ONE year ago Slovakia was still expressing confidence about its ability to tame its budget deficit, while at the same time boasting about having one of the fastest growing economies in the European Union. But it has become clear over the past three months that the deficit will not only exceed the 3 percent of gross domestic product (GDP) limit – as set by the Maastricht criteria for euro membership – but might climb to 5 or even 6 percent. By the end of August the state budget deficit had reached €1.206 billion, over €200 million more than the deficit originally forecast for the whole of 2009.
Compared to late July, when the deficit reached €914.4 million, it swelled in August by a further €291.9 million. At the end of August last year the state budget deficit stood at €168.8 million, according to data released by the Finance Ministry.
Observers have expressed regret that the country missed the opportunity during previous years of economic growth to create more reserves for harder times. Economists say the government should be far more conservative when it comes to spending public funds; they dismiss the government’s current management of funds as being far from “belt tightening”.
“The prospect of keeping the deficit at the €1.0 billion planned for the whole year has been gone for several months,” Poštová Banka analyst Eva Sárazová told The Slovak Spectator.
Eight-month budget revenues reached €6.441 billion, down 10.4 percent year-on-year.
Collected tax revenues represented the biggest portion of revenues, at €5.05 billion, down 11.7 percent year-on-year, the SITA newswire reported.
The most significant reason for the deepening of the deficit in August was a 20-percent year-on-year increase in state expenditures, the Finance Ministry said, as quoted by the TASR newswire. Meanwhile, state revenues in August were lower than in the same month last year, although the significant year-on-year slump recorded in previous months was reduced to 1.3 percent year-on-year in August.
According to TASR, Finance Minister Ján Počiatek praised the importance of the government's expansive fiscal policy as an essential tool for boosting the Slovak economy.
“When you look at GDP structure, one of the few components that is at a positive level is public expenditure,” said Počiatek. “The entire world is following this path. So we'll follow it, too. It's obvious that if cuts to public expenditure had been made, the fall would have been a lot worse.”
Weaker tax revenues have fallen 12 percent behind last year’s tax receipts and despite two-thirds of the year having passed, in terms of total revenues not even half of the projected sum has been collected, Sárazová added.
According to Sárazová, Slovakia is feeling the reality of the crisis not only through trimmed revenues but also through curtailed government spending, plans for which were developed on the assumption of economic growth. But although the state is spending less than it was geared to consume, it is not really possible to talk about any “belt-tightening policies”, the analyst suggested.
“The state has managed to spend 9 percent more than last year,” she said, adding that tightening the government’s belt is not only necessary, but at this point unavoidable. “There is definitely a certain room for more transparent and effective public procurement.”
The collection of value-added tax continues to lag behind last year's results. It is down 21.9 percent to €2.25 billion, according to the ministry.
“Considering the fact that we now have two thirds of the year behind us, not even half of the planned VAT has been collected,” Sárazová said. “It is exactly this type of indirect taxation which makes up the main revenue of the state budget.”
Along with taxing income, through VAT the state also taxes consumption: the process is based on the fact that the end-consumer pays the tax assigned to a certain product or service along with the price of the product, she explained.
“All participants in the distribution channel transfer their share of tax to the state coffers and this is why weaker performance in the whole distribution channel, which comprises producer, retailer and sellers, should be seen as being behind the weaker collection of this universal tax,” Sárazová said.
As for the government’s plans, total revenues in the 2009 state budget are projected at €13.116 billion, with tax revenues making up €9.886 billion of this sum; the rest should flow in the form of grants and transfers, mainly from the EU budget, and from non-tax revenues. Total expenditure for the year 2009 is budgeted at €14.125 billion, of which current expenditures should make up €11.898 billion. The state budget deficit this year was projected to be €1.009 billion.
One of the Maastricht criteria for euro membership was a sustainable public finance deficit beneath 3 percent of national GDP.
“The last two years had been unproblematic, but this year does not seem rosy at all,” said Sárazová. “It is not only that Slovakia will not keep within the 3-percent ceiling, but estimates suggest that the public finance deficit might stand at 5 or 6 percent of GDP.”
The expected revival of the economy next year will be rather slow and unemployment will still be high while tax revenues will only rise gradually, said Sárazová.
“Moreover, next year is an election year, which creates risks that the deficit will not be low in 2010 either,” Sárazová added. “The public debt might, over two years, deepen by an additional 10 percent.”
Higher deficits mean fatter public debt, which sooner or later every country must pay off.
“Countries struggling with more significant debt are already reaching for less popular measures, such as raising taxes,” Sárazová said. “Higher debt could also mean a drop in the activities of foreign investors.”
