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-3.8 -4.2 Structural balance (COM) -3.3 Structural balance based on freezing (COM) -3.3 -3.8 - Position vis-a -vis the MTO3 Not at MTO Not at MTO Not at MTO 2017 2018 2019 (% of GDP) COM CP COM CP COM Structural balance pillar 4 0.8 0.8 Required adjustment 0.5 5 0.8 0.8 Required adjustment corrected 0.5 6 Change in structural balance -1.2 -0.4 -0.4 0.5 -0.4 7 One-year deviation from the required adjustment -1.7 -1.2 -1.2 -0.3 -1.2 Two-year average deviation from the required -1.7 -1.5 -1.5 -0.8 -1.2 adjustment 7 Expenditure benchmark pillar Applicable reference rate8 1.0 3.3 5.1 9 One-year deviation adjusted for one-offs -3.3 -0.7 -2.0 -0.2 -1.1 Two-year deviation adjusted for one-offs9 -2.7 -2.0 -2.7 -0.5 -1.6 10 PER MEMORIAM: One-year deviation -3.0 -0.7 -2.1 -0.2 -1.0 10 PER MEMORIAM: Two-year average deviation -2.8 -1.9 -2.6 -0.5 -1.6 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.). 5 Required adjustment corrected for the clauses, the possible margin to the MTO and the allowed deviation in case of overachievers. 6 Change in the structural balance compared to year t-1. Ex post assessment (for 2017) is carried out on the basis of Commission 2018 spring forecast. 7 The difference of the change in the structural balance and the corrected required adjustment. 8 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. 9 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. 10 Deviation of the growth rate of public expenditure net of discretionary revenue measures and revenue increases mandated by law 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 2018 spring forecast (COM); Commission calculations. 14 To conclude, based on the outturn data and the Commission 2018 spring forecast, the ex-post assessment suggests a significant deviation from the adjustment path towards the MTO in 2017. Following an overall assessment, there is a risk of deviation from the requirements under the SDP in 2018 and 2019. This entails a risk of a significant deviation from the adjustment path towards the MTO in 2018 and in 2019. 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.5 Based on Commission 2018 spring forecasts and a no-fiscal policy change scenario beyond the forecast horizon, government debt, at 35.0% of GDP in 2017, is expected to gradually rise to 57.3% in 2028, thus remaining somewhat below the 60% of GDP Treaty threshold. Over this horizon, government debt is projected to peak in 2028. Sensitivity analysis shows higher risks.6 Overall, debt sustainability analysis highlights medium 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 2028. 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 2032) is at 0.9 percentage points of GDP, primarily related to the initial budgetary position. It indicates medium fiscal sustainability risks over the medium term. The full implementation of the Programme would put the sustainability risk indicator S1 at -1.9 percentage points of GDP, leading to low medium-term risk. Overall, risks to fiscal sustainability over the medium-term are, therefore, medium. 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 ensure that the debt-to-GDP ratio is not on an ever-increasing path) is at 5.5 percentage points of GDP. In the long-term, Romania therefore appears to face medium fiscal sustainability risks, primarily related to the initial budgetary position, and the projected ageing costs. Full implementation of the programme would put the S2 indicator at 3.6 percentage points of GDP, leading to the same category of long-term risk, despite a somewhat lower indicator level. 7 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). This cut is set to have a positive short-term effect on government revenues and thus on government 5 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. 6 Sensitivity analysis includes several deterministic debt projections, as well as stochastic projections (see Debt Sustainability Monitor 2017 for more details). 7 The projected costs of ageing used to compute the debt projections and the fiscal sustainability indicators S1 and S2 are based on the updated projections, endorsed by the EPC on 30 January 2018, and to be published in the forthcoming Ageing Report 2018. 15 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. This reversal will result in less diversified retirement income. Furthermore, since mid-2017 the authorities have been increasing the pension point beyond the standard indexation mechanism. The governing programme foresees additional ad-hoc increases until 2020, which, if enacted, would generate higher pension expenditure8. 8 Several pension point increases foreseen in the governing programme as social policy targets and not enacted by the cut-off date of the Ageing Report 2018 are not covered by the recent pension projections - see Country Fiche Romania p 5-7, European Commission (DG ECFIN) and Economic Policy Committee (Ageing Working Group) (2018), Country Fiche to the "The 2018 Ageing Report: economic and budgetary projections for the EU Member States (2016-2070)including Country Fiches", forthcoming 16  Table 6: Sustainability indicators Stability / Convergence Commission Scenario Time horizon Programme Scenario Short Term LOW risk [1] 0.2 S0 indicator Fiscal subindex 0.2 LOW risk Financial & competitiveness subindex 0.2 LOW risk Medium Term MEDIUM risk [2] MEDIUM risk DSA S1 indicator [3] 0.9 MEDIUM risk -1.9 LOW risk of which Initial Budgetary Position 2.8 0.5 Debt Requirement -1.8 -2.3 Cost of Ageing -0.1 -0.1 of which Pensions -0.4 -0.4 Health-care 0.3 0.2 Long-term care 0.0 0.0 Other 0.0 0.0 Long Term MEDIUM risk MEDIUM risk [4] 5.5 3.6 S2 indicator of which Initial Budgetary Position 3.4 1.4 Cost of Ageing 2.1 2.2 of which Pensions 0.9 1.0 Health-care 0.7 0.7 Long-term care 0.2 0.2 Other 0.3 0.3 Source: Commission services; 2018 stability/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 2018 forecast covering until 2019 included. 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 2032. This adjustment effort corresponds to a cumulated improvement in the structural primary balance over the 5 years following the forecast horizon (i.e. from 2020 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 2015 and Debt Sustainability Monitor 2017. 17 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) 9 The main national fiscal rule is the structural deficit rule that requires compliance with or convergence – according to an adjustment path agreed with the institutions of the EU - to the medium-term budgetary objective of a structural deficit not exceeding 1% of GDP. 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 debt rule sets a 60% of GDP threshold on public debt. The national structural deficit rule is acompanied 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 2017, the structural balance increased, breaching the structural deficit rule from the national framework. Also, the growth of total expenditure was well above the expenditure benchmark (see chapter 4.2 above). Additionally, the two 2017 budget amendments (adopted in September and in November) broke, among others, rules prohibiting: (i) increases of the headline and primary deficit ceilings during the fiscal year, (ii) increases in personnel expenditure and total government expenditure, excluding EU funds during the fiscal year and (iii) transfers of unspent investment allocations to current expenditures. For 2018, the Programme foresees that the structural balance will deteriorate further, thus continuing to breach the structural deficit rule, and that the expenditure gr