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the draft fiscal code, as approved by the senate on 27 April, stands at 1.6% of GDP according to the authorities' estimates included in the Convergence Programme alternative scenario, therefore not reflected in the Convergence Programme deficit target. On the other hand, the Commission's forecast includes the new draft fiscal code in the form adopted by the government on 25 March. Furthermore, the Convergence Programme does not include or mention other recent deficit- increasing initiatives. The Ministry of Labour is reportedly envisaging to reform the uniform wage grid and to increase public sector salaries. Moreover, the current draft transport master plan assumes levels of budget expenditure which appear to exceed the ones planned in the Convergence Programme. Also, a draft law to re-introduce special pensions for defence, 12 police and intelligence services personnel was adopted by the government on 22 April and subsequently submitted to parliament, but the budget impact is not yet clarified. The Commission's forecast does not include these initiatives either, since they became public after the cut-off date or are not yet sufficiently advanced in the legislative process to be covered. As opposed to the Convergence Programme, the Commission's forecast incorporates the expiration of parts of the current natural resource taxation regime, in particular of the windfall tax. The Convergence Programme also relies on measures which are not sufficiently specified. Taxes on products and imports are forecast to slightly increase as a share of GDP in 2016, even though the full-year impact of the cut in VAT for food will negatively affect revenues. Current taxes on income and wealth are set to increase by 0.3 pp. of GDP even though no particular related measure is specified. An impact assessment of the planned and on-going tax collection measures is not included in the Convergence Programme. The partial wage freeze does not seem sufficient to explain a drop in personnel expenditure by 0.4 pp. of GDP. From 2017 onwards, further consolidation relies on reduction in "other expenditure", even though no measures are specified to explain this change. Moreover, the new draft fiscal code includes further tax cuts in 2017 and 2018 which are not incorporated in the Convergence Programme. Additional risks stem from the still on-going certification of court-related wage claims and property restitution claims. The spring forecast includes a deficit of 3.5% of GDP in 2016, 3.4% of GDP in structural terms. Differences are thus significant. As underlined before, the main difference stems from the fact that the spring forecast includes the impact of the new draft fiscal code as adopted by the government on 25 March. The above-mentioned risks to the deficit also entail risks for the development of the debt ratio in the medium term. Figure 2: Government balance projections in successive programmes (% of GDP) Source: Commission's 2015 spring forecast; Convergence Programme 13 4. COMPLIANCE WITH THE PROVISIONS OF THE STABILITY AND GROWTH PACT Box 1. Council recommendations addressed to Romania On 8 July 2014, 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 implement the budgetary strategy for 2014, significantly strengthen the budgetary effort to ensure reaching the medium-term objective in 2015 in line with commitments under the Balance of Payments programme and as reflected in the 2014 Convergence Programme, in particular by specifying the underlying measures, and remain at the medium-term objective thereafter. Improve tax collection by continuing to implement a comprehensive tax compliance strategy, stepping up efforts to reduce VAT fraud. Fight undeclared work. Reduce tax burden for low- and middle-income earners in a budget- neutral way. 4.1. Compliance with the deficit criterion According to the spring forecast, Romania is expected to exceed the deficit reference value of 3% of GDP in 2016. For 2016, a deficit of 3.5% of GDP is forecast, which is estimated to correspond to a structural deficit of 3.4% of GDP. The Convergence Programme plans a deficit of 1.2% of GDP. The main reason is that the Commission's forecast follows the customary no-policy-change assumption and thereby incorporates the new draft fiscal code. The main scenario of the Convergence Programme does not include the new draft fiscal code, but takes particular political intentions, such as a new natural resource taxation regime, fully into account. The 2016 deficit as in the Commission's 2015 spring forecast exceeds the reference value, but remains sufficiently close to it. 4.2. Compliance with the MTO or the required adjustment path towards the MTO Assessment of structural reform clause and pension reform clause Romania applied for the structural reform clause and the pension reform clause. Romania has applied for a temporary deviation of 0.5% of GDP under the structural reform clause. The structural reforms included in the Convergence Programme pertain to research and development, health care sector and social inclusion. The Convergence Programme specifies that detailed documentation would be submitted by June. Hence, it is not possible to provide an assessment of the reforms and their impact on public finances. Romania has also applied for a temporary deviation from the MTO under the pension reform clause. The country will finalise the diversion of up to 6% of GDP of social security contributions to the second pension pillar in 2016. However, the country is not eligible for either the structural reform clause or for the pension reform clause given that the structural deficit for 2016, as forecast in the Commission's 2015 spring forecast, significantly exceeds the minimum benchmark (i.e. 3.4% versus 1.8% of GDP). Compliance with the MTO and the required adjustment path towards the MTO In 2014, Romania reached its MTO, a deficit of 1.0% of GDP in structural terms. The structural adjustment was 0.4% of GDP. Based on the applicable freezing rules, Romania has experienced 'bad times' (output gap between -3 and -1.5% of GDP) in 2014. In line with the 13 January flexibility Communication, Member States in bad times with a general government debt ratio below 60% of GDP and a real GDP growth rate below the potential 14 growth rate are not expected to deliver a structural adjustment. Romania thus over-performed its requirements under the Pact. Also over two years, the structural balance pillar and the expenditure benchmark pillar point to compliance. The ex-post assessment thus suggests that the adjustment path towards the MTO was appropriate and compliant with the requirement of the preventive arm of the Pact in 2014. In 2015, both according to the Convergence Programme taken at face value and recalculated, Romania appears in line with the requirements. Under the 2013-15 balance-of-payments financial assistance programme, Romania was granted a deviation from the MTO, the so- called EU funds adjustor of ¼% of GDP, in order to accelerate EU funds absorption above past trends. This adjustor only fully applies if national EU funds co-financing (net of non- eligible spending and corrections) is in line with or above the allocation in the budget. The Convergence Programme includes a structural deficit of 1.25% of GDP (recalculated: 1.1% of GDP), which is in line with the granted deviation. According to the spring forecast, the structural balance is projected to deteriorate by 0.3% of GDP, pointing to a risk of some deviation from the requirements. Based on the Commission's 2015 spring forecast, the growth rate of government expenditure, net of discretionary revenue measures, in 2015 will exceed the applicable expenditure benchmark rate of 2.4% by 0.5 pp. An overall assessment reveals revenue windfalls as the main explanation for the difference between the structural balance and the expenditure benchmark. Relatively strong tax revenues in recent quarters point towards improved tax collection and a more tax-rich growth composition. The structural balance therefore seems to better reflect the fiscal effort, since the improvement in revenues seems to be durable. Therefore, following an overall assessment, some deviation over one year beyond the deviation allowed for by the EU funds adjustor is to be expected. Although taken at face value progress is appropriate, the overall assessment based on the Commission's forecast suggests thus that there is a risk of some deviation from the adjustment path towards the MTO in 2015. In 2016, according to the Convergence Programme as recalculated, Romania would reach its MTO. The Convergence Programme does not incorporate important deficit-increasing measures embedded in the new draft fiscal code and it relies on measures which are not sufficiently specified. According to the spring forecast and the rules of the preventive arm, an adjustment of 0.3% of GDP is required for Romania to reach its MTO in 2016. The structural deficit is projected at 3.4% of GDP. The deviation from the MTO is thus set to become significant in 2016 at 2.4% of GDP in the Commission's forecast, also on account of the new draft fiscal code as approved by the government on 25 March. According to the information provided in the Commission's 2015 spring forecast, the growth rate of government expenditure, net of discretionary revenue measures, in 2015 will exceed the applicable expenditure benchmark rate of 1.6% by 2.6pps. Both pillars also point to a deviation over two years. Although based on the Convergence Programme progress appears appropriate, there is a risk of significant deviation from the MTO based on the Commission forecast. For 2017-18, the projected structural adjustment of 0% of GDP, i.e. remaining at the MTO, in the Convergence Programme appears broadly in line with the requirements of the preventive arm. However, measures are not sufficiently specified and the draft fiscal code includes additional tax cuts in 2017 and 2018 as well, which are not incorporated in the fiscal targets presented in the convergence program. 15  Table 4: Compliance with the requirements under the preventive arm (% of GDP) 2014 2015 2016 Initial position1 Medium-term objective (MTO) -1.0 -1.0 -1.0 2 -1.3 -3.4 Structural balance (COM) -1.0 Structural balance based on freezing (COM) -1.0 -1.3 - Position vis-a -vis the MTO3 Not at MTO At or above the MTO Not at MTO 2014 2015 2016 (% of GDP) COM CP COM CP COM Structural balance pillar 4 0.0 0.3 Required adjustment 0.0 5 0.0 0.3 Required adjustment corrected 0.0 6 Change in structural balance 0.4 -0.2 -0.3 0.2 -2.1 One-year deviation from the required 0.4 -0.2 -0.3 -0.1 -2.4 adjustment 7 Two-year average deviation from the required 7 0.5 0.1 0.1 -0.2 -1.4 adjustment Expenditure benchmark pillar Applicable reference rate8 2.5 2.4 1.6 9 One-year deviation 1.2 1.6 -0.5 0.7 -2.6 9 Two-year average deviation 2.0 1.4 0.3 1.1 -1.6 Conclusion Overall Overall Overall Significant Conclusion over one year Compliance assessment assessment assessment deviation Overall Significant Conclusion over two years Compliance Compliance Compliance assessment 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 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 28.). 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. 7 The difference of the change in the structural balance and the required adjustment corrected. 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 not at its MTO. 9 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 2015 spring forecasts (COM); Commission calculations. 16 5. LONG-TERM SUSTAINABILITY The analysis in this section includes the new long-term budgetary projections of age-related expenditure (pension, health care, long-term care, education and unemployment benefits) from the 2015 Ageing Report6 published on 12 May. It therefore updates the assessment made in the Country Reports7 published on 26 February. Government debt stood at 39.8% of GDP in 2014. It is expected to rise only slightly and thus would remain below the 60% of GDP Treaty threshold. The full implementation of the Convergence Programme would put debt on a decreasing path by 2025, remaining below the 60% of GDP reference value in 2025 (see Figure 3). Figure 3: Gross debt as % of GDP – Medium term debt projections Source: Commission 2015 spring forecast; Convergence Programme; Commission calculations Romania appears to face medium fiscal sustainability risks. The medium-term sustainability gap, is at 1.1% of GDP, primarily related to the structural primary balance in 2015, indicating medium risks. In the long-term, Romania appears to face medium fiscal sustainability risks, primarily related to the structural primary balance in 2015, the projected ageing costs contributing with 1.5 pp. of GDP over the very long run. The long-term sustainability gap shows the adjustment effort needed to ensure that the debt-to-GDP ratio is not on an ever- increasing path is at 3.9 % of GDP. Risks would be higher in the event of the structural primary balance reverting to lower values than observed in the past, such as the average observed for the period 2005-14. It is therefore appropriate for Romania to continue to implement measures that reduce risks to fiscal sustainability in the short term. 6 See http://ec.europa.eu/economy_finance/publications/european_economy/2015/ee3_en.htm 7 See http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/index_en.htm 17 In 2010, "special pensions" were abolished to achieve a uniform public pension system. In early 2015 several proposals for special pension regimes were brought forward by the government or in parliament. For instance, a draft law, approved by the government on 22 April, aims at re-introducing a special pension regime for defence, police and intelligence services personnel. To the extent that legal initiatives constitute a clarification of constitutionally protected rights, they might serve as avoiding future budget