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ealth care 0.3 0.2 Long-term care 0.0 0.0 Other 0.0 0.0 Long-term HIGH risk [2] HIGH risk DSA S2 indicator [4] 6.3 HIGH risk 4.1 MEDIUM risk of which Initial Budgetary Position 4.1 1.8 Cost of Ageing 2.1 2.3 of which Pensions 1.0 1.1 Health care 0.7 0.6 Long-term care 0.2 0.2 Other 0.3 0.3 Source: Commission services; 2019 convergence programme. Note: the 'Commission' scenario depicts the sustainability gap under the assumption that the structural primary balance position evolves according to the Commissions' spring 2019 forecast until 2020. The 'stability/convergence programme' scenario depicts the sustainability gap under the assumption that the budgetary plans in the programme are fully implemented over the period covered by the programme. Age-related expenditure as given in the 2018 Ageing Report. [1] The S0 indicator of short term fiscal challenges informs the early detection of fiscal stress associated to fiscal risks within a one-year horizon. To estimate these risks S0 uses a set of fiscal, financial and competitiveness indicators selected and weighted according to their signalling power. S0 is therefore a composite indicator whose methodology is fundamentally different from the S1 and S2 indicators, which quantify fiscal adjustment efforts. The critical threshold for the overall S0 indicator is 0.46. For the fiscal and the financial-competitiveness sub-indexes, thresholds are respectively at 0.36 and 0.49*. [2] Debt Sustainability Analysis (DSA) is performed around the no fiscal policy change scenario in a manner that tests the response of this scenario to different shocks presented as sensitivity tests and stochastic projections*. [3] The S1 indicator is a medium-term sustainability gap; it measures the upfront fiscal adjustment effort required to bring the debt-to-GDP ratio to 60 % by 2033. This adjustment effort corresponds to a cumulated improvement in the structural primary balance over the 5 years following the forecast horizon (i.e. from 2021 for Commission scenario and from last available year for the SCP scenario); it must be then sustained, including financing for any additional expenditure until the target date, arising from an ageing population. The critical thresholds for S1 are 0 and 2.5, between which S1 indicates medium risk. If S1 is below 0 or above 2.5, it indicates low or high risk, respectively*. [4] The S2 indicator is a long-term sustainability gap; it shows the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical thresholds for S2 are 2 and 6, between which S2 indicates medium risk. If S2 is below 2 or above 6, it indicates low or high risk, respectively*. * For more information see Fiscal Sustainability Report 2018. 18 6. FISCAL FRAMEWORK Based on the information provided in the programme, the past, planned and forecast fiscal performance in Romania appears to significantly depart from the requirements of the national numerical fiscal rules set in the Fiscal Responsibility Law (FRL)11. In fact, departures from the requirements of the FRL have been systematically observed in every year since 2016. The main national fiscal rule is the structural balance rule that requires compliance with or convergence to – according to an adjustment path agreed with the institutions of the EU – the medium-term budgetary objective of a government balance not exceeding -1% of GDP in structural terms. In addition, the national framework contains several auxiliary rules concerning expenditure and revenue items, including a general government expenditure rule that requires compliance with the expenditure benchmark as defined by the SGP. Finally, the national debt rule sets a 60% of GDP threshold on public debt, which is currently non- constraining given the current debt levels. The national structural balance rule is accompanied by a correction mechanism, according to which, when identifying a deviation from the MTO or from the timetable of adjustment towards it, the government should prepare a set of measures meant to correct this deviation, unless the deviation occurs in exceptional circumstances as defined in the Stability and Growth Pact and after consultation of the Fiscal Council. In 2018, the structural deficit slightly increased, breaching the structural balance rule from the national framework. Also, the growth of total expenditure was well above the expenditure benchmark (see chapter 4.2 above). Additionally, the 2018 budget amendment from September broke, among others, rules prohibiting: (i) increases to the nominal headline and primary deficit ceilings during the fiscal year; and (ii) increases in personnel expenditure and total government expenditure excluding EU funds during the fiscal year. The second 2018 budget amendment, published in November, also broke several national fiscal rules. In spite of the significant deviation from the structural balance rule in 2018, the correction mechanism set in the FRL has not been triggered, even though no exceptional circumstances were identified. This was legally possible because, as in previous years, the 2018 budget contained derogations from the national fiscal rules it was not complying with, as well as from the correction mechanism itself. The 2019 budget contains similar derogations. For 2019 the authorities target an increase of structural deficit, which is contrary to the adjustment mandated by the structural deficit rule. The expenditure growth will not comply with the recommended expenditure benchmark either. Moreover, as in previous years, the authorities did not send an update of the medium-term fiscal strategy to Parliament by the statutory August deadline, thereby undermining its guiding role. Similarly to previous years, the authorities derogated from the requirement to sign a statement that the 2018 and 2019 budgets and the accompanying fiscal strategies respect the fiscal rules and principles of fiscal responsibility. 11 Fiscal Responsibility Law no. 69/2010, amended by Law 377/2013, as republished in 14 May 2015. It entered into force on 23 April 2010. 19 According to the Romania’s Fiscal Council, the 2018 budget "is in flagrant contradiction with the fiscal rules set up by the FRL"12. Similarly, in the 2019 budget “the fiscal rules set by the FRL remain inoperable”. 7. CONCLUSIONS In 2018, Romania continued to deviate further away from the MTO. The growth of net primary government expenditure was well above the expenditure benchmark, pointing to a significant deviation (deviation of 2.4% of GDP). The structural balance remained broadly stable at around -3.0% of GDP, also pointing to a significant deviation from the recommended structural adjustment (deviation of 0.8% of GDP). Following an overall assessment, this points to a significant deviation from the recommended adjustment path towards the MTO. This assessment is 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. Both in 2019 and in 2020, there is a risk of deviation from the recommended structural adjustment, both based on the programme and based on the Commission 2019 spring forecast. Moreover, although the programme projects the headline deficit to remain below the 3% of GDP reference value, according to the Commission 2019 spring forecast, based on a no- policy change assumption, Romania's headline deficit is projected to exceed the reference value in 2019 and in 2020. 12 Fiscal Council’s Addendum to Fiscal Council’s preliminary opinion on the State Budget Law, Social Insurance Budget Law for 2018 and Fiscal Strategy for 2018-2020 and Fiscal Council’s Opinion on the State Budget Law, Social Insurance Budget Law for 2019 and Fiscal Strategy for 2019-2021, both available at http://www.fiscalcouncil.ro/ 20 8. ANNEXES Table I. Macroeconomic indicators 2001- 2006- 2011- 2016 2017 2018 2019 2020 2005 2010 2015 Core indicators GDP growth rate 5.7 3.0 3.0 4.8 7.0 4.1 3.3 3.1 1 Output gap 1.9 3.8 -3.9 -1.9 0.8 0.9 0.6 0.2 HICP (annual % change) 18.6 6.2 2.7 -1.1 1.1 4.1 3.6 3.0 Domestic demand (annual % change) 2 8.1 4.6 2.3 5.1 7.6 5.7 4.4 3.7 3 Unemployment rate (% of labour force) 7.7 6.5 6.9 5.9 4.9 4.2 4.1 4.0 Gross fixed capital formation (% of GDP) 22.2 30.3 25.7 22.9 22.4 21.2 21.0 21.1 Gross national saving (% of GDP) 16.8 20.1 23.7 21.3 20.0 19.4 18.8 18.7 General Government (% of GDP) Net lending (+) or net borrowing (-) -1.7 -5.2 -2.6 -2.7 -2.7 -3.0 -3.5 -4.7 Gross debt 21.5 17.7 37.2 37.3 35.2 35.0 36.0 38.4 Net financial assets 23.9 6.9 -19.2 -21.8 -21.5 n.a n.a n.a Total revenue 32.8 32.8 34.1 31.8 30.9 32.0 32.5 33.3 Total expenditure 34.6 38.0 36.7 34.5 33.6 35.0 36.1 38.0 of which: Interest 2.0 1.0 1.7 1.5 1.3 1.2 1.2 1.3 Corporations (% of GDP) Net lending (+) or net borrowing (-) -5.7 4.5 11.3 12.2 11.5 8.9 7.5 7.3 Net financial assets; non-financial corporations -84.1 -97.5 -87.1 -82.4 -79.4 n.a n.a n.a Net financial assets; financial corporations -0.4 -0.1 4.1 2.6 1.5 n.a n.a n.a Gross capital formation 18.4 20.2 15.7 15.2 14.5 14.3 13.9 13.2 Gross operating surplus 23.7 31.3 31.3 31.1 31.1 28.6 26.7 25.7 Households and NPISH (% of GDP) Net lending (+) or net borrowing (-) 2.2 -7.7 -9.2 -8.8 -10.4 -8.8 -7.2 -5.8 Net financial assets 35.2 39.2 42.0 50.6 49.0 n.a n.a n.a Gross wages and salaries 32.1 29.8 27.7 30.2 31.1 38.6 40.9 42.1 Net property income 2.1 0.6 0.4 0.4 0.4 0.1 0.1 0.2 Current transfers received 15.5 14.7 14.0 13.9 13.6 13.4 13.5 14.5 Gross saving -4.3 -7.0 -5.7 -5.2 -5.0 -3.5 -1.9 -0.2 Rest of the world (% of GDP) Net lending (+) or net borrowing (-) -5.5 -8.4 -0.5 0.5 -1.8 -3.1 -3.4 -3.4 Net financial assets 27.7 53.4 62.7 53.2 52.3 n.a n.a n.a Net exports of goods and services -8.1 -10.4 -2.6 -0.9 -2.1 -3.2 -4.0 -4.4 Net primary income from the rest of the world -2.3 -1.7 -1.4 -2.4 -2.0 -2.1 -2.0 -1.8 Net capital transactions 0.5 0.7 1.9 2.5 1.5 1.7 1.8 1.9 Tradable sector 59.3 53.9 50.3 50.9 51.7 51.4 n.a n.a Non tradable sector 30.4 35.7 37.7 38.8 38.8 39.0 n.a n.a of which: Building and construction sector 6.3 9.5 6.6 6.0 5.6 5.4 n.a n.a Real effective exchange rate (index, 2000=100) 75.2 98.0 88.2 90.6 96.3 107.1 112.7 116.7 Terms of trade goods and services (index, 2000=100) 72.9 95.7 102.6 105.7 104.0 105.1 105.8 106.2 Market performance of exports (index, 2000=100) 62.0 86.6 121.5 146.7 152.8 156.8 159.2 159.2 Notes: 1 The output gap constitutes the gap between the actual and potential gross domestic product at 2015 market prices. 2 The indicator on domestic demand includes stocks. 3 Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15- 74. Source : AMECO data, Commission 2019 spring forecast 21 Mandatory variables not included in the Convergence Programme The programme does not include the following mandatory variables: 2018 level of both GDP deflator and HICP. Not included mandatory variables do not impede the Commission’s ability to assess the Convergence Programme on the basis of the Programme’s assumptions. 22