Romania

   

Economic Policies

#39
Key Findings
Despite encouraging growth, 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.

The economy has continued to show robust growth. As in previous years, this has been driven by tax cuts and strong wage increases, and has been accompanied by high, increasingly unsustainable fiscal and current-account deficits. Inflation rates are high by EU standards.

Unemployment rates have fallen to a record low. However, youth unemployment levels are high. Emigration rates have been extremely high, with 18.2% of the population, and nearly 40% of those with higher education, living abroad. Labor market participation rates are among the EU’s lowest.

The personal-income tax is among the EU’s least progressive. The corporate-tax rate of 16% is low, but frequent tax-code changes and the resulting uncertainty have reduced the competitiveness of the system. Despite robust economic growth, the fiscal deficit has grown to 3.6%, and is expected to widen considerably in 2020 and 2021.

Economy

#36

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
The Romanian economy continued to grow by about 4% in 2019. As in previous years, growth was stimulated by tax cuts and strong wage increases and is accompanied by high, and increasingly unsustainable, deficits in the fiscal balance and the current account. As a result of this economic overheating, Romania has one of the highest inflation rates in the EU. The country’s international competitiveness has been undermined by strong wage increases as well as skill and labor shortages, which has eroded investor confidence.

Citations:
European Commission (2020): Country Report Romania 2020. SWD(2020) 522 final. Brussels (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-romania-en.pdf).

Labor Markets

#37

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
Buoyed by strong economic growth, unemployment in Romania has fallen to a record low. However, unemployment is unevenly felt, with Romania’s youth unemployment rate as of August 2019 two percentage points above the EU average (16.2% vs. 14.2%). Moreover, labor market participation in Romania remains among the lowest in the EU. Labor force activity is disproportionately low for Roma people, women, those with disabilities, and those living in rural areas.

Romania’s labor market has been strongly shaped by massive emigration. Some 18.2% of the country’s population, including nearly two in five Romanians with a higher education, live abroad. Emigration has contributed to low unemployment levels but has also resulted in labor shortages and brain drain. The healthcare sector, for instance, faces an unprecedented shortage of qualified personnel, as doctors and nurses have left for higher paying jobs in the EU. While the period under review saw some efforts to remedy this – for instance, through an exemption from income tax for ten years and an increased minimum wage for construction workers – the latter’s outcome is unclear. To curb the loss of medical professionals, the government doubled wages in the sector during the period under review, but physician retention rates have remained negligible, especially outside Bucharest. In an attempt to bolster the country’s labor supply, the government raised quotas for non-EU foreign workers in 2019 to an all-time high of 30,000 work permits.

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
Under the Dăncilă government, tax policy has suffered from hectic and highly selective tax changes. The government has abolished income taxes for employees of public cleaning companies and mineral extraction companies for the next ten years, provided employers are paying salaries of at least RON 3,000 (around €630). It has introduced a new tax on banks, lowered VAT rates for some transport services, created a new registry for non-profit and religious organizations for sponsorship, and stopped the publication of a list of bad debtors. Following the practice of the previous governments, most tax changes have been adopted by emergency ordinances, on short notice, and without proper preparation and consultation.

Romania’s tax-to-GDP ratio stands at about 27%. This is the second-lowest value in the EU and compares to an EU average of 39.2%. As the substantial fiscal deficits show, tax revenues have remained behind expenditures.

The impact of the tax system on reducing poverty and income inequality is limited. The Romanian income tax is among the least progressive in the EU, as measured by the difference between the relative tax burdens for low- and high-income earners. Moreover, the share of indirect taxes in overall tax revenues is high.

With a standard rate of 16%, Romania’s corporate income tax burden is low. The differential treatment of different economic sectors has ambivalent effects. The frequent changes in taxation and the resulting uncertainty over tax policy have reduced the competitiveness of the system.

Environmental taxation remains at a relatively low level. Environmental taxes amounted to 2.1% of GDP in 2018, below the EU average of 2.4%. Revenues from transport fuel taxes as a share of GDP are among the lowest in the EU. The Dăncilă government lowered the excise duty on motor fuels from 1 January 2020. This will result in lower budgetary revenues and have a negative impact in terms of the climate objectives. Moreover, the government dropped its plans to introduce a pollutants-dependent car registration tax in 2019 and postponed the implementation of a landfill tax.

Citations:
American Chamber of Commerce in Romania (2018): Stop the Assault on the Economy! Bucharest, December 19 (https://www.amcham.ro/communication/amcham-press-releases/stop-the-assault-on-the-economy).

European Commission (2020): Country Report Romania 2020. SWD(2020) 522 final. Brussels, 26-28 (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-romania-en.pdf).

Urse, D. (2019): Tax Breaks for the Construction Sector in Romania: Higher Net Wages, But Lower Pension Rights. European Social Policy Network, Flash Report 2019/36, Brussels: European Commission.

Budgets

#36

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
As the Dăncilă government has continued to increase public sector wages and public spending, the fiscal deficit has further increased. Despite robust economic growth, it has risen from 2.9% of GDP in 2018 to 3.6% in 2019 and is set to widen to 4.4% in 2020 and 6.1% in 2021. This means that the debt ratio is likely to rise from about 35% of GDP in 2018 to 40% of GDP in 2021. Despite the still relatively low level of debt, rating agencies and other market observers have been pessimistic about the sustainability of Romania’s public finances, given the rather high financing costs the country has to bear.

Citations:
European Commission (2020): Country Report Romania 2020. SWD(2020) 522 final. Brussels, 13 (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-romania-en.pdf).

Melenciuc, S. (2019): Pay time: Romanian government’s borrowing cost is off the charts in the EU, in: Business Review, September 10 (https://business-review.eu/money/pay-time-romanian-governments-borrowing-cost-is-off-the-charts-in-the-eu-204575).

Research, Innovation and Infrastructure

#41

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’s weak performance in the areas of research and innovation has continued in the year under review. As of 2019, the country ranked among the lowest in the EU in indicators including research and development expenditure (0.48% of GDP), number of patents per capita, employment in knowledge-intensive activities, and rates of international scientific publications. Performance in innovation has consistently deteriorated over the past decade, with start-up success rates falling in tandem. There are discernible gaps between industry needs and curriculum in higher education institutions, while Romania’s noted “brain drain” of skilled migrants, particularly in science, technology, engineering, and mathematics, further hampers the country’s success in these areas. Another identified issue is the lack of policy efforts attempting to leverage the research and development efforts of foreign-owned and operated companies in Romania domestically. Ultimately, despite the clear need for substantial public and private investment in research and development as a starting point for improvements in this arena, there have been no clear plans from the government to pursue this. In 2019, however, for the first time since 2016, Romanian researchers were allowed to compete for national grants awarded by UEFISCDI, the national granting agency. While applicants are unsure whether the research funds promised by the Romanian government will be disbursed to successful teams, many of them are hopeful that the new competition will support the creation of new products.

Global Financial System

#18

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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