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particular the amendment to the Fiscal Code) enacted since the previous convergence programme. Figure 1: Government balance projections in successive programmes (% of GDP) 0 % of GDP -1 -2 Reference value -3 COM CP2016 -4 CP2015 CP2014 -5 CP2013 r.v. -6 -7 -8 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: Commission 2016 spring forecast., convergence programmes 7 3.3. Measures underpinning the programme The main measures as reported in the programme are listed in the table below. The most significant measures are the significant tax cuts over 2016-2017 included in the amendment of the Fiscal Code adopted in 2015 as well as wage increases for different categories of public sector workers with a major impact in 2016. The programme does not specify additional measures from 2018 onwards (apart from the change of schedule of phasing-in of the second pension pillar and a planned introduction of a minimum insertion income). The programme provides for a further postponement of the phasing in of the second pillar of the pension system in 2017 (increase of the share of the contribution sent to the second pillar of the pension system by 0.4 percentage points, instead of 0.9 percentage points in the previous schedule). This 2017 postponement was not included in the Commission spring forecast, since it had not been announced by the cut-off date. Main budgetary measures Revenue Expenditure 2015  Cut of social insurance contributions by 5 percentage points (from October 2014, effect not specified in the programme)  Cut of VAT rate on food products (from June 2015, effect not specified in the programme) 2016  Cut of standard VAT rate from 24% to  Increases of public wages and other 20% (-1% of GDP) expenditure categories (+1.5% of GDP)  Cut of tax on dividends from 16% to 5% (-  Doubling of child allowance (+0.2% of 0.1% of GDP) GDP; implemented in mid-2015)  Increase of PIT allowances granted based on the number of dependents (-0.1% of GDP) 2017  Cut of standard VAT rate from 20% to  Planned unified wage law (+0.2% of GDP) 19% (-0.3% of GDP)  Removal of the ceiling on the monthly  Cut in the excise on petroleum products maternity benefit (+0.1% of GDP) and increase in the excise on cigarettes (- 0.4% of GDP)  Elimination of special construction tax (- 0.1% of GDP)  Capping the base for the health insurance 8  contributions at 5 national gross average salaries (-0.1% of GDP)  Introduction of a permanent tax on the petroleum sector (+0.1% of GDP compared to the scenario with no taxation, no significant impact compared to the previous, temporary tax regime which has been prolonged since 2013)  Increase of the contribution rate to the second pension pillar by 0.4 percentage points (-0.1% of GDP compared to the 2016 contribution rate, +0.1% of GDP compared to the originally planned increase by 0.9 percentage points) 2018  Increase of the contribution rate to the  Introduction of minimum insertion income second pension pillar by 0.5 percentage (effect not specified) points (-0.1% of GDP compared to the 2017 contribution rate) 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 Government debt projections have deteriorated compared to the previous years (Figure 2). General government debt is expected in the programme to gradually increase from 38.4% of GDP in 2015 to 39.9% of GDP in 2018 on the back of a significant decrease of the primary balance from a surplus of 0.9% of GDP in 2015 to a deficit of -1.3% of GDP in 2016 due to the enacted fiscal loosening measures. It is then projected to decrease somewhat in 2019, thanks to the gradual improvement of the primary balance by 1.1 percentage points of GDP between 2017 and 2019. The Commission projects a lower debt-to-GDP ratio by 0.4% of GDP in 2016 due to a similar projected improvement in the primary balance. For 2017 the Commission forecasts a slightly higher debt-to-GDP ratio (by 0.3% of GDP) due to a somewhat higher primary balance projection (by 0.4% of GDP). 9  Table 3: Debt developments Average 2016 2017 2018 2019 (% of GDP) 2015 2010-2014 COM CP COM CP CP CP Gross debt ratio1 35.9 38.4 38.7 39.1 40.1 39.8 39.9 39.3 Change in the ratio 3.3 -1.4 0.3 0.7 1.4 0.7 0.1 -0.6 2 Contributions : 1. Primary balance 2.1 -0.9 1.1 1.3 1.6 1.2 0.7 0.2 2. “Snow-ball” effect -0.1 -0.8 -0.6 -0.6 -0.5 -0.7 -0.9 -1.1 Of which: Interest expenditure 1.7 1.6 1.7 1.6 1.7 1.7 1.6 1.4 Growth effect -0.5 -1.4 -1.5 -1.5 -1.3 -1.6 -1.7 -1.8 Inflation effect -1.2 -1.1 -0.7 -0.7 -0.9 -0.8 -0.8 -0.7 3. Stock-flow 1.2 0.4 -0.2 0.0 0.3 0.2 0.3 0.3 adjustment Of which: Cash/accruals diff. -0.2 -0.1 -0.1 -0.1 Acc. financial assets -0.3 0.0 0.0 0.0 Privatisation 0.0 0.0 0.0 0.0 Val. effect & residual -1.7 -2.0 -2.1 -2.1 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 2016 spring forecast (COM); Convergence Programme (CP), Comission calculations. 10  Figure 2: Government debt projections in successive programmes (% of GDP) 70 % of GDP 60 Reference value 50 COM CP2016 CP2015 40 CP2014 CP2013 r.v. 30 20 10 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: Commission 2016 spring forecast, convergence programmes 3.5. Risk assessment The main risks to the achievement of the planned budgetary targets stem from the risks to the macroeconomic outlook, the reliance on measures which are not sufficiently specified and implementation risks in view of upcoming elections. Downside risks to the macroeconomic outlook stem from the uncertainty caused by the adoption of a law on debt discharge ('datio in solutum') by Parliament on 13 April 2016 and its subsequent promulgation by the President. Under the law, debtors with mortgage loans or real-estate backed consumer loans of up to €250 000 will be given the option to hand over the property used as collateral to the bank in exchange for full termination of their contractual obligations. Banks will not be able to make any further claims on debtors after the enforcement of the debt discharge law. This law poses substantial risks for the stability of the financial sector and has multiple implications for the economy as a whole. More specifically, it may potentially undermine the stabilization of the real estate market, slow down the recent rebound in credit to the economy, with negative effect on employment, and eventually discourage investors by undermining their perception of legal certainty in the country. The programme relies on expenditure measures which are not sufficiently specified. It relies on a significant moderation of expenditures (fall by 2% of GDP from 2016 to 2019) in order to compensate for the impact of the tax cuts in 2016 and in order to gradually decrease the general government deficit from 2018 onwards. However, the programme does not specify in sufficient detail the underlying measures which would ensure such expenditure developments. Moreover, a downward risk to the fiscal outlook stems from potential additional expansionary legislative initiatives in the run-up to the local and parliamentary elections in 2016. 11 4. COMPLIANCE WITH THE PROVISIONS OF THE STABILITY AND GROWTH PACT Box 1. Council recommendations addressed to Romania  On 14 July 2015 , the Council addressed recommendations to Romania in the context of the European Semester. In particular, in the area of public finances the Council recommended to Romania to limit the deviation from the medium-term budgetary objective in 2015 to a maximum of 0,25 % of GDP as specified under the 2013-15 balance-of-payments programme and return to the medium-term budgetary objective in 2016. 4.1. Compliance with the deficit criterion Romania's deficit is projected to exceed the 3% of GDP reference value in 2017 based on the Commission's spring 2016 forecast. The Commission projects the headline balance to deteriorate from 2.8% in 2016 to 3.4% of GDP in 2017 due to enacted tax cuts, such as the cut in the standard VAT rate from 20% to 19%, the abolition of the extra excise duty on fuel , and of the special construction tax. These tax cuts are not sufficiently compensated by other enacted measures. At the same time, the programme projects the headline deficit to remain at 2.8% of GDP in 2017. This difference is partially due to more optimistic macroeconomic assumptions in the programme as compared to the Commission forecast and partially due to reliance on unspecified measures. 4.2. Compliance with the MTO Based on outturn data, in 2015 the structural balance amounted to -0.6% of GDP, and thus remained above the MTO which it had reached already in 2014. In 2016, according both to the information provided in the convergence programme, and to the Commission 2016 spring forecast, a structural deterioration of 2.2% of GDP is projected, pointing to a significant deviation from the MTO (gap of -1.8% of GDP from the required adjustment of -0.4% 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 a significant deviation (gap of -2.5% of GDP according to the programme). Similarly, the Commission projects the growth rate of government expenditure, net of discretionary revenue measures, to be well above the benchmark rate, also pointing to a significant deviation (gap of -2.7% of GDP based on the Commission 2016 spring forecast). To sum up, there is a risk of a significant deviation from the MTO in 2016. This assessment is confirmed over 2015-2016, when both pillars point towards a significant deviation, based both on the Commission forecast and the convergence programme.. In 2017, 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 (gap of -0.7% 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, pointing to significant deviation (gap of -0.9% of GDP).. Similarly, according to the Commission, in 2017 a further structural deterioration of 0.6% of GDP is projected, pointing to a significant deviation from the MTO (gap of -1.1% of GDP from the required adjustment of 0.5% of GDP). The growth rate of government expenditure, net of discretionary revenue measures, is forecast by the Commission to be well above the benchmark rate, also pointing to a significant deviation (gap of -1.8% of GDP). Therefore, there is a risk of significant deviation from the MTO in 2017. This assessment is confirmed 12 over 2016-2017, when both pillars point towards a significant deviation, based on both the Commission forecast and the convergence programme. Table 4: Compliance with the requirements under the preventive arm (% of GDP) 2015 2016 2017 1 Initial position Medium-term objective (MTO) -1.0 -1.0 -1.0 2 -2.8 -3.4 Structural balance (COM) -0.6 Structural balance based on freezing (COM) -0.6 -2.8 - 3 At or above Position vis-a -vis the MTO At or above the MTO Not at MTO the MTO 2015 2016 2017 (% of GDP) COM CP COM CP COM Structural balance pillar Required adjustment4 0.0 0.0 0.5 5 -0.4 0.5 Required adjustment corrected -0.8 6 Change in structural balance -0.5 -2.2 -2.2 -0.2 -0.6 One-year deviation from the required 0.4 -1.8 -1.8 -0.7 -1.1 adjustment 7 Two-year average deviation from the required 0.4 -0.7 -0.7 -1.2 -1.5 adjustment 7 Expenditure benchmark pillar 8 3.6 1.0 Applicable reference rate 4.9 9 One-year deviation 0.1 -2.5 -2.7 -0.9 -1.8 9 Two-year average deviation 0.7 -1.2 -1.3 -1.7 -2.2 Conclusion Significant Significant Significant Significant Conclusion over one year Compliance deviation deviation deviation deviation Significant Significant Signif