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rgence programme (see Figure 1 below). 6  Figure 1: Government balance projections in successive programmes (% of GDP) 3.3. MEASURES UNDERPINNING THE PROGRAMME The main measures as reported in the Programme are listed in the table below. In 2018, the unified wage law, enacted in summer 2017, increased gross public wages by 25% in January 2018 and contains additional increases in health and education sectors, leading to a significant increase of spending on compensation of public employees (by 0.6% of GDP according to the programme projections). The fiscal cost of these increases to gross wages is set to be partially compensated by a shift of social security contributions from 22.75% for employers and 16.5% for employees to 2.25% and 35% respectively. Moreover, the government partially reversed the past systemic pension reform by lowering the proportion of the social contributions transferred to the second pension pillar (which is classified outside the general government) from 5.1% to 3.75% of gross wages from 2018. On the other hand, the flat personal income tax (PIT) rate was cut from 16% to 10%. The Programme does not specify measures for 2019 and beyond. The main new measure as compared to the Commission 2017 autumn forecast is the lowering of the proportion of social contributions transferred to the second pension pillar. The Commission spring 2018 forecast, following a general practice of treating with caution such type of measures, does not take into account the fiscal impact of the VAT split payment and other tax collection and tax compliance measures listed in the report. 7  Main budgetary measures Revenue Expenditure 2017  Cut of standard VAT rate from 20% to 19%  Unified Wage Law and other increases (-0.3% of GDP) of public wages (impact not quantified in the programme)  Cut in the excise on energy products and increase in the excise on cigarettes (-0.3% of  Increases to social benefits, including an GDP) increase of old-age pensions as from 1 July 2017 beyond the standard  Elimination of the special construction tax (- indexation mechanism (+0.1% of GDP) 0.1% of GDP)  Exemption of pensions from social and health insurance contributions and exemption of pensions below RON 2,000 from personal income tax (-0.2% of GDP)  Removal of the cap of 5 gross average salaries for the calculation of the health insurance contribution (0.1% of GDP)  Cut of the turnover tax on microenterprises and the property transactions tax (-0.1% of GP)  Increase of dividends from SOEs to 90% of net profit (+0.1% of GDP)  Dividends from SOEs on profits retained from previous years (+0.3% of GDP; however, under ESA-2010 these are classified as a super-dividend and have no impact on the general government balance) 2018  Cut of flat Personal Income Tax rate from  Unified Wage Law and other increases 16% to 10% (-1.4% of GDP) of public wages (impact not quantified in the programme)  Shift of social security contributions from 22.75% for employers and 16.5% for  Increases to social benefits, including an employees to 2.25% and 35%, respectively increase of old-age pensions as from 1 (+1.2% of GDP) July 2017 beyond the standard indexation mechanism (impact not  Lowering of the social contributions quantified in the programme) transferred to the second pension pillar from 5.1% to 3.75% of gross wages (+0.2% of GDP).  Increase of the excise on energy products 8  from September 2017 and increase of excise on cigarettes (+0.3% of GDP)  Maintaining of dividends from SOEs at 90% of net profit (+0.1% of GDP)  Increase of the taxation base for companies for unemployed persons with disabilities from September 2017 (+0.1% of GDP)  Starting the procedure for selling 5G licences (+0.1% of GDP; however under ESA-2010 the impact of this measure shoud be smoothed out over several years)  Introduction of a split-payment system in VAT, mandatory for companies in insolvency or with VAT arrears, optional to the others (+0.3% of GDP)  Other measures to decrease tax evasion and increase tax collection (+0.2% of GDP) Note: 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 General government debt is planned to increase in the programme from 35.0% of GDP in 2017 to 35.8% of GDP in 2019 driven by the negative primary balance due to the enacted fiscal loosening measures. It is projected to start to decrease from 2020 onwards thanks to a planned improvement of the primary balance. The Commission 2018 spring forecast projects a higher debt-to-GDP ratio in 2019 due to the lower projection for the primary balance and real GDP growth. Projections for general government debt in the programme are lower than in the 2017 programme (see Figure 2 below). 9  Table 3: Debt developments 2016 2017 2018 2018 2019 2019 2020 2021 Average 2018 2019 2020 2021 (% of GDP) 2017 2012-2016 COM CP COM CP CP CP 1 Gross debt ratio 37.7 35.0 35.3 35.4 36.4 35.8 35.4 34.5 Change in the ratio 0.7 -2.3 0.2 0.4 1.2 0.4 -0.4 -0.9 Contributions 2 : 1. Primary balance 0.5 1.6 2.0 1.5 2.4 1.0 0.5 0.1 2. “Snow-ball” effect -0.5 -2.7 -1.7 -1.1 -1.1 -1.1 -1.2 -0.9 Of which: Interest expenditure 1.7 1.3 1.4 1.5 1.4 1.4 1.3 1.4 Growth effect -1.2 -2.3 -1.4 -2.0 -1.3 -1.9 -1.9 -1.7 Inflation effect -1.0 -1.8 -1.6 -0.7 -1.3 -0.6 -0.6 -0.7 3. Stock-flow 0.7 -1.1 0.0 0.0 0.0 0.5 0.4 -0.1 adjustment Of which: Cash/accruals diff. -0.1 -0.1 -0.1 -0.1 Acc. financial assets 0.0 0.0 0.0 0.0 Privatisation 0.0 0.0 0.0 0.0 Val. effect & residual -2.4 -1.8 -2.2 -2.3 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 2018 spring forecast (COM); Convergence Programme (CP), Commission calculations. 10  Figure 2: 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 2019 onwards is based on fiscal consolidation measures which are not specified in the Programme. In 2018, the planned headline deficit of 2.95% of GDP is lower than the 3.4% of GDP projected by the Commision in the spring 2018 forecast. The difference is driven by the revenue side. Total revenues as a share of GDP are higher than in the Commission forecast (a difference of 0.4 percentage points), while the expenditure ratio is the same as projected by the Commission. The underlying macroeconomic projection of 6.1% of real GDP growth is more optimistic than the 4.5% forecasted by the Commission, with a positive impact on tax revenues. The projection of revenues from all the main categories of taxes and social contributions is higher than in the Commission forecast (see Table 2). On the expenditure side, current expenditures (in particular social benefits and intermediate consumption) are somewhat lower while capital expenditures are somewhat higher than projected by the Commission. In 2019, the headline deficit target of 2.38% of GDP in the Programme is markedly lower than the 3.8% of GDP projected by the Commission in the 2018 spring forecast. The difference is partially driven by the 2018 base effect (the difference between 2018 deficit projection of 2.95% of GDP in the Programme compared to 3.4% in the Commission 2018 spring forecast, which carries forward to 2018). The difference is also influenced by the less 11 favourable macroeconomic projection in the Commission 2018 spring forecast and by the fact that the Commission forecast is based on a no-policy change scenario while the Programme relies on unspecified measures. 4. COMPLIANCE WITH THE PROVISIONS OF THE STABILITY AND GROWTH PACT Box 1. Council Recommendations addressed to Romania On 16 June 2017, the Council decided in accordance with Article 121(4) of the Treaty on the Functioning of the European Union that a significant observed deviation from the MTO occurred in Romania in 2016. In view of the established significant deviation, the Council on 16 June 2017 issued a recommendation for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure2 does not exceed 3.3% in 2017, corresponding to an annual structural adjustment of 0.5% of GDP3. On 5 December 2017 the Council found that Romania had not taken effective action in response to the 16 June 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 3.3% in 2018, corresponding to an annual structural adjustment of 0.8% of GDP. 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 2018 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 2.9% of GDP in 2017, just below 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, based on the Commission 2018 spring forecast, Romania's headline deficit is projected to exceed the 3% of GDP in 2018 and in 2019. The differences in the headline deficit projections are driven by a favourable macroeconomic projection and a higher projection of revenues from taxes and social contributions in the Programme. For more details, see section 3.5 above. 4.2. Compliance with the MTO or the required adjustment path towards the MTO According to the 2017 outturn data, the growth of net primary government expenditure was well above the expenditure benchmark, pointing to a significant deviation from the requirement by a large margin (deviation of 3.3% of GDP). The structural balance deteriorated to -3.3% of GDP from a position of -2.1% of GDP in 2016, also pointing to a 2 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. 3 Council Recommendation of 16 June 2017 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania (OJ C 216, 6.7.2017, p. 1). 12 significant deviation from the recommended structural adjustment by a large margin (deviation of 1.7% of GDP). The size of deviation indicated by the structural balance is positively impacted by a higher point estimate for potential GDP growth compared to the medium-term average underlying the expenditure benchmark while the drop in public investment is smoothed out in the expenditure benchmark. 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 5 December 2017, in which the Council found that Romania had not taken effective action in response to the Council recommendation of 16 June 2017 and issued a revised recommendation. The conclusion of a signficant deviation is confirmed when looking at 2016 and 2017 together. Based on this, on 23 May 2018, 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 objective4. It includes fiscal requirements for 2018 and 2019. 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 2018, according to the information provided in the Programme, the growth of net primary government expenditure is expected to deviate by 0.7% of GDP from the required adjustment, while the recalculated structural balance is set to worsen by 0.4% of GDP, leading to a deviation by 1.2% from the required adjustment. Based on the Commission spring 2018 forecast, the growth of net primary government expenditure amounts to 10.4%, well above the expenditure benchmark of 3.3%. The structural balance is set to deteriorate by 0.4 % of GDP, reaching a deficit of 3.8% in 2018. This is the opposite of the recommended structural improvement of 0.8% of GDP relative to 2017. Therefore, both pillars point to a deviation from the recommended adjustment by a wide margin. The expenditure benchmark points to a deviation of 2.0% of GDP. The structural balance confirms this reading, but at a relatively smaller margin (deviation of 1.2% of GDP). The structural balance is positively impacted by a higher point estimate for potential GDP growth compared to the medium-term average underlying the expenditure benchmark. Taking this into account, the overall assessment confirms the risk of a deviation from the required adjustment by a wide margin in 2018. In 2019, according to the information provided in the Programme, the growth of net primary government expenditure is expected to deviate by 0.2% of GDP from the required adjustment. At the same time, according to the programme, the recalculated structural balance is set to improve by 0.5% of GDP, leading to a deviation by 0.3% from the required adjustment. Based on the Commission spring 2018 forecast, both indicators point to a risk of a deviation from the required adjusment of a similar magnitude, of slightly above 1% of GDP. There are no major differences in the reading between both indicators. The overall assessment thus confirms the risk of a deviation from the requirements of the Council recommendation by a wide margin in 2019. 4 For more information, see the Comission 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 5 December 2017 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. 13  Table 4: Compliance with the requirements under the preventive arm (% of GDP) 2017 2018 2019 Initial position1 Medium-term objective (MTO) -1.0 -1.0 -1.0 2