Romania

   

Economic Policies

#40
Key Findings
Despite some positive signs, Romania falls into the bottom ranks internationally (rank 40) in the area of economic policies. Its score on this measure has improved by 0.3 points relative to 2014.

The exceptional growth rates of recent years have tumbled, but the overall rate remains robust. The growth has been driven by private consumption, boosted by tax cuts and strong increases in wages and pensions. Inflation rates are comparatively high.

Unemployment rates reached a 10-year low of 4.3%. Wages have grown substantially, led by an increase in the minimum wage. Problems include a high inactivity rate among the working-age population, high youth unemployment levels and a brain drain among the most educated youth.

A significant cut in the flat income-tax rate has enhanced reliance on indirect taxes. The fiscal deficit has grown to above 3% of GDP, driven by the tax cuts and public spending. Debt levels are rising as a result. Increases in R&D spending have been reversed, with funds recently withheld and grant allocations blocked.

Economy

#37

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
4
Real GDP growth in Romania was almost halved within one year, falling from 7% in 2017 to 4% in 2018, and is expected to decline further in 2019. Private consumption, supported by tax cuts and strong increases in gross wages and pensions, has remained the main driver of growth, but has suffered due to strong inflation and the uncertainties associated with a shift in the distribution of social contributions from employers to employees. With an annual average of 4.1%, Romania’s inflation has been the highest in the European Union. Both the Tudose and the Dăncilă government have done little to improve the medium- and long-term prospects of the Romanian economy by addressing long-standing problems such as a weak education system, poor infrastructure, cumbersome procedures for businesses and frequent regulatory changes. Public investment recovered only slightly from its post-EU accession low in 2017. Despite the political turmoil, private investment has remained high.

Citations:
European Commission (2019): Country report Romania 2019. SWD(2019) 1022 final, Brussels (https://ec.europa.eu/info/sites/info/files/2019-european-semester-country-report-romania-en.pdf).

Labor Markets

#36

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
4
In 2018, Romania’s labor market continued to benefit from the country’s strong economic performance. The unemployment rate dropped from 5.1% in 2017 to 4.3% in 2018 and reached a ten-year low in December 2018. However, the Tudose and Dăncilă governments have has failed to address long-standing issues such as a high inactivity rate of the working-age population, massive youth unemployment, a growing skills mismatch, strong disparities between rural and urban areas, and the brain drain of the most educated and ambitious youth. Instead it has focused on raising wages in the public sector and the minimum wage. In January 2019, the latter will rise from RON 1,900 to RON 2,050 per month (€440). The resulting strong general increase in wages is likely to threaten the country’s competitiveness and stifle employment growth.

Taxes

#36

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

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
Romania has the second lowest tax-to-GDP ratio in the EU. Tax compliance has been low, as exemplified by a high VAT gap. A high use of cash payments and a large shadow economy have gone hand-in-hand with massive tax evasion. As the tax system has strongly relied on indirect taxes, its redistributive effect has been limited. The substantial changes in the tax system that went into effect in January 2018 after a short preparation period – a decrease in the flat personal income tax rate from 16% to 10%, combined with an increase in the income tax allowance and a far-reaching shift in the distribution of social contributions from employers to employees – have further strengthened the reliance on indirect taxes. Their positive effects on the collection of social insurance contributions have been limited so far. During the period under review, the Dăncilă government has launched a number of additional changes to the tax system, most notably an extension of the application of the reduced VAT rate of 5% for sporting and recreational activities as well as to accommodations, restaurant and catering services and further changes to the taxation of micro-enterprises. However, the frequent amendments to the fiscal code, often adopted on short notice by government emergency ordinance, have undermined the credibility of the tax system. As part of the Revenue Administration Modernization Project, the National Tax Administration Agency (ANAF) has consolidated its tax forms. However, the effectiveness of the Romanian tax administration has improved only slowly.

Citations:
European Commission (2019): Country report Romania 2019. SWD(2019) 1022 final, Brussels, 22-24 (https://ec.europa.eu/info/sites/info/files/2019-european-semester-country-report-romania-en.pdf).

Budgets

#39

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
Romania’s general government fiscal deficit continued to grow in 2018. Eventually exceeding 3% of GDP, it was the second highest in the European Union. The deficit was caused by both by the government’s tax cuts and its profligate public spending. In the first half of 2018, the deficit was substantially higher than planned. This prompted the Council of the European Union to launch a significant deviation procedure addressed to Romania in June 2018 and led the government to pass two budget amendments in September and November 2018. The original 2018 budget, as well as the two budget amendments violated several national fiscal rules. As in previous years, the government also failed to send the update of the medium-term fiscal strategy to parliament by the statutory August deadline. While the debt-to-GDP currently stands at below 40%, it is likely to increase and to go beyond the 60% reference value by 2029, if budgetary policy continues the course adopted since the 2016 parliamentary elections.

Citations:
European Commission (2019): Country report Romania 2019. SWD(2019) 1022 final, Brussels, 22, 24-26 (https://ec.europa.eu/info/sites/info/files/2019-european-semester-country-repor t-romania-en.pdf).

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
Under the Dăncilă government, the progress made in recent years in the areas of research and innovation has been undone. Contrary to the 2014-2020 National Research, Development and Innovation Strategy, the government’s R&I budget has been cut rather than increased. This prompted the resignation of Minister of Research and Innovation Minister Nicolae Burnete at the end of August. The allocation of research grants has been blocked by bureaucratic impediments, the central government’s withholding of funds and the mass expulsion of foreign scholars from adjudicating committees.

Global Financial System

#28

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
Romania continues to be an active participant in the EU, the IMF and other international fora. The country’s ability to lead in these fora is limited by its rightful focus on internal economic development and stability.
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