2.6 -2.3 0.2 2 Structural primary balance -1.8 -2.4 -1.5 -3.5 -1.6 -1.4 -1.2 0.1 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 2019 spring forecasts (COM); Commission calculations. The programme plans a gradual improvement of the headline balance over 2019-2022. The planned fiscal consolidation is focused on the revenue side, in particular on increased revenues from social contributions. Expenditures are projected to increase over the programme horizon, driven by increased social spending and public investment. The programme does not specify the measures which would support the planned 2020-2022 consolidation targets. The deficit targets for 2019-2022 in the current programme are higher than the targets from the previous convergence programme (see Figure 1 below). 7  Figure 1: Government balance projections in successive programmes (% of GDP) Figure 2: Cumulative deviations of the preceding five years from the upper limit for net growth of government expenditure and from structural effort requirements (in % of GDP) Romania has been under the preventive arm of the SGP since 2013. Romania was at its MTO in 2014 and in 2015. Since then Romania has deviated from the MTO and from the required adjustment towards it on the basis of the structural balance and the expenditure benchmark every year. The expenditure benchmark has been more stringent than the structural balance for Romania, mostly because of the lower underlying GDP deflators and lower underlying 8 medium-term potential growth rates. This has led to increasing divergence between the cumulative deviation from the requirements for the two pillars since 2016. 3.3. MEASURES UNDERPINNING THE PROGRAMME The main measures in 2018 and 2019 as reported in the programme are listed in the table below. The programme does not specify measures for 2020 and beyond. Compared to the 2018 convergence programme, the main new measures are the significant increases in the pension point indexation in 2019 and 2020 and a set of tax changes (including new sectoral taxes on energy, telecommunication and banking and tax exemptions to the construction sector) contained in an emergency ordinance enacted in December 2018 (GEO 114/2018), slightly amended in March 2019 through a new emergency ordinance. These ordinances are also new as compared to the Commission 2018 autumn forecast. The programme does not provide an assessment of the quantitative effects of all the listed measures on the general government balance. This is inconsistent with the guidelines laid down in the Code of Conduct. 9  Main budgetary measures Revenue Expenditure 2018  Cut of flat Personal Income Tax rate from  Increases to public wages from Unified 16% to 10% (-1.4% of GDP); Wage Law (the overall spending on compensation of employees increased by  Shift of social security contributions from 1.1 % of GDP); 22.75% for employers and 16.5% for employees to 2.25% and 35%, respectively  Changes to social benefits in cash, (+1.2% of GDP); including increase of pension point (main parameter used for pension indexation) by  Lowering of the social contributions 10% from 1 July 2018; (impact per measure transferred to the second pension pillar from not specified in the programme, the overall 5.1% to 3.75% of gross wages (+0.2% of spending on social benefits in cash GDP); remained stable as a share of GDP).  Other changes to taxation, including an increase of excise on tobacco, changes to taxation of microenterprises, introduction of a split-payment system in VAT and other measures to increase tax collection (impact not specified in the programme). 2019  Increase of gambling taxes and of excise  Changes to public wages, including: (i) duties on tobacco (+0.1% of GDP); application of increases mandated by the Unified Wage Law; (ii) freeze of bonuses  Sectoral taxes: turnover tax on and other extra wage elements for various telecommunication and energy (+0.1% of categories; (iii) granting of food allowance GDP); to all civil servants; (iv) maintenance of pre-existing measures, e.g. no monetary  Construction sector: exemption from PIT compensation for overtime work for some and health contributions (-0.2% of GDP); categories; (impact per measure not specified in the programme, the overall  Maintaining of dividends from SOEs at spending on compensation of employees set 90% of net profit (measure already in force to increase by 0.7 % of GDP); since 2017, therefore no incremental impact);  Changes to social benefits in cash: (i) increase of pension point (main parameter  Dividends from SoEs: payment as dividends used for pension indexation) by 15% from of 35% of unspent investment allocations 1 September 2019; (ii) increase of (+0.1% of GDP according to the minimum pension by 10% from 1 programme, however, under ESA, these Septenber 2019; (iii) increase of child sums, as superdividends, do not count as allowance (impact per measure not government revenue); specified in the programme, the overall spending on social benefits in cash set to  Sale of 5G licences (0.2% of GDP reported decrease by 0.1 % of GDP). in the programme, however, the impact of this measure shoud be smoothed out over 10  several years). Note: The table refers to the main measures included in the 2019 Convergence Programme that have an incremental budgetary impact over the programme period. The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. 3.4. DEBT DEVELOPMENTS The programme projects the general government debt to increase slightly in 2019, from 35.0% of GDP in 2018 to 35.4% of GDP in 2019 and 2020, driven by the primary deficit. It is projected to start to decrease slightly in 2021 and 2022 thanks to a planned improvement in the primary balance. The Commission 2019 spring forecast projects a higher debt-to-GDP ratio in 2019 and 2020 mainly due to its higher forecast of the primary deficit. Projections for general government debt in the programme are higher than in the 2018 programme (see Figure 2 below). Table 3: Debt developments Average 2019 2020 2021 2022 (% of GDP) 2018 2013-2017 COM CP COM CP CP CP Gross debt ratio1 37.4 35.0 36.0 35.4 38.4 35.4 35.2 34.8 Change in the ratio -0.4 -0.2 1.0 0.4 2.4 0.0 -0.2 -0.4 2 Contributions : 1. Primary balance 0.3 1.8 2.3 1.6 3.4 1.4 1.2 0.9 2. “Snow-ball” effect -1.0 -2.0 -1.5 -1.7 -1.0 -1.2 -1.1 -1.2 Of which: Interest expenditure 1.6 1.2 1.2 1.2 1.3 1.3 1.2 1.1 Growth effect -1.6 -1.3 -1.0 -1.8 -1.0 -1.9 -1.7 -1.6 Inflation effect -1.0 -1.9 -1.7 -1.1 -1.2 -0.6 -0.6 -0.6 3. Stock-flow 0.4 0.0 0.3 0.6 0.0 -0.2 -0.3 -0.1 adjustment Of which: Cash/accruals diff. 0.1 0.0 0.0 0.0 Acc. financial assets 0.0 0.0 0.0 0.0 Privatisation 0.0 0.0 0.0 0.0 Val. effect & residual -2.5 -2.7 -2.6 -2.4 Notes: 1 End of period. 2 The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth and inflation on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash and accrual accounting, accumulation of financial assets and valuation and other residual effects. Source : Commission 2019 spring forecast (COM); Convergence Programme (CP), Commission calculations. 11  Figure 3: Government debt projections in successive programmes (% of GDP) 3.5. RISK ASSESSMENT Downward risks to the achievement of the planned budgetary targets stem from the favourable macroeconomic projections underpinning the programme. Moreover, the fiscal consolidation from 2020 onwards is based on fiscal consolidation measures which are not specified in the programme. In 2019, the planned headline deficit of 2.8% of GDP is lower than the 3.5% of GDP projected by the Commission in the spring 2019 forecast. Both total revenues and total expenditures as a share of GDP are higher than in the Commission forecast but the difference is driven by the revenue side. The underlying macroeconomic projection of 5.5% of real GDP growth is more optimistic than 3.3% forecasted by the Commission, with a positive impact on tax revenues. The projection of revenues from indirect taxes and social contributions is higher than in the Commission forecast (see Table 2). On the expenditure side, current expenditures (in particular social benefits) are lower while gross fixed capital formation is higher than projected by the Commission. In 2020, the headline deficit programme target of 2.7% of GDP is markedly lower than the 4.7% of GDP projected by the Commission in the 2019 spring forecast. The difference is partially driven by the 2019 base effect (the difference between the 2019 deficit projection of 2.8% of GDP in the programme and 3.5% in the Commission forecast, which carries forward to 2020). The difference is also influenced by the less favourable macroeconomic projection in the Commission 2019 spring forecast. Moreover, the Commission forecast is based on a 12 no-policy change scenario while the programme relies on unspecified measures, in particular on an unexplained drop in expenditure on compensation of employees. Finally, the social benefit expenditures in the programme do not seem to fully reflect the costs of the 40% increase of the pension point from 1 September 2020. 4. COMPLIANCE WITH THE PROVISIONS OF THE STABILITY AND GROWTH PACT Box 1. Council Recommendations addressed to Romania On 22 June 2018, the Council decided in accordance with Article 121(4) TFEU that a significant observed deviation from the adjustment path toward the MTO occurred in Romania in 2017. In view of the established significant deviation, the Council on 22 June 2018 issued a recommendation for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure3 does not exceed 3.3% in 2018 and 5.1% in 2019, corresponding to an annual structural adjustment of 0.8% of GDP in each year4. On 4 December 2018, the Council found that Romania had not taken effective action in response to the 22 June 2018 recommendation and issued a revised recommendation. In the new recommendation, the Council asked Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 4.5% in 2019, corresponding to an annual structural adjustment of 1.0% of GDP5. It recommended Romania to use any windfall gains for reduction of its deficit, while budgetary consolidation measures should ensure a lasting improvement in the general government structural balance in a growth-friendly manner. The Council established a deadline of 15 April 2019 for Romania to report on the action taken in response to the recommendation. 4.1. Compliance with the deficit criterion The headline general government deficit amounted to 3.0% of GDP in 2018, just at the deficit reference value of the Treaty. The programme projects the headline deficit to remain below the 3% of GDP reference value over the programme horizon. However, the Commission 2019 spring forecast projects Romania's headline deficit to exceed the 3% of GDP in 2019 and continue to increase in 2020. The differences in the headline deficit projections between the programme and the Commission are mostly driven by a favourable macroeconomic projection in the programme, as well as the programme’s higher revenue projection and lower projection of current spending, in particular on social benefits. For more details, see section 3.5 above. 3 Net primary government expenditure is comprised of total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a four-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out. 4 Council Recommendation of 22 June 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania (OJ C 223, 27.6.2018, p. 3). 5 Council Recommendation of 4 December 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania (OJ C 460, 21.12.2018, p. 1). 13 4.2. Compliance with the MTO or the required adjustment path towards the MTO According to 2018 outturn data, in 2018, the growth of net primary government expenditure was well above the expenditure b