Romania

   

Economic Policies

#39
Key Findings
Despite a vigorous recovery from the pandemic, Romania falls into the bottom ranks internationally (rank 39) in the area of economic policies. Its score on this measure has improved by 0.4 points relative to 2014.

Romania’s economy contracted by 3.9% in 2020. However, its recovery from the effects of the pandemic was strong, with GDP growing by 6.5% in the first half of 2021. Business and consumer sentiment remained strong, and 2021 saw robust growth in wages along with an uptick in public and private investment.

The unemployment rate rose from 3.9% in early 2020 to a peak of near 6.5% late that year, falling back to around 5.5% through 2021. Youth unemployment rates remain considerably higher. However, labor and skills shortages persist, driven by low labor-force participation rates and emigration.

The country has relatively low, flat personal-income and corporate tax rates. The government deficit increased to 9.4% of GDP in 2020 before falling somewhat. The debt-to-GDP ratio reached 50%. Research and innovation systems are fragmented due to insufficient budgets and a brain drain of tech workers.

Economy

#34

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
5
Romania’s economy contracted by 3.9% in 2020, because of the economic effects brought on by the COVID-19 pandemic. However, Romania’s contraction was one of the lowest in the European Union. In the first half of 2021, Romania’s economy recovered strongly, growing 6.5%, due partly to business and consumer sentiment remaining strong, relatively strong growth of wages in the first months of 2021, and an uptick in public and private sector investment. The sharp increase in energy prices, stemming from both the liberalization of the domestic electricity market and the increase in global oil prices, as well as the recovery in aggregate demand, contributed to inflationary pressures in 2021. From the end of the fiscal year 2020 to the April 2021, Romania’s inflation rate increased from 1.8% to 2.7%. As energy prices decline and demand cools down, inflation was reported to reach 2.9% in early 2022. The central bank has raised interest rates to accommodate these developments. At the end of 2020, the fiscal deficit reached 9.2%, driven to a lesser degree than in fellow EU economies by the COVID-19 fiscal stimulus. The government responded to the pandemic by providing a fiscal stimulus of 4.4% of GDP in 2020 and 1.2% in the first half of 2021. According to the 2021 edition of the IMD World Competitiveness Ranking, Romania’s international competitiveness has dramatically improved. Improvements were noted for government and business efficiency. The performance was supported by broad economic performance and export growth, given the country’s relative resilience to the pandemic.

Citations:
Ernst, Iulian. “Romania gains three places in IMD World Competitiveness Ranking.” Romania-Insider.com, June 2021. URL: https://www.romania-insider.com/romania-imd-world-competitiveness-ranking-2021
European Commission (2020): Country Report Romania 2020. SWD (2020) 522 final. Brussels, https://eur- lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A52020SC0522
European Commission (2021): European Economic Forecast Summer 2021. ISSN 2443- 8014 (online). Brussels, https://ec.europa.eu/info/sites/default/files/economy-finance/ip156_en.pdf
The World Bank in Romania. The World Bank, October 2021, https://www.worldbank.org/en/country/romania/overview#3. Accessed October 2021

Labor Markets

#39

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
5
The pandemic created the highest number of unemployed in the last two years. In March 2020, the unemployment rate reached 4.6% compared to 3.9% in the previous month. The labor market dynamics in Romania remain positive, but with only a slight uptick in the unemployment rate in 2021, from 4.2% in 2020 to 5.5% in May. Still, differences in the labor market remain between regions and demographic groups. Youth unemployment has declined, but remains the highest rate of any age group, at 19.5% in June 2021 – a steady figure from 2020. Moreover, labor market conditions remain tight, with labor and skills shortages persisting from 2020 because of the exacerbated decline in the labor force. Low labor force participation remains a concern, despite the minor success of labor activation policies and adult learning programs, largely due to emigration. While participation increased to 55.5% in 2020, Romania continues to struggle with labor force and skill shortage challenges. Women, people with a low education attainment rate, and vulnerable groups (e.g., Roma) disproportionately contribute to the low participation rate.

The population continues to decrease due to a negative natural rate of population growth and outward migration. According to an INS report, from January 2020 to January 2021, Romania’s population dropped from 19.32 million to 19.18 million. Since joining the European Union in 2007, the effects of free movement on the healthcare system has been particularly pronounced. While emigration has contributed to lower unemployment levels, it has also resulted in a brain drain and shortages, particularly in the healthcare system during the pandemic. According to Solidaritatea Sanitara, the country’s public healthcare system has a deficit of 40,000 healthcare workers, equivalent to 17.5% of public hospital staffing needs. To combat the trepidations of the country’s labor supply, government measures (e.g., wage subsidies and other incentives to preserve employment amounting to 5% of GDP) mitigated the labor market impact.

Citations:
Adriana Ana Maria Davidescu et al. “Socioeconomic Effects of COVID-19 Pandemic: Exploring Uncertainty in the Forecast of the Romanian Unemployment Rate for the Period 2020–2023.” Econometric Analysis of Pandemics and Sustainability, 13(13), 2021. https://doi.org/10.3390/su13137078
European Commission (2020): Country Report Romania 2020. SWD (2020) 522 final. Brussels, https://eur- lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A52020SC0522
Marica, Irina. “Romania’s resident population continues to shrink in 2020.” Romania-Insider.com, August 2021. URL: https://www.romania-insider.com/romania-resident-population-shrinking-2020
Romania Unemployment Rate. CEIC, May 2021, https://www.ceicdata.com/en/indicator/romania/unemployment-rate. Accessed October 2021
About the ILO in Romania. International Labour Organization, August 2021, https://www.ilo.org/budapest/countries-covered/romania/WCMS_650156/lang–en/index.htm

Taxes

#36

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
4
Ludovic Orban’s government (and succeeding PNL governments) amended the Romanian Fiscal Code in December 2020. Corporate taxation has been revised, particularly in regard to foreign direct investment (FDI). Overall corporate income tax, according to the revised Convergence Program of 2020, is set to remain at 16%. The new legislation grants cumulative calculated corporate tax exemptions to firms when taxpayers apply the quarterly corporate tax return/payment and one can allocate said funds from the granted corporate tax exemption to reserves for the following year. The bill on micro-enterprises allows micro-enterprises to recover tax losses in the context of structural operations (e.g., merger, division or split). Tax consolidation has been made possible for corporate income tax, allowing firms to offset the tax profits and tax losses of jointly owned firms – so long as a responsible legal entity calculates, declares and pays corporate income tax for the group. The legislation clarifies that there is no obligation on a Romanian legal entity to retain, declare and pay a dividend tax. Dividend incomes received by micro-enterprises have been made nontaxable for the purposes of taxing the incomes of micro-enterprises.

The government has considered the elimination of the mechanism of VAT payment in installments, according to the acquis communautaire. To support the liquidity of the private sector, the government has reimbursed RON 3.17 billion to firms. Furthermore, in the midst of the COVID-19 pandemic, VAT is no longer required for imports of medicines, PPE, and other medical and sanitary devices.

Romanian residents are taxed at a flat rate of 10% on different types of revenues, including capital gains and interest, except for dividend income, which is taxed at a flat rate of 5%. Individuals may owe social security contributions for certain types of income, including investment income. Non-resident individuals are also subject to tax in Romania for certain Romanian sourced incomes, such as investment income obtained from residents. The building tax ranges from 0.08% to 1.3%, depending on the usage of the building (e.g., residential, non-residential or mixed use) and is levied at a fixed rate per square meter, varying according to the local governments categorization of said property.

Romania’s tax-to-GDP ratio continues to stand at around 26% to 27%. This is well below the EU average of 41% and one of the lowest in the European Union. Moreover, the influence of Romania’s tax schemes has maintained its fiscal deficit, with tax revenues continuing to trail expenditures.

Alongside Romania’s flat tax scheme in both corporate and personal income tax measures, and misguided public expenditure priorities, the pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment and social protection. As a result of the pandemic, poverty has increased in 2020, especially among vulnerable communities (e.g., Roma), and this trend will likely continue in 2021, because of the triple-hit taken by the Romanian economy (i.e., the persistence of the pandemic, poor agricultural yields and declining remittances). Low-skilled, temporary, frontline and self-employed workers, women, young people, and small businesses have all been disproportionately impacted by the crisis (e.g., lost salaries, jobs and opportunities). The uprooting of deep-seated inequalities has only been exacerbated by the pandemic, with Romanians in informal sectors and those with fragile incomes (e.g., Roma) continuing to struggle.

While Romania’s environmental taxes amount to around 2.2%, they are well below their EU counterparts. Furthermore, while the country has committed to the targets outlined in the Paris Agreement, energy taxes and a carbon tax have still not been implemented. The “strategic plan regarding climate change for 2016 – 2020” does, however, aim to increase taxes on motor fuels and introduce a tax on air travel.

Citations:
Bjerde, Anna. “Reforms Key to Romania’s Resilient Recovery.” The World Bank, July 2021. https://www.worldbank.org/en/news/opinion/2021/07/23/reforms-key-to-romania-s-resilient-recovery
Environmental taxation. OECD, 2021, https://www.oecd.org/environment/environmentaltaxation.htm
Government of Romania (2020): Convergence Programme for 2020, May 2020. Bucharest, https://ec.europa.eu/info/sites/default/files/2020-european-semester-convergence-programme-romania_en.pdf
Popel, Roxana. “Climate Change Taxation Reforms and Incentives in Romania.” CMS, August 2020. https://cms.law/en/int/expert-guides/cms-expert-guide-to-climate-change-tax-reforms-and-incentives/romania
Schöb, René. “Law no. 296/2020 – Changes to the Fiscal Code.” KPMG, January 2021. https://home.kpmg/ro/en/home/insights/2021/01/law-no-296-2020-changes-to-the-fiscal-code.html
TAXAND Global Guide to M&A Tax 2021: Romania. TAXAND, May 2021, https://www.taxand.com/wp-content/uploads/2021/05/Romania.pdf

Budgets

#33

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
4
The pandemic has intensified Romania’s public spending, with the budget deficit increasing from 9.4% of GDP in 2020 to 9.8% of GDP in 2021 – significantly more than the government’s estimate in November 2020. Romania’s budget posted a deficit above RON 100 billion for the first time in the country’s history, maintaining a budget gap of RON 102 billion, more than double that of the 2019 budget. This came despite a budget revenue increase in 2020 of 0.4%, to RON 323 billion. But expenditures rose to RON 424.4 billion, an increase of nearly 15%. The Ministry of Finance argued that the increase of 4.5% of GDP in spending was caused by the COVID-19 pandemic. Romania’s debt-to-GDP ratio has reached 50%, increasing from 47% in 2020. As a result of running high deficits, before and during the pandemic, the European Commission started an excessive deficit procedure against Romania in April 2020. The Romanian government has remained steadfast in limiting the budget deficit to 7% in 2021. Moreover, while public sector payroll has increased by 2.6% in 2020, it decreased as a percentage of annual GDP by 0.5%, to 6.3% of GDP.

Citations:
Ernst, Iulian. “Romania’s budget deficit shrinks on one-off, deferred tax payments from Covid period.” Romanian Insider, September 2021. https://www.romania-insider.com/budget-deficit-shrinks-january-august-2021
Neagu, Bogdan. “Romania’s budget deficit soars to 9.8% of its GDP.” EURACTIV, January 2021. https://www.euractiv.com/section/politics/short_news/romanias-budget-deficit-soars-to-9-8-of-its-gdp/

Research, Innovation and Infrastructure

#40

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
3
Romania adopted the National Strategy for Research, Development and Innovation in 2014, setting out domestic goals until 2020. Following a policy dialogue phase between the coordinating consortia and MECS, the final four priorities selected were bioeconomy; ICT, space and security; energy, environment and climate change; and eco-nano technologies and advanced materials. The Ministry of Education and Research is in charge of planning and monitoring research, development and innovation (RDI) undertakings, and is funded by the state budget and EU funds. Nevertheless, the efficiency of the RDI strategies was low. Due to the large research and development gap between Romania and western EU member states, insufficient budgets, and a brain drain of tech-industry workers, Romania’s research and innovation systems are fragmenting, and are unable to integrate EU RDI dimensions into successful domestic policies. Because of said setbacks, Romania received the smallest amount of EU funds for RDI. Romania’s participation in Horizon 2020, the European Union’s largest research and innovation program, was modest, resulting in the country attracting some €215 million from the program’s budget. Still, this capital injection was generated by the underfunding of research from public funds, difficulties in attracting private funds in research and innovation, and the lack of effective national policies to stimulate RDI activity. According to past government budgets and the Europe 2020 Strategy, Romania’s government allocated between 0.13% and 1% of GDP to RDI – a drop from 2019 and a concern that has only been exacerbated by the pandemic. All these factors have resulted in a lackluster RDI environment and Romania being labeled as a “modest innovator,” with a 50% gap between Romania and the EU RDI average. According to the European Innovation Scoreboard, Romania has ranked last for RDI in the European Union for the past several years. As a result, the Ministry of Education and Research launched a new RDI national strategy in Romania, coinciding with the EU Strategic Agenda for 2019–24 and the Cohesion Policy for 2021–27. Financially, the government has encouraged taxpayers engaged exclusively in innovation, research, development and related activities to continue their RDI activities by exempting them from corporate income tax during the first 10 years of activity. This tax relief is applied in compliance with state aid regulations. State aid schemes (e.g., non-refundable grants) aimed at supporting R&D activities and investments in the R&D sector are also available.

Between 2014 and 2020, Romania received €43 billion in accordance with the 2014–20 MFF, of which the allocation for European Structural and Investment Funds (ESIF) made up €31 billion. Most of the funds were allocated to ESIF – operational programs of large infrastructure projects. Taking into consideration the COVID-19 pandemic, Romania saw a significant decrease in FDI. However, Romania’s capabilities in the IT sector, logistics projects and retail development projects attracted investors, with 57 projects registered in 2020. The welcoming tax environment for foreign firms has resulted in investment confidence in 2021, with 75% of investors stating that the pandemic no longer influences their direct investments (versus 5% that are influenced). In order to maintain and see an uptick in confidence in the long run, Romania must continue to invest in reliable infrastructure and broaden regions for investment, outside of major urban centers.

Citations:
Constantin, Aurel. “EY Romania Attractiveness Survey: Investors are returning in 2021. Romania must prepare for a reconfigured business environment.” Business Review, June 2021, https://business-review.eu/investments/news-investments/ey-romania-attractiveness-survey-investors-are-returning-in-2021-romania-must-prepare-for-a-reconfigured-business-environment-220850
Popovici, Oana C. “Romania economy briefing: The science and technology innovation mechanism of CEE countries.” China–Cee Institute, 32(2), September 2020, ISSN: 2560-1601
European Commission (2020): European Innovation Scoreboard 2020. QANDA/20/1150 (2020). Brussels, https://ec.europa.eu/commission/presscorner/detail/en/QANDA_20_1150
European Commission (2021): European Innovation Scoreboard 2021. QANDA/21/3050 (2021). Brussels, https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3050
Government of Romania (2020): Convergence Programme for 2020, May 2020. Bucharest, https://ec.europa.eu/info/sites/default/files/2020-european-semester-convergence-programme-romania_en.pdf
TAXAND Global Guide to M&A Tax 2021: Romania. TAXAND, May 2021, https://www.taxand.com/wp-content/uploads/2021/05/Romania.pdf

Global Financial System

#19

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
6
With the influence of the pandemic in mind, Romania has participated more than ever in the EU and global economy, with the hope of mitigating the health and economic consequences of COVID-19. Most notable was the influence of the SURE initiative and Next Generation EU funding. Romania received €3 billion from SURE, in the form of loans granted on favorable terms from the European Union to EU member states. The program was introduced to preserve employment in the context of the pandemic crisis. Romania’s application for Next Generation EU funding has been met with positive assessments from the European Commission, because of Romania’s recovery and resilience plan (i.e., Romania devotes 41% of funds to support a green transition and 21% to support a digital transition). Next Generation EU is set to offer Romania €14.2 billion in grants and €14.9 billion in loans under the RFF to tackle the COVID-19 crisis, to embrace green and digital transitions, to strengthen economic and social resilience, and to improve cohesion with the European Single Market. As an emerging and developing economy, Romania has remained as active and influential in IFIs, such as the IMF, as it can be, but has remained steadfast in recovering from the pandemic. As a result, the IMF endorsed Romania’s plan to combat the economic consequences of the pandemic and it sees the EU-Romanian cooperative measures as beneficial to combat the effects of COVID-19. The government imposed a moratorium enabling non-financial corporations and households to postpone debt repayments by up to 9 months. While this moratorium (in force until March 2021) constrained the increase in non-performing loans, banks continue to be exposed to highly indebted firms. External debts comprise more than half of the total debt in the non-financial corporate sector. The government increasingly relies on external markets to finance public debt, implying risks for financial stability (OECD 2022)

Citations:
European Commission (2021): NextGenerationEU: European Commission endorses Romania’s €29.2 billion recovery and resilience plan. (2021). Brussels, https://ec.europa.eu/commission/presscorner/detail/en/ip_21_4876
European Commission (2021): SURE: The European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE). (2021). Brussels, https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/financial-assistance-eu/funding-mechanisms-and-facilities/sure_en
IMF (2021): IMF Executive Board Concludes 2021 Article IV Consultation with Romania. (2021). Washington, D.C., https://www.imf.org/en/News/Articles/2021/08/27/pr21249-romania-imf-executive-board-concludes-2021-article-iv-consultation-with-romania
OECD (2022): OECD Economic Surveys: Romania, Paris: OECD, https://www.oecd.org/countries/romania/oecd-economic-surveys-romania-2022-e2174606-en.htm
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