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enchmark, pointing to a significant deviation (deviation of 2.4% of GDP). The structural balance remained broadly stable at around 3.0% of potential GDP, also pointing to a significant deviation from the recommended structural adjustment (deviation of 0.8% of GDP). The size of the deviation indicated by the structural balance is smaller thanks to a revenue windfall, a higher GDP deflator and a higher underlying estimate of potential GDP growth as compared to the medium-term average underlying the expenditure benchmark. On the other hand, the size of the deviation indicated by the structural balance is increased by low public investment expenditures, which are smoothed in the expenditure benchmark. Irrespective of these differences, both indicators confirm a significant deviation from the requirements of the preventive arm of the SGP in 2018. Taking into account these factors, the overall assessment confirms a significant deviation from the Council recommendation. This assessment is also in line with the earlier conclusion of 4 December 2018, in which the Council found that Romania had not taken effective action in response to the Council recommendation of 22 June 2018 and issued a revised recommendation. The conclusion of a signficant deviation is confirmed when looking at 2017 and 2018 together. Based on this assessment, on 5 June 2019, the Commission issued a warning to Romania and recommendation for a Council recommendation in accordance with Article 121(4) TFEU and Article 10(2) of Regulation (EC) No 1466/97, with a view to correcting the significant observed deviation from the adjustment path towards the medium-term budgetary objective6. It recommends 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 and 5.1% in 2020, corresponding to an annual structural adjustment of 1.0 % of GDP in 2019 and 0.75% in 2020. The delivery of effective action under the SDP requires compliance with the required adjustment, based on an economic reading of the two pillars. However, there is no notion of broad compliance with recommendations under an SDP. In 2019, according to the information provided in the programme, the growth of net primary government expenditure is expected to deviate by 2.0% of GDP from the required adjustment, while the recalculated structural balance is set to deteriorate by 0.2% of GDP, leading to a deviation by 1.2% from the required adjustment. Based on the Commission 2019 spring forecast, the growth of net primary government expenditure is expected to deviate by 2.1% of GDP from the required adjustment, while the structural balance is set to deteriorate by 0.7 % of GDP, leading to a deviation of 1.7% from the required adjustment. The size of the deviation indicated by the structural balance is smaller thanks to a revenue windfall and a higher GDP deflator. Taking this into account, the overall assessment confirms a deviation from the recommended adjustment in 2019. In 2020, according to the information provided in the programme, the growth of net primary government expenditure is expected to deviate by 0.8% of GDP from the required adjustment. At the same time, according to the programme, the recalculated structural balance is set to deteriorate by 0.2% of GDP, leading to a deviation by 0.9% from the required adjustment. 6 For more information, see the Commission Staff Working Document accompanying the Recommendation for a Council Decision establishing that no effective action has been taken by Romania in response to the Council Recommendation of 4 December 2018 and the Recommendation for a Council Recommendation with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania. 14 Based on the Commission spring 2019 forecast, both indicators point to a risk of a deviation from the required adjustment of a similar magnitude, of 1.8% in the case of expenditure benchmark and 1.9% of GDP in the case of structural balance. The overall assessment thus confirms the risk of a deviation from the requirements of the Council recommendation in 2020. Table 4: Compliance with the requirements under the preventive arm (% of GDP) 2018 2019 2020 1 Background budgetary indicators Medium-term objective (MTO) -1.0 -1.0 -1.0 Structural balance2 (COM) -3.0 -3.6 -4.8 Setting the required adjustment to the MTO Structural balance based on freezing (COM) -3.3 -3.6 - Position vis-a -vis the MTO 3 Not at MTO Not at MTO Not at MTO 4 Required adjustment 0.8 1.0 0.75 Required adjustment corrected5 0.8 1.0 0.75 6 Corresponding expenditure benchmark 3.3 4.5 5.1 Compliance with the required adjustment to the MTO COM CP COM CP COM Structural balance pillar Change in structural balance7 0.0 -0.2 -0.7 -0.2 -1.2 8 One-year deviation from the required adjustment -0.8 -1.2 -1.7 -0.9 -1.9 Two-year average deviation from the required adjustment 8 -1.3 -1.0 -1.2 -1.1 -1.8 Expenditure benchmark pillar 9 Net public expenditure annual growth corrected for one-offs 11.5 11.3 11.6 7.8 10.8 10 One-year deviation adjusted for one-offs -2.4 -2.0 -2.1 -0.8 -1.8 Two-year deviation adjusted for one-offs10 -2.9 -2.2 -2.3 -1.4 -2.0 Finding of the overall assessment Significant deviation Deviation Deviation Deviation Deviation Legend 'Compliance ' - the recommended structural adjustment or a higher adjustment is being observed. 'Some deviation ' - a deviation from the recommended structural adjustment is being observed, but it is below the threshold for a significant deviation. 'Significant deviation ' - a deviation which has reached or breached the threshold for a significant deviation (i.e. 0.5% of GDP over one year, 0.25% of GDP over two years on average). Notes 1 The most favourable level of the structural balance, measured as a percentage of GDP reached at the end of year t-1, between spring forecast (t-1) and the latest forecast, determines whether there is a need to adjust towards the MTO or not in year t. A margin of 0.25 percentage points (p.p.) is allowed in order to be evaluated as having reached the MTO. 2 Structural balance = cyclically-adjusted government balance excluding one-off measures. 3 Based on the relevant structural balance at year t-1. 4 Based on the position vis-à-vis the MTO, the cyclical position and the debt level (See European Commission: Vade mecum on the Stability and Growth Pact, page 38.). In case of a SDP, the requirement corresponds to the Council recommendation when available, otherwise it refers to the Commission recommendation to the Council. 5 Required adjustment corrected for the clauses, the possible margin to the MTO and the allowed deviation in case of overachievers. 6 Reference medium-term rate of potential GDP growth. The (standard) reference rate applies from year t+1, if the country has reached its MTO in year t. A corrected rate applies as long as the country is adjusting towards its MTO, including in year t. 7 Change in the structural balance compared to year t-1. Ex post assessment (for 2019-1) is carried out on the basis of Commission 2019 spring forecast. 8 The difference of the change in the structural balance and the corrected required adjustment. 9 Net public expenditure annual growth (in %) corrected for discretionary revenue measures, revenue measures mandated by law and one-offs (nominal) 10 Deviation of the growth rate of public expenditure net of discretionary revenue measures, revenue increases mandated by law and one-offs from the applicable reference rate in terms of the effect on the structural balance. The expenditure aggregate used for the expenditure benchmark is obtained following the commonly agreed methodology. A negative sign implies that expenditure growth exceeds the applicable reference rate. Source : Convergence Programme (CP); Commission 2019 spring forecast (COM); Commission calculations. 15 To conclude, based on the outturn data and the Commission 2019 spring forecast, the ex-post assessment suggests a significant deviation from the adjustment path towards the MTO in 2018. Following an overall assessment, there is a risk of deviation from the requirements in 2019 and 2020. This entails a risk of a significant deviation from the adjustment path towards the MTO in 2019 and in 2020. Overall, Romania is at risk of non-compliance with the requirements of the preventive arm of the Pact. 5. FISCAL SUSTAINABILITY Romania does not appear to face fiscal sustainability risks in the short run.7 Based on Commission 2019 spring forecasts and a no-fiscal policy change scenario beyond the forecast horizon, government debt, at 35.0% of GDP in 2018, is expected to gradually rise to 66.4% in 2029, thus breaching the 60% of GDP Treaty threshold. Sensitivity analysis, in particular to a positive shock to the interest rates or to a negative shock to primary balance, shows higher risks.8 Overall, debt sustainability analysis highlights high risks for the country in the medium term. The full implementation of the programme would nonetheless put debt on a markedly less increasing path by 2029. The medium-term fiscal sustainability risk indicator S1 (which measures the upfront fiscal adjustment effort required to bring the debt-to-GDP ratio to 60% by 2033) is at 2.2 percentage points of GDP, primarily related to the high initial budgetary position9. It therefore indicates medium sustainability risks over the medium term. The full implementation of the programme would put the sustainability risk indicator S1 at -1.3 percentage points of GDP, leading to low medium-term risk. Overall, risks to fiscal sustainability over the medium-term are, therefore, high. Fully implementing the fiscal plans in the programme would decrease those risks. The long-term fiscal sustainability risk indicator S2 (which shows the adjustment effort needed to stabilise the debt-to-GDP ratio over the infinite horison) is at 6.3 percentage points of GDP. In the long-term, Romania therefore appears to face high fiscal sustainability risks, related to the initial budgetary position and the projected ageing costs10. Full implementation 7 This conclusion is based on the short-term fiscal sustainability risk indicator S0. See the note to Table 5 for a definition of the indicator. 8 Sensitivity analysis includes several deterministic debt projections, as well as stochastic projections (see Fiscal Sustainability Report 2018 for more details). 9 The Commission projections, based on a methodology commonly agreed with the Member States, take the forecasted 2020 structural deficit as a starting point for 2021 and beyond (modified by the projected aging costs from the 2018 Aging Report). Therefore, the 40% increase of the pension point from 1 September 2020 is taken into account at 1/3 of its full annual impact in 2021 and beyond. 10 The projected costs of ageing that are used to compute the debt projections and the fiscal sustainability indicators S1 and S2 are based on the projections of the 2018 Ageing Report. These aging costs projections do not take into account the long-term fiscal impact of legislation adopted after the cut-off date of the Aging Report, such as the pension law passed by the parliament in December 2018. The law changed several parameters used to calculate pension benefits, which will likely lead to substantially higher long-term pension costs. In particular, the pension point value will rise as the indexation factor for existing pensions would no longer converge to prices but will, instead, remain permanently composed of wages and prices. Moreover, the contributory period used in the calculation of one’s pension is now shorter, leading to higher pension expenditure for new pensions. On the other hand, the abolishment of the correction index for new pensions (which used to partly link the first pension to wages) will mitigate the overall pension expenditure increase implied by the other parameters. 16 of the programme would put the S2 indicator at 4.1 percentage points of GDP, leading to medium long-term risk. The debt sustainability analysis discussed above points to high risks so that, overall, long-term fiscal sustainability risks are assessed as high for Romania. Implementing reforms to contain the projected age-related increase in spending could improve fiscal sustainability over the long term. A bill equalizing the retirement age for women and men at 65 has been pending before Parliament for several years. Moreover, as described in section 3 above, the authorities partially reversed the past systemic pension reform by lowering the proportion of social contributions transferred to the second pension pillar (which consists of privately managed pension funds classified outside the general government) and making participation in the second pension pillar optional for those with a contribution history of at least five years. This cut has a positive short-term effect on government revenues and thus on government balance. However, that fiscal gain is set to dissipate in the long term as the social contributions diverted from the second pillar are accompanied by an obligation to pay old-age pensions in the future. Moreover, workers in the construction sector were exempted from contributions to the second pension pillar. These changes will result in less diversified retirement income. Furthermore, since mid-2017 the authorities have been increasing the pension point beyond the standard indexation mechanism. 17  Table 5: Sustainability indicators Convergence Commission Scenario Time horizon Programme Scenario Short-term LOW risk [1] 0.3 S0 indicator Fiscal subindex 0.3 LOW risk Financial & competitiveness subindex 0.3 LOW risk Medium-term HIGH risk [2] HIGH risk DSA S1 indicator [3] 2.2 MEDIUM risk -1.3 LOW risk of which Initial Budgetary Position 3.9 0.9 Debt Requirement -1.6 -2.3 Cost of Ageing -0.1 0.0 of which Pensions -0.4 -0.3 H