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(% of GDP) 2014-2018 COM COM CP COM CP CP CP CP Revenue 33.4 33.1 33.6 30.8 32.6 32.6 32.5 -0.9 of which: - Taxes on production and imports 12.8 12.7 12.9 11.1 13.0 13.2 13.3 0.5 - Current taxes on income, wealth, etc. 6.2 6.3 6.1 5.9 6.4 6.5 6.5 0.3 - Social contributions 8.6 8.1 8.3 7.9 8.1 8.2 8.3 -0.3 - Other (residual) 5.8 6.0 6.3 5.8 5.1 4.7 4.4 -1.4 Expenditure 34.9 34.7 35.1 34.3 33.8 33.6 33.3 -1.6 of which: - Primary expenditure 33.3 33.1 33.5 32.6 32.2 32.1 31.7 -1.6 of which: Compensation of employees 7.7 7.5 7.4 7.4 7.0 6.9 6.8 -0.9 Intermediate consumption 5.2 5.1 5.3 5.1 5.4 5.7 5.8 0.6 Social payments 11.9 11.9 12.1 11.8 12.0 11.9 11.8 -0.1 Subsidies 0.5 0.5 0.5 0.5 0.4 0.4 0.3 -0.2 Gross fixed capital formation 4.3 4.3 4.4 4.0 4.3 4.4 4.5 0.2 Other (residual) 3.8 3.8 3.9 3.8 3.1 2.8 2.5 -1.3 - Interest expenditure 1.6 1.6 1.6 1.6 1.6 1.5 1.6 0.0 General government balance (GGB) -1.5 -1.6 -1.5 -3.5 -1.2 -1.0 -0.8 0.7 Primary balance 0.1 0.0 0.1 -1.9 0.4 0.5 0.8 0.7 One-off and other temporary 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 GGB excl. one-offs -1.5 -1.6 -1.5 -3.5 -1.2 -1.0 -0.8 0.7 Output gap1 -1.3 -0.9 -1.1 -0.3 -0.8 -0.3 0.4 1.7 1 Cyclically-adjusted balance -1.0 -1.3 -1.1 -3.4 -0.9 -0.9 -0.9 0.1 2 Structural balance (SB) -1.0 -1.3 -1.1 -3.4 -0.9 -0.9 -0.9 0.1 2 Structural primary balance 0.6 0.3 0.5 -1.8 0.7 0.6 0.7 0.1 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 2015 spring forecasts (COM); Commission calculations. In the alternative scenario, where measures embedded in the new draft fiscal code are included, these are assumed to be fully offset by a better macroeconomic outlook, second- 7 round effects and tax collection measures. GDP growth is expected to improve to 4% in 2016 and 4.8% of GDP in 2018. However, the tables in the alternative scenario only cover main macroeconomic aggregates and do not include an explicit deficit forecast (neither headline nor structural). Measures underpinning the programme The Convergence Programme contains a list of measures taken or planned in 2014-2018. However, most have not been specified in sufficient detail to allow for a quantification of their exact impact. This is especially the case for the measures covering the 2016-2018 period. The main measures as reported in the Convergence Programme are listed in the table below. The Convergence Programme includes details on payments related to past and on-going court decisions, see table below. However, in an accrual/ESA perspective, the certification of these claims is the trigger for the budgetary accounting. No details are provided on expected certifications of additional claims, even though they might be considerable. Main budgetary measures Revenue Expenditure 2014  Cut in social security contributions by 5 pps. in force as of 1 October 2014 (impact not quantified)  Tax exemption for reinvested profits as of July 2014 (impact not quantified) 2015  Reduction in special constructions tax rate from  Enhanced funding for EU co-funded projects 1.5% to 1.0% (impact not quantified) (impact not quantified)  Reduced VAT rate from 24 % to 9% for food and  Increase in minimum wage to 975 as of 1 related services (RON 2.8 bn for 6 months; 0.4% of January and to 1,050 as of 1 July (impact not GDP) quantified)  ANAF measures to reduce tax evasion, improve  Wage increases for professors and auxiliary volutnary compliance and increase revenue personnel by 5% on 1 March and 1 September collection: (i) application of the risk-based analysis (impact not quantified) for fiscal inspections; (ii) increase controls of the Anti-Fraud Unit; (iii) optimise the VAT registration  Wage increased for health personnel by 100 procedures; (iv) roll out the undeclared work pilot; RON as of 1 January (impact not quantified) (v) continue the High New Worth Individuals  Pensions indexation (by 5%) (impact not intiative; (vi) implement the WB's RAMP project; quantified) and (vii) devolution of the large and medium taxpayers to the regional structures. (impact not  Increases in social allowances (impact not quantified) quantified) 2016 – 2018  Modify legislation on natural resource taxation  2016: Increase in minimum wage to 1,125 in the such that the revenues are kept at the same level as first semester and to 1,200 in the second before (impact not quantified) semester (impact not quantified)  Continue to implement ANAF measures to reduce  2016: Wage increases for professors and tax evasion, improve voluntary compliance and auxiliary personnel by 5% on 1 April and 1 8 Revenue Expenditure increase revenue collection (impact not quantified) October (impact not quantified)  2016-2018: Personnel expenditure includes payments related to wage claims resulting from court orders (impact not quantified)  2016-2018: Payment of compensations based on property restitution related payments related to law 165/2013 and law 164/2014 (RON 760 mn per year; 0.1% of GDP)  Enhance funding for EU co-funded projects and re-orient capital expenditure from purely domestic sources (impact not quantified)  Implement multi-annual budget programming to ensure savings (impact not quantified) Note: The budgetary impact in the table is the impact reported in the Convergence Programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. Important measures embedded in the new draft fiscal code are not included in the main scenario of the Convergence Programme. However, the Commission's spring forecast includes the measures embedded in the new draft fiscal code as adopted by the government on 25 March. Since the cut-off date for the spring forecast (21 April), the senate has amended the fiscal code, such that fuel excise rates would not be cut and dividend taxation would be reduced to 5% instead of being abolished. According to the authorities' estimates, these amendments would reduce the direct budget impact of the fiscal code by around 0.5% of GDP. However, according to the impact assessment included in the Convergence Programme, the negative budget impact would be 0.3% of GDP higher than according to estimates sent by the Ministry of Finance to staff ahead of the Commission's 2015 spring forecast. In addition, the amendments approved by the senate would lower the fiscal stimulus and thus also second- round effects embedded in the 2015 spring forecast. The measures included in the new draft fiscal code, as amended by the senate on 27 April, are spelled out and quantified in an "alternative scenario" section, but they are not included in the main scenario of the Convergence Programme (they are therefore not included in the table above). According to the Convergence Programme, the direct deficit-increasing impact of these measures is estimated at RON 12 bn (1.6% of GDP) for 2016, but they are not included in the deficit target for 2016 and onwards as reported by the main scenario. In the alternative scenario, the combined revenue impact of tax collection measures, the improved macroeconomic outlook and second round effects is expected to fully offset the impact of the measures embedded in the new draft Fiscal Code. Main additional measures included in the alternative scenario Revenue Expenditure 2016  Reduce standard VAT rate from 24% to 20% (-7.8 bn RON, -1.1% of GDP)  Reduce the tax rate on dividends from 16% 9 Revenue Expenditure to 5% (-1.3 bn RON, -0.2% of GDP)  Various excise rate cuts (-0.4 bn RON, - 0.1% of GDP)  Changes in exemptions in personal income taxation (-1.1 bn RON, -0.1% of GDP)  Abolish the tax on special constructions (- 1.0 bn RON, -0.1% of GDP)  ANAF tax collection measures including VAT gap reduction, undeclared work pillot rollout, changes in the insolvency law, increase in voluntary compliance (14 bn RON, 1.9% of GDP) 2018  Reduce standard VAT rate from 20% to 18% (-5.8 bn RON, -0.7% of GDP)  Reduce the individual public social security contribution rate by 3 pps. from 10.5% to 7.5% and the employer’s rate by 2.3 pps. from 15.8% for normal working conditions to 13.5% (-8.4 bn RON, -1% of GDP)  ANAF tax collection measures yielding additional revenues (4 bn RON, 0.5% of GDP) Note: The budgetary impact in the table is the impact reported in the Convergence Programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. 3.3. Debt developments Government debt is estimated at 39.8% of GDP for 2014 and according to the Convergence Programme is expected to marginally increase in 2015 to 40.1% of GDP. It is forecast in the Convergence Programme to gradually decrease afterwards to reach 37.1% of GDP by 2018, therefore remaining safely below the 60% threshold set through the Treaty. The decline in government debt is mainly driven by small primary deficits and stock-flow adjustments below past trends over the Convergence Programme's forecast horizon. This profile is similar to the one included in the country's previous Convergence Programme as estimates of the governmental debt level were under the threshold of 40% of GDP every year in the 2015-17 period (see Figure 1). The Convergence Programme's forecast for the public debt level in 2016 is below the Commission's 2015 spring forecast (39.4% compared to 42.4%) mainly because the 10 Convergence Programme does not include the draft fiscal code measures and hence it assumes a lower budget deficit to be financed in 2016. In 2015, the Romanian authorities expect to cover about 60% of the public debt from internal financing by continuing to develop the domestic market for RON-denominated government securities and thus diminishing the exchange rate risk. The external financing will be ensured mainly through issuances of Eurobonds on external markets under the EMTN (Euro Medium Term Note) Convergence Programme and through other loans from international creditors. Moreover, the Romanian authorities intend to maintain the Treasury's cash buffer at a comfortable level. For 2015, this buffer is set to continue to cover four months of the government's gross financing needs. Table 3: Debt developments Average 2015 2016 2017 2018 (% of GDP) 2014 2009-2013 COM CP COM CP CP CP Gross debt ratio1 32.5 39.8 40.1 40.1 42.4 39.4 38.4 37.1 Change in the ratio 5.0 1.8 0.3 0.3 2.3 -0.7 -1.0 -1.3 2 Contributions : 1. Primary balance 3.6 -0.1 0.0 -0.1 1.9 -0.4 -0.5 -0.8 2. “Snow-ball” effect 0.3 0.0 0.1 -0.3 -0.3 -0.5 -0.7 -0.6 Of which: Interest expenditure 1.6 1.6 1.6 1.6 1.6 1.6 1.5 1.6 Growth effect -0.1 -1.0 -1.1 -1.2 -1.2 -1.3 -1.4 -1.4 Inflation effect -1.2 -0.6 -0.5 -0.7 -0.7 -0.8 -0.8 -0.8 3. Stock-flow 1.1 2.0 0.2 0.7 0.8 0.3 0.2 0.1 adjustment Of which: Cash/accruals diff. -0.1 -0.1 -0.1 -0.1 Acc. financial assets -0.9 -0.1 0.1 0.0 Privatisation 0.0 0.0 0.0 0.0 Val. effect & residual -0.2 -1.9 -2.0 -2.0 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 2015 spring forecast (COM); Convergence Programme (CP), Comission calculations. 11  Figure 1: Government debt projections in successive programmes (% of GDP) Source: Commission's 2015 spring forecast; Convergence Programme 3.4. Risk assessment For 2015, the Convergence Programme appears to underestimate the impact of the VAT cut for food and related services in force starting June 2015. The revenue over-performance recorded in Q1 2015, as spelled out in the Convergence Programme, appears overestimated. These are the main drivers which explain why the 2015 spring forecast includes a moderately higher budget deficit of 1.6% of GDP. However, EU funds related spending might remain below the assumptions used in both the Convergence Programme and the Commission's forecast, given recent developments including interruptions of several operational programmes. For 2016, the Convergence Programme does not include the significant tax cuts proposed in the new draft fiscal code, which inter alia comprises a cut in the VAT rate from 24% to 20%. A key element of current fiscal policies is therefore not included, which is not in line with the Code of Conduct. The direct budgetary impact of