Download

EUROPEAN COMMISSION DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS Brussels, 23 May 2017 Assessment of the 2017 convergence programme for Romania (Note prepared by DG ECFIN staff) 1  CONTENTS 1. INTRODUCTION ....................................................................................................... 3 2. MACROECONOMIC DEVELOPMENTS ................................................................ 3 3. RECENT AND PLANNED BUDGETARY DEVELOPMENTS.............................. 4 3.1. DEFICIT DEVELOPMENTS IN 2016 AND 2017 .................................................... 4 3.2. MEDIUM-TERM STRATEGY AND TARGETS ..................................................... 5 3.3. MEASURES UNDERPINNING THE PROGRAMME ............................................. 7 3.4. DEBT DEVELOPMENTS .......................................................................................... 9 3.5. RISK ASSESSMENT ............................................................................................... 10 4. COMPLIANCE WITH THE PROVISIONS OF THE STABILITY AND GROWTH PACT ...................................................................................................... 11 4.1. Compliance with the deficit criterion .............................................................. 11 4.2. Compliance with the MTO or the required adjustment path towards the MTO ................................................................................................................ 11 5. LONG-TERM SUSTAINABILITY ......................................................................... 14 6. FISCAL FRAMEWORK .......................................................................................... 16 7. SUMMARY .............................................................................................................. 16 8. ANNEX ..................................................................................................................... 18 2 1. INTRODUCTION On 5 May 2017 Romania submitted its 2017 convergence programme (hereafter called "convergence programme" or "the programme"), covering the period 2017-2020. The programme was adopted by a government memorandum on 5 May 2017. Romania is currently subject to the preventive arm of the the Stability and Growth Pact (SGP) and should ensure sufficient progress towards its MTO. This document complements the Country Report published on 22 February 2017 and updates it with the information included in the convergence programme. Section 2 presents the macroeconomic outlook underlying the convergence programme and provides an assessment based on the Commission 2017 spring forecast. The following section presents the recent and planned budgetary developments, according to the convergence programme. In particular, it includes an overview on the medium term budgetary plans, an assessment of the measures underpinning the convergence programme and a risk analysis of the budgetary plans based on the Commission 2017 spring forecast. Section 4 assesses compliance with the rules of the SGP, including on the basis of the Commission forecast. Section 5 provides an overview of long term sustainability risks and Section 6 of recent developments and plans regarding the fiscal framework. Section 7 provides a summary. 2. MACROECONOMIC DEVELOPMENTS The convergence programme's macroeconomic scenario assumes a continuous improvement of economic performance. The real GDP growth rate is expected to increase steadily from 4.8% in 2016 to 5.5% in 2018 and to remain sustained at 5.7% in 2019-2020. Domestic demand is set to remain the engine of growth. Private consumption is expected to continue growing fast as labour market growth outlook is improving with increasing employment and sustained wage increases. The growth rate of gross fixed capital formation (GFCF) is forecast to turn around and increase sharply from -3.3% in 2016 to 7.9% in 2018, supported by significantly improving EU funds absorption. Net exports are set to contribute negatively to growth. The real GDP growth forecast was significantly revised upwards, by almost 1 pp. in 2017 and by 0.8 pp. in 2018 compared to the previous convergence programme. This is due to higher growth of domestic demand, particularly private consumption, and to less negative contributions of net exports. The (negative) recalculated output gap as estimated by the Commission based on the information in the programme, following the commonly agreed methodology, is projected to have closed in the second half of 2016 and to turn positive in 2017 and 2018. The real GDP growth in the programme is higher than the Commission projections for 2017 and 2018 mostly due to favourable assumptions for the growth rates of GFCF. The expected growth rates for private consumption are plausible both for 2017 and 2018, taking into account planned wage increases. The GFCF growth rates in the convergence programme for 2017 and 2018 are markedly favourable compared with the Commission projections and assume improvements in absorption of EU funds. On the external side, the assumptions for export and import growth rates are plausible for 2017 and 2018. The projections for the growth rates of compensation of employees per head are markedly cautious for both 2017 and 2018 compared with the Commission 2017 spring forecast, due to differences in the assumptions on public wage increases. The inflation projections of the convergence 3 programme are in line with Commission estimates for 2017 but favourable (i.e. higher) for 2018 as the Commission projects an earlier closing of the output gap and a higher positive output gap in 2017 and 2018. Overall, the economic growth assumptions in the convergence programme are favourable for 2017-2020. The main downward risk to the macroeconomic outlook stems from a lower impact of fiscal and structural measures on short- and medium-term growth prospects. Table 1: Comparison of macroeconomic developments and forecasts 2016 2017 2018 2019 2020 COM CP COM CP COM CP CP CP Real GDP (% change) 4.8 4.8 4.3 5.2 3.7 5.5 5.7 5.7 Private consumption (% change) 7.4 7.4 6.9 7.3 4.7 6.4 6.2 6.0 Gross fixed capital formation (% change) -3.3 -3.3 1.3 6.9 5.2 7.9 8.4 8.6 Exports of goods and services (% change) 8.3 8.3 6.9 6.8 6.2 6.3 6.9 7.0 Imports of goods and services (% change) 9.8 9.8 8.6 8.5 7.9 7.9 8.1 8.0 Contributions to real GDP growth: - Final domestic demand 4.4 4.4 5.1 6.3 4.6 6.2 6.2 6.2 - Change in inventories 1.1 1.1 0.0 -0.3 0.0 0.0 0.0 0.0 - Net exports -0.7 -0.7 -0.8 -0.8 -0.9 -0.7 -0.6 -0.5 Output gap1 -0.1 -0.9 0.7 -0.1 0.8 0.4 1.1 1.7 Employment (% change) -0.9 -0.9 0.1 0.7 0.4 0.9 1.0 1.0 Unemployment rate (%) 5.9 5.9 5.4 5.7 5.3 5.5 5.4 5.3 Labour productivity (% change) 5.8 5.8 4.2 4.4 3.3 4.5 4.6 4.6 HICP inflation (%) -1.1 -1.1 1.1 1.2 3.0 2.5 2.3 2.2 GDP deflator (% change) 2.2 2.2 1.5 2.0 2.8 2.1 1.9 1.4 Comp. of employees (per head, % change) 10.3 11.6 9.5 5.8 6.5 5.9 6.0 5.8 Net lending/borrowing vis-à-vis the rest of -1.5 0.2 -1.3 0.4 -0.8 0.8 0.9 0.9 the world (% of GDP) Note: 1 In % of potential GDP, with potential GDP growth recalculated by Commission services on the basis of the programme scenario using the commonly agreed methodology. Source : Commission 2017 spring forecast (COM); Convergence Programme (CP). 3. RECENT AND PLANNED BUDGETARY DEVELOPMENTS 3.1. DEFICIT DEVELOPMENTS IN 2016 AND 2017 In 2016, the general government deficit rose to 3% of GDP, from 0.8% of GDP in 2015, while the economy grew above its potential. Tax cuts, particularly a four percentage point cut in the standard VAT rate, had a negative effect on tax revenues. On the expenditure side, public wages were considerably increased. The 2016 budget outcome was slightly worse than the 2016 convergence programme target of a deficit of 2.9% of GDP. Both the revenues and the expenditures turned out lower than planned in the 2016 convergence programme. On the revenue side, the indirect tax revenues target was not achieved. On the expenditure side, 4 public investment was significantly lower than planned, mainly due to low EU-funds absorption. The Commission 2017 spring forecast projects the headline deficit to increase to 3.5% of GDP in 2017. The standard VAT rate was cut by one additional percentage point. Moreover, part of the excise duty on fuel and a special construction tax were abolished. The 2017 budget contains significant increases of public wages and social benefits, including an additional pension increase of 9%, scheduled for July 2017, on top of the standard indexation. In the programme, the Romanian authorities plan a headline deficit of 2.9% of GDP in 2017. The overall revenues and expenditures ratios are higher than in the Commission 2017 spring forecast. The underlying macroeconomic projection of 5.2% of real GDP growth is more optimistic than the Commission projection, with a positive impact on tax revenues. The projection of revenues from all categories of taxes and social contributions is higher than in the Commission forecast (see Table 2). On the expenditure side, public wages and social contributions are lower than in the Commission forecast, while planned public investment is significantly higher. The lower public investment projection in the Commission forecast takes into account (i) a systematic under-execution in the previous years, (ii) low execution in the first quarter of 2017, and (iii) a more prudent assumption on the military equipment deliveries in 2017. 3.2. MEDIUM-TERM STRATEGY AND TARGETS The purpose of the programme is to maintain the headline deficit at 2.9% of GDP in 2018 and to achieve a gradual decrease of the headline deficit thereafter, to 2.0% of GDP in 2020. The programme does not change the MTO chosen in the previous programmes of a deficit of 1% of GDP in structural terms. This MTO is more stringent1 than what the Pact requires and also aims at taking into account the requirements of the Treaty on the Stability, Coordination and Governance in the Economic and Monetary Union. After significantly deviating from the MTO in 2016, the programme plans to significantly deviate from the adjustment path towards the MTO in 2017- 2018 and to start to adjust toward the MTO only from 2019 onwards. The programme does not envisage reaching the MTO over the programme horizon (until 2020). The structural balance - recalculated by the Commission according to the commonly agreed methodology – is projected to increase from 2.6% of GDP in 2016 to 2.9% of GDP in 2017 and 3.0 % in 2018, and gradually decrease thereafter, to 2.6% of GDP in 2020. The Commission 2017 spring forecast projects significantly higher strucutral deficits, of 3.9% of GDP in 2017 and 4.0% of GDP in 2018. The difference is mostly attributable to different headline deficit projecitons. (see section 3.1 and the paragraph below). 1 The MTO selected by the Member State is more ambitious than the minimum MTO by more than 1/2 percentage point. The minimum MTOs are country-specific and calculated based on an agreed methodology. 5  Table 2: Composition of the budgetary adjustment Change: 2016 2017 2018 2019 2020 (% of GDP) 2016-2020 COM COM CP COM CP CP CP CP Revenue 31.7 30.6 32.2 31.5 32.3 32.8 33.3 1.6 of which: - Taxes on production and imports 11.3 10.5 11.0 10.5 11.0 11.0 11.1 -0.2 - Current taxes on income, wealth, etc. 6.5 6.4 6.6 6.6 6.8 7.0 7.1 0.6 - Social contributions 8.1 8.5 8.7 8.4 8.7 9.0 9.4 1.3 - Other (residual) 5.8 5.2 5.9 6.0 5.8 5.8 5.7 -0.1 Expenditure 34.7 34.1 35.1 35.2 35.2 35.4 35.3 0.6 of which: - Primary expenditure 33.2 32.6 33.7 33.5 33.7 33.9 33.9 0.7 of which: Compensation of employees 8.2 8.7 8.4 8.7 8.3 8.1 8.0 -0.2 Intermediate consumption 5.3 5.2 5.1 5.2 5.0 5.0 5.0 -0.3 Social payments 11.6 12.0 11.7 12.2 12.0 11.7 11.4 -0.2 Subsidies 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.1 Gross fixed capital formation 3.6 3.5 4.3 3.9 4.0 4.5 5.0 1.4 Other (residual) 4.2 2.9 3.9 3.3 4.1 4.2 4.1 -0.1 - Interest expenditure 1.5 1.6 1.4 1.6 1.5 1.5 1.4 -0.1 General government balance (GGB) -3.0 -3.5 -2.9 -3.7 -2.9 -2.5 -2.0 1.0 Primary balance -1.5 -2.0 -1.6 -2.0 -1.4 -1.0 -0.6 0.9 One-off and other temporary -0.4 0.1 0.0 0.1 0.0 0.0 0.0 0.4 GGB excl. one-offs -2.7 -3.6 -2.9 -3.8 -2.9 -2.5 -2.0 0.7 Output gap1 -0.1 0.7 -0.1 0.8 0.4 1.1 1.7 1.7 1 Cyclically-adjusted balance -3.0 -3.8 -2.9 -3.9 -3.0 -2.9 -2.6 0.4 2 Structural balance -2.6 -3.9 -2.9 -4.0 -3.0 -2.9 -2.6 0.1 2 Structural primary balance -1.1 -2.3 -1.5 -2.4 -1.5 -1.4 -1.2 0.0 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 2017 spring forecasts (COM); Commission calculations. In 2018, the programme projects the headline deficit to remain at 2.9% of GDP, while the Commission 2017 spring forecast projects it to increase to 3.7% of GDP. The difference is mostly driven by the 2017 base effect (the difference between 2017 deficit projection of 2.9% of GDP in the programme compared to 3.5% in the Commission 2017 spring forecast, which carries forward to 2018). The difference is also influenced by less favourable macroeconomic projection in the Commission 2017 spring forecast and by different assumptions regarding the growth of compensation of public employees. In 2019 and 2020, the improvement of the headline balance planned in the programme relies on an increase of revenues from direct taxes and social contributions relative to GDP and a moderation of expenditures on social spending and public wages. On the other hand, public 6 investment relative to GDP is planned to increase. The programme does not mention the measures which would support the planned 2019-2020 consolidation targets. The deficit targets for 2018-2020 in the current programme are higher than the targets from the previous convergence programme, as the start of the fiscal consolidation is delay