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revenue measures is forecast to be well above the benchmark rate, also pointing to significant deviation (a gap of -0.7% of GDP). Both indicators point to a risk of a significant deviation. An overall assessment thus 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 0.2% of GDP in 2018, pointing to a risk of a significant deviation from the required structural adjustment (a deviation of 0.7% 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 - 1.1% of GDP). Both indicators provide a fairly similar reading. The overall assessment confirms that there is a risk of a significant deviation from the requirements in 2018 based on the Commission 2017 spring forecast. Over two years, this assessment is confirmed. To conclude, following an overall assessment, a significant deviation from the adjustment path towards the MTO is expected in years 2017 and 2018, putting at risk the compliance with the requirements of the preventive arm of the Pact. 12  Table 4: Compliance with the requirements under the preventive arm (% of GDP) 2016 2017 2018 Initial position1 Medium-term objective (MTO) -1.0 -1.0 -1.0 2 -3.9 -4.0 Structural balance (COM) -2.6 Structural balance based on freezing (COM) -2.5 -3.9 - At or above Position vis-a -vis the MTO3 Not at MTO Not at MTO the MTO 2016 2017 2018 (% of GDP) COM CP COM CP COM Structural balance pillar 4 0.5 0.5 Required adjustment 0.0 5 0.5 0.5 Required adjustment corrected -0.5 6 Change in structural balance -2.1 -0.5 -1.2 -0.2 -0.2 7 One-year deviation from the required adjustment -1.6 -1.0 -1.7 -0.7 -0.7 Two-year average deviation from the required 7 -0.6 -1.2 -1.7 -0.8 -1.2 adjustment Expenditure benchmark pillar Applicable reference rate8 3.9 1.0 4.3 9 One-year deviation adjusted for one-offs -2.0 -1.1 -1.7 -0.7 -1.1 9 Two-year deviation adjusted for one-offs -1.1 -1.6 -1.9 -0.9 -1.4 10 PER MEMORIAM: One-year deviation -2.9 -0.7 -1.2 -0.7 -1.1 10 PER MEMORIAM: Two-year average deviation -1.4 -1.0 -2.1 -0.7 -1.2 Conclusion Significant Significant Significant Significant Significant Conclusion over one year deviation deviation deviation deviation deviation Significant Significant Significant Significant Significant Conclusion over two years deviation deviation deviation deviation deviation 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 2014) is carried out on the basis of Commission 2015 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 2017 spring forecast (COM); Commission calculations. 13 5. LONG-TERM SUSTAINABILITY Romania does not appear to face fiscal sustainability risks in the short run according to the S0 indicator. This indicator captures short-term risks of fiscal stress stemming from the fiscal, as well as the macro-financial and competitiveness sides of the economy. Based on Commission forecasts and a no-fiscal policy change scenario beyond forecasts, general government debt, at 37.6% of GDP in 2016, is expected to rise to 61.5% in 2027, thus breaching the 60% of GDP Treaty threshold. This highlights medium risks for the country from debt sustainability analysis in the medium term. The full implementation of the convergence programme would put general government debt on a more slowly increasing path, remaining below the 60% of GDP reference value in 2027. 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 2031) is at 1.5 pps. of GDP, primarily related to the initial budgetary position thus indicating medium risks in the medium term. The full implementation of the convergence programme would put the sustainability risk indicator S1 at -0.5 pps. 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 convergence 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 4.6 pps. of GDP. In the long-term, Romania therefore appears to face medium fiscal sustainability risks, primarily related to the initial budgetary position and to the projected ageing costs. Full implementation of the programme would put the S2 indicator at 3.4 pps. of GDP, leading to the same category of long-term risk, despite a somewhat lower indicator level. Implementing reforms to contain the projected age-related increase in spending could improve fiscal sustainability over the long term. The retirement age is not equal among genders. A bill equalizing the retirement age for women and men at 65 has been pending before Parliament for several years. Moreover, to contain possible pressures on public finances, the government established in 2007 a multi-pillar pension system. However, the implementation of the second pension pillar consisting of privately managed pension savings has been repeatedly delayed. The original plan envisaged that contributions to the second pillar would be raised to 6 percentage points of the employees' contribution to the pension system by 2016. However, the 2016 budget provided for transfers corresponding to only 5.1 pps. of contributions and the 2017 budget maintained this share. 14  Table 5: Sustainability indicators No-policy Change Stability / Convergence Time horizon Scenario Programme Scenario Short Term LOW risk S0 indicator [1] 0.2 Fiscal subindex 0.2 LOW risk Financial & competitiveness subindex 0.2 LOW risk Medium Term MEDIUM risk DSA [2] MEDIUM risk S1 indicator [3] 1.5 MEDIUM risk -0.5 LOW risk of which Initial Budgetary Position 2.7 1.2 Debt Requirement -1.4 -2.0 Cost of Ageing 0.3 0.2 of which Pensions 0.0 0.0 Health-care 0.2 0.1 Long-term care 0.1 0.1 Other 0.0 0.1 Long Term MEDIUM risk MEDIUM risk [4] 4.6 3.4 S2 indicator of which Initial Budgetary Position 3.1 1.9 Cost of Ageing 1.5 1.5 of which Pensions 0.1 0.0 Health-care 0.6 0.5 Long-term care 0.5 0.5 Other 0.3 0.3 Source: Commission services; 2017 stability/convergence programme. Note: the 'no-policy-change' scenario depicts the sustainability gap under the assumption that the structural primary balance position evolves according to the Commissions' spring 2017 forecast covering until 2018 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 2015 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 2031. This adjustment effort corresponds to a cumulated improvement in the structural primary balance over the 5 years following the forecast horizon (i.e. from 2019 for No-policy Change 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 2016. 15 6. FISCAL FRAMEWORK The national fiscal rules3 in Romania require that the medium-term budgetary objective cannot be lower than an annual structural general government balance of -1 % of GDP (or - 0.5 % if public debt exceeds 60 % of GDP). In case of deviation from the MTO, the structural balance should converge towards this level on a path agreed with the Commission. Moreover, public debt cannot exceed 60 % of GDP. In 2016, the structural balance significantly departed from the MTO reached in 2014 and 2015, therefore breaching the structural deficit rule from the national law. The convergence programme foresees that the structural balance will deteriorate further in both 2017 and 2018, thus continuing to breach the domestic structural deficit rule. General government debt is planned in the programme to remain well below the threshold of 60 % of GDP for the entire period. According to the national Fiscal Council4, the 2016 budget was "a textbook example for everything that the Fiscal Responsibility Law no. 69/2010 was designed to prevent – simultaneous enactment of tax cuts and increases in the expenditure, both having a permanent budgetary impact, likely to create the premises for lasting and very difficult to correct deviations from a balanced budget". Moreover, "the draft budget for 2017, as well as that one of the previous year, dev