OECD Economic Surveys: Romania 2024

1. Sustaining income convergence

Growth in Romania’s economy slowed over the past two years but remained solid, helping to close ground on living standards in higher-income countries. Output continued to increase even as Russia’s invasion of Ukraine, and ensuing shocks to energy and agricultural commodity markets, threatened to cut short a recovery from the COVID-19 pandemic. Major supply disruptions have since eased. So too have the high energy prices that sparked a surge in inflation which tight monetary policy is still trying to tame. Higher borrowing costs and weak global growth are now combining to slow activity in the economy.

Achieving rapid income gains in the years ahead will not be easy. Recent developments have exposed the limits of a growth formula reliant on a cheap supply of labour and low taxes. Firms’ costs are rising as real wages increase faster than productivity. A pressing challenge is that Romania does not raise enough tax to fund ongoing public spending, which is set to rise. New consumption and income tax measures go part way towards addressing persistent revenue shortfalls. But without more ambitious reform, fiscal imbalances will deteriorate as population ageing strains future budgets. Higher debt servicing costs or lower potential growth would further complicate the task of fiscal consolidation.

Romania confronts its macroeconomic policy challenges from a reasonable starting position. Public debt, while rising, is for now still at manageable levels. With the steadying influence of EU institutions, Romania is benefiting from a period of relative financial stability as it seeks to stabilise public finances. External support from EU funds will keep infrastructure investments on track, provided available grants and loans can be absorbed quickly and effectively over the next few years. There is also ample room to efficiently expand Romania’s narrow revenue bases and momentum in reforms to remove barriers to higher economic potential (Box 1.1 and Box 1.2).

Strong productivity growth would quickly lift living standards but needs a strong investment climate and continued structural reform if it is to last (Figure 1.1). Regulations are improving but heavy bureaucracy still adds to firms’ costs. Underperforming state-owned businesses distort competition, while limited credit access constrains business growth and impedes resource reallocation. Romania’s past institutional reforms are still paying off. But predictable policymaking is needed to shore up business conditions.

Socio-economic disparities remain wide. Poverty risk is high (Figure 1.2), particularly in rural areas and Roma communities. Cost-of-living pressures in the past two years have been a reminder of the need to improve social protection as public resources expand. Policies can also do more to encourage formal employment, including among women and older Romanians. Better health care and schools would expand opportunities and give young people strong reasons to stay in Romania rather than emigrating.

Box 1.1. Quantifying the GDP impact of structural reforms

The following table presents estimates of the GDP impact of selected structural reforms. Estimates are based in part on empirical relationships between past policies and macroeconomic outcomes, in some cases drawing on evidence for countries other than Romania. The estimates are illustrative only.

Table 1.1. Illustrative GDP impact of selected structural reforms

Reform	Long-run effect
Supply-side reforms boost credit to small firms by 1%	+0.1%
Lower regulatory barriers (PMR) to close half the gap to the OECD average	+2%
Raise the female retirement age to match that of men	+0.5 to +0.8%
Education-sector investments lift schooling outcomes to match the OECD average	+0.5 to +1%
Higher fuel excise duties1	0%

1. The scenario is adapted from the 2023 World Bank review of Romania’s tax system conducted for the Recovery and Resilience Plan. Excise duties are assumed to increase to account for all climate and non-climate related externalities. Negative effects on GDP of higher fuel prices are offset either by returning additional revenues to low-income households or by reducing distortive taxes on labour income.

Source: OECD (2022[1]), OECD calculations based on Long-term model estimates and World Bank Report on the Tax System in Romania (2023).

In support of global climate action, Romania has committed to eliminate its net greenhouse gas emissions by 2050. Achieving that goal will be challenging. Fossil fuel dependence and old cars and buildings increase carbon emissions from economic activity (Figure 1.3). Romania needs cleaner power, more green investment, and stronger price incentives for energy saving. To limit costs from abatement action, mitigation policies must be efficient. To shield vulnerable people from harm, climate policies must also be fair.

Against this background, the four key messages of this Economic Survey are:

• Monetary policy should remain tight until inflation is clearly on course to meet the central bank’s target. Fiscal policy must support monetary tightening in cooling demand. Near-term efforts to contain government spending must be matched with implementation of new pension reforms to mitigate long-term fiscal pressures from population ageing. Tax reform is needed to lift revenue collections and keep fiscal consolidation on track while limiting drags on economic activity.

• Removing obstacles to efficient resource reallocation would support productivity growth. Continued governance reforms would complement ongoing efforts to reduce firms’ costs of complying with Romania’s regulations. Improving access to finance would remove barriers to growth for small firms and help strengthen the business environment. Continued efforts to combat corruption are needed to enhance market efficiency and encourage investment.

• Labour force participation is weaker than in many OECD countries, and particularly low among older Romanians, women, and in rural areas. Childcare shortages, low pension ages and scarce supply of part-time jobs discourage many women from paid formal work. Changing this would support greater gender equality in employment. Romania would also be better placed to meet demographic challenges threatening to slow future growth and strain budgets.

• Romania must do more to get on a sure path to net zero emissions by 2050. Large investments are planned or underway to reduce greenhouse gas emissions from power generation, buildings and transport. Yet a comprehensive policy package is needed to accelerate emission reductions in an efficient and equitable manner, with strong price signals for abatement, stricter regulations, good governance and more public support for green investment. Policy support can help displaced workers back into the labour market and shield vulnerable households from higher costs. Romania also needs to build resilience to the impacts of a changing climate.

Figure 1.1. Living standards are lower than in most OECD countries

Source: OECD Economic Outlook database; OECD Labour Force Statistics database; and OECD calculations.

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Figure 1.2. Poverty risk is high

1. Indicator reversed so that the right side of the scale corresponds to better outcomes.

Note: Relative poverty rate is determined after taxes and transfers based on a poverty line at 60% of median household income. Average PISA score is the average scores in mathematics, science and reading. Gender wage gaps are defined as the unadjusted difference between median wages of men and women relative to the median wages of men.

Source: OECD Income Distribution database; OECD Labour Force Statistics database; OECD PISA database; OECD Education at a Glance database; OECD Earnings and Wages database; and OECD calculations.

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Figure 1.3. Household energy consumption is elevated

1. Indicator reversed so that the right side of the scale corresponds to better outcomes.

Note: Greenhouse gas (GHG) emissions exclude land use, land-use change and forestry (LULUCF). The indicator is expressed in GHG emissions per unit of GDP, measured in 2015 PPP USD, and represents the GHG intensity of economic activity. “Fine particles intensities” shows PM2.5 particulate emissions per inhabitant. For this indicator, the OECD unweighted average excludes Australia, Colombia, Costa Rica, Israel, Japan, Mexico, and New Zealand. “Household energy consumption” is the energy consumption per square metre of housing for space heating scaled to the EU average climate. OECD EUR is the unweighted average of European OECD countries.

Source: OECD Green Growth Indicators database; Odyssee-Mure; IEA World Energy Balances database; and OECD calculations.

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Box 1.2. Recent and upcoming reforms in Romania

Reform momentum has picked up in Romania, spurred on by the country’s Recovery and Resilience Plan (RRP). This box details selected structural reforms that have been completed since the previous Survey or are planned for the coming years.

• Public pensions are being reformed. New legislation provides for automatic indexation of pension entitlements to price and wage inflation. Recalculation of entitlements in 2024, based on a consistent points-based formula, will address inequities in the pension system but increase near-term fiscal pressure. Other reforms will improve the system’s long-term financial sustainability. The statutory retirement age for women is gradually increasing to match the male retirement age. New laws also provide for indexation of pension ages to gains in life expectancy.

• Tax policy changes have curtailed firms’ access to Romania’s generous turnover-based microenterprise tax regime. The government is also taking small steps to expand the value added tax base and starting to unwind sectoral income tax breaks. A review of Romania’s tax system has been completed, but most of its recommendations are yet to be addressed.

• Judicial reforms have strengthened the independence of Romania’s magistrates. In 2023 the European Commission formally closed the “Cooperation and Verification Mechanism” which had been tracking court reform and progress fighting corruption.

• Government capacity upgrades will revamp IT and data systems, reform public wage determination and recruitment, and improve project management. Investments in the tax administration aim to encourage compliance and make it easier to trace and punish evasion.

• EU-funded infrastructure investments are expanding road and rail transport, retrofitting dwellings to save energy, upgrading schools and health facilities, improving and expanding infrastructure for early childhood education and care, and boosting renewable energy generation. Projects are underway to improve social and health services in rural areas, including through greater access to online services.

• Simplified licensing procedures from 2024 will make it easier for manufacturing firms to start operating. Entrepreneurs can also now register and incorporate businesses online. The goal is to reduce paperwork and set-up costs for firms. New measures also aim to simplify licensing procedures for renewable energy projects.

• A new minimum wage mechanism is due to start in 2024. The new system will set wage increases based on objective criteria, including to limit risks of job destruction or lost competitivity. Past determinations proceeded without governments benefiting from formal advice. Large wage increases awarded for social aims at times exacerbated macroeconomic imbalances.

• Coal power and coal mining will be phased out by 2032, a measure critical to decarbonisation of Romania’s energy supply. Most mines and coal-fired power capacity are scheduled to shut down by the end of 2025 as part of a step-wise phase-out legislated in 2022.