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ed by one year, from 2018 in the last convergence programme to 2019 in the current one (see Figure 1 below). Figure 1: Government balance projections in successive programmes (% of GDP) 0 -1 -2 -3 Reference value COM -4 CP2013 CP2014 -5 CP2015 -6 CP2016 CP2017 -7 Ref value -8 -9 -10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: Commission 2017 spring forecast (COM). Convergence programmes (CP). 3.3. MEASURES UNDERPINNING THE PROGRAMME The main measures as reported in the programme for 2016-2018 are listed in the table below. The programme does not specify any measures from 2019 onwards. The programme mentions two planned measures: a draft unified wage law (UWL), and a global income tax set to replace the current personal income taxation, but does not include their impact in the convergence programme projections. These two measures pose a significant downward risk to the fiscal projections both in the programme and in the Commission 2017 spring forecast (see section 3.5 below). Main budgetary measures Revenue Expenditure 2016 • Cut of standard VAT rate from 24% to 20%  Increases of public wages (impact not specified in (impact not specified in the programme)) the programme)  Pension increase by 5% as of 1 January (impact not specified in the programme)  Doubling of child allowance (from June 2015) 7  (impact not specified in the programme)  Reimbursement of foregone salaries to teachers in the public education sector for 2008-2011 (one-off; impact not specified in the programme)  Compensation decisions issued by the National Authority for Restitution of Property (+0.3% of GDP)  Refunding of special motor vehicle tax, pollution tax and the tax on pollutant emissions from motor vehicles following CJEU ruling (+0.1% of GDP) 2017  Cut of standard VAT rate from 20% to 19% (-  Salary increases for civil servants in the local 0.3% of GDP) administration and artists (+0.1% of GDP)  Cut in the excise on petroleum products and  Increase of the pension point to 1,000 RON from increase in the excise on cigarettes (-0.4% of July 2017 (+0.3% of GDP) GDP)  Increase of the minimum pension to RON 520  Elimination of the special construction tax (-0.1% (+0.1% of GDP) of GDP)  Increase of wages in the education and health sector  Removal of the cap of 5 gross average salaries for by 15% as of 1 January 2017 (impact not specified the calculation of the health insurance contribution in the programme) (0.1% of GDP)  Increase of gross minimum salary from RON 1,250  Exemption of pensions from social and health to RON 1,450 (impact not specified in the insurance contributions and exemption of pensions programme) below RON 2,000 from personal income tax (- 0.3% of GDP)  Freeze of special pensions and cut of operating costs of public institutions (-0.1% of GDP)  Cut of the turnover tax on microenterprises and Tax cut on property transactions (-0.1% of GP)  Increase of dividends from SOEs to 90% of net profit (one-off; +0.1% of GDP)  Maintaining the contribution rate to the second pension pillar at the 2016 level of 5.1% (impact not specified in the programme)  Employers' contributions for part-time workers to be paid on the gross minimum salary, increase by 1% of excise duty on cigarettes (both from June 2017), VAT for public procurement directly paid into the state budget (from July 2017) (+0.1% of GDP) 2018  Employers' contributions for part-time workers to  Reduction of the number of government- be paid on the gross minimum salary, increase by subordinated bodies, rationalization of public 1% of excise duty on cigarettes (both from June expenditure, creation of a national employment 2017), VAT for public procurement directly paid record for the public administration, improving of into the state budget (from July 2017) (+0.1% of corporate governance of SoEs, cut of operating costs of public institutions, 35% price cut for new 8  GDP) generic drugs, freeze of special pensions, centralization of public procurement, capping of  Maintaining of dividends from SOEs at 90% of child allowance to RON 5,000-10,000 (-0.2% of net profit (one-off, +0.1% of GDP) 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 the measure. 3.4. DEBT DEVELOPMENTS General government debt is expected in the programme to increase from 37.6% of GDP in 2016 to 38.3% of GDP in 2018 driven by the negative primary balance due to the enacted fiscal loosening measures. It is projected to decrease back to 37.6 %of GDP by 2020, thanks to a planned improvement of primary balance. The Commission 2017 spring forecast projects a higher debt-to-GDP ratio in 2017 and 2018 due to lower projections for primary balance and real GDP growth. Projections for general government debt in the programme are lower than in last year's programme (see Figure 2 below). Table 3: Debt developments Average 2017 2018 2019 2020 (% of GDP) 2016 2011-2015 COM CP COM CP CP CP Gross debt ratio1 37.3 37.6 39.3 38.0 40.9 38.3 38.1 37.6 Change in the ratio 1.6 -0.4 1.7 0.4 1.6 0.3 -0.2 -0.5 2 Contributions : 1. Primary balance 1.0 1.5 2.0 1.6 2.0 1.4 1.0 0.6 2. “Snow-ball” effect -0.3 -1.0 -0.5 -1.2 -0.8 -1.2 -1.2 -1.1 Of which: Interest expenditure 1.7 1.5 1.6 1.3 1.6 1.5 1.5 1.4 Growth effect -0.9 -1.7 -1.5 -1.8 -1.4 -1.9 -2.0 -2.0 Inflation effect -1.1 -0.8 -0.5 -0.7 -1.0 -0.7 -0.6 -0.5 3. Stock-flow 1.0 -1.0 0.3 0.1 0.4 0.1 0.0 0.0 adjustment Of which: Cash/accruals diff. -0.1 -0.1 -0.1 -0.1 Acc. financial assets -0.4 0.0 0.0 0.0 Privatisation 0.0 0.0 0.0 0.0 Val. effect & residual -2.1 -2.5 -2.6 -2.4 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 2017 spring forecast (COM); Convergence Programme (CP), Comission calculations. 9  Figure 2: Government debt projections in successive programmes (% of GDP) 60 Reference value 50 COM 40 CP2013 CP2014 CP2015 30 CP2016 CP2017 Ref value 20 10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: Commission 2017 spring forecast (COM). Convergence programmes (CP). 3.5. RISK ASSESSMENT Downward risks to the achievement of the planned budgetary targets stem from favourable macroeconomic projections and from reliance on not sufficiently specified fiscal consolidation measures, in particular for 2019-2020. Moreover, the draft unified wage law (UWL), currently debated by the parliament, poses a significant downward risk in 2018 and beyond, with a potential impact on the general government balance of up to -2% of GDP in 2018. The final form and implementation schedule of UWL are not yet known. Therefore, the UWL has not been included in the programme projection nor in the Commission 2017 spring forecast. Additionally, the programme mentions plans for a 10% global income tax, which would replace the existing 16% personal income tax. This planned measure poses a further downward risk to the fiscal projections in the programme and in the Commission 2017 spring forecast. 10 4. COMPLIANCE WITH THE PROVISIONS OF THE STABILITY AND GROWTH PACT Box 1. Council recommendations addressed to Romania On 12 July 2016, the Council addressed recommendations to Romania in the context of the European Semester. In particular, in the area of public finances the Council recommended Romania to limit the deviation from the the medium-term budgetary objective in 2016 and achieve an annual fiscal adjustment of 0.5% of GDP in 2017 unless the the medium-term budgetary objective is respected with a lower effort.2 4.1. Compliance with the deficit criterion The headline general government deficit increased from 0.8% of GDP in 2015 to 3% of GDP in 2016, exactly at the level of the deficit reference value of the Treaty. The programme projects the headline deficit to remain below 3% of GDP reference value over the programme horizon. However, based on the Commission 2017 spring forecast Romania's headline deficit is projected to exceed the 3% of GDP in 2017 and in 2018. The differences in the headline deficit projections are driven by an optimistic macroeconomic projection and lower projection of current expenditures in the convergence programme. For more details, see sections 3.1 and 3.2 above. 4.2. Compliance with the MTO or the required adjustment path towards the MTO According to the outturn data, in 2016, from a position of -0.6% of GDP in 2015, i.e. above the MTO, the structural balance deteriorated to -2.6% of GDP, pointing to a significant deviation from the recommended structural adjustment (a deviation of 1.6% of GDP). The growth of government expenditure, net of discretionary revenue measures and one-offs, was well above the expenditure benchmark, also pointing to a significant deviation (a deviation of -2.0% of GDP). The difference in the indicators is mainly explained by different annual nominal potential GDP growth rates used in their computation. Irrespective of this difference, the overall assessment, in line with the Article 10(3) of Regulation (EC) No 1466/97, confirms a significant deviation from the requirements of the SGP in 2016 based on both indicators. Based on that, on 22 May 2017, 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 objective. 2 On 22 February 2017 Vice-President Valdis Dombrovskis and Commissioner Pierre Moscovici sent a joint letter to the Romanian authorities in which they recalled that Romania was estimated to have significantly deviated from its MTO in 2016, while the Commission forecast pointed to further deterioration of the structural balance in 2017 and 2018. The letter also pointed to a clear risk, based on the Commission forecast for 2017 and 2018, that the deficit criterion for the purposes of the Treaty and of Regulation (EC) No 1467/97 would not be fulfilled. The letter recalled that the Commission would reassess Romania's compliance with its obligations under the Stability and Growth Pact on the basis of the Commission 2017 spring forecast, including the budgetary data for 2016 and Romania's 2017 convergence programme. It recalled the importance that the necessary measures to ensure compliance with the deficit criterion and with the adjustment path towards the MTO were credibly announced by that time. https://ec.europa.eu/info/sites/info/files/letter_to_romanian_mof.pdf 11 In 2017, according to the information provided in the programme, the recalculated structural balance is projected to deteriorate by 0.5% of GDP, pointing to a significant deviation from the adjustment path towards the MTO (gap of -1.0% of GDP from the required adjustment of 0.5% of GDP). The growth rate of government expenditure, net of discretionary revenue measures is forecast to be well above the benchmark rate, also pointing to significant deviation (a gap of -1.1% of GDP). The two indicators provide a fairly similar reading. An overall assessment confirms the risk of a significant deviation. Over two years, this assessment is confirmed. Similarly, based on the Commission 2017 spring forecast, the structural balance is expected to deteriorate by 1.2% of GDP in 2017, pointing to a risk of a significant deviation from the recommended structural adjustment (a deviation of -1.7% of GDP). The growth of government expenditure, net of discretionary revenue measures and one-offs, is forecast to be well above the expenditure benchmark, also pointing to a risk of a significant deviation (a deviation of -1.7% of GDP). That is, both indicators point to a risk of a significant deviation. The overall assessment confirms that there is a risk of a significant deviation from the requirements in 2017 based on the Commission 2017 spring forecast. Over two years, this assessment is confirmed. In 2018, according to the information provided in the programme, a structural deterioration of 0.2% of GDP is projected, pointing to a significant deviation from the adjustment path towards the MTO (a gap of -0.7% of GDP from the required adjustment of 0.5% of GDP). The growth rate of government expenditure, net of discretionary