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Deficit only budget certainty

THE CABINET of Prime Minister Robert Fico held its first debate on next year's state budget on August 16 as market watchers waited for news on how the government would square its social spending programme with its promise to cut the fiscal deficit.

THE CABINET of Prime Minister Robert Fico held its first debate on next year's state budget on August 16 as market watchers waited for news on how the government would square its social spending programme with its promise to cut the fiscal deficit.

In the end, the only thing the government agreed on was to hold next year's budget deficit under 3 percent of GDP, or about Sk50 billion, which would keep the country on track to fulfil one of the most important Maastricht economic criteria for adopting the euro currency as planned on January 1, 2009.

But the draft budget, which will go through many rounds of debate and revision before it is submitted to parliament by September 22, does not take into account the government's plans to introduce a lower VAT rate or a higher tax on wealthy individuals and corporations.

How those tax changes play out - and whether they are introduced at all this year - will have a major impact on whether the government manages to meet its deficit goal. Further questions remain over how the government will find the money to cover steps such as eliminating patient health care fees, subsidizing mortgage interest rates, or introducing a Christmas bonus for pensioners.

Many cabinet ministers are also unhappy with spending cuts proposed for their ministries, such as agriculture, which is set to lose almost Sk7 billion from its Sk21 billion in 2006, or economy (Sk4.3 billion of its Sk9.5 billion in 2006) and environment, which may lose almost half of this year's Sk6.7 billion.

"This is a working version that still has to go through some serious changes," Fico said after the cabinet session. "The most important thing is that we passed a resolution showing the clear intentions of the government to meet the Maastricht criteria and introduce the euro by 2009."

Cleaving to the plan of the previous right-wing Dzurinda government to join the eurozone in 2009 is seen by the government as vital to reassuring foreign investors and financial markets that its left-wing programme will not jeopardize the country's economic health.

The original state budget draft, a copy of which is available at www.vlada.gov.sk, proposes revenues of Sk310 billion and expenditures of Sk346 billion for a deficit of Sk36 billion.

"The first version of the budget continues in the trend of the previous government, and doesn't greatly change the structure or planned revenues and expenditures," said Radovan Ďurana, an analyst with the Institute for Economic and Social Studies, for The Slovak Spectator.

Ďurana added that the 2006 budget had seriously underestimated revenues from VAT, while the 2007 draft, in estimating Sk37 billion more in VAT income, was more realistic.

As to whether the government's overall deficit goal was realistic, he was more cautious.

"There are two sides to the coin," he said. "The revenues estimate is realistic, but the spending estimate, which foresees an increase of 5 percent, is always a matter for the government to decide, so one can't really say whether it is realistic or not. Spending can always be changed during the year.

"The budget is also missing some planned steps such as introducing the double VAT rate, the tax on millionaires, or the mortgage subsidy, so I'm sure we'll see some changes on the spending side at least," the analyst added.

"But personally I see this budget as a signal by the government that it wants to observe the Maastricht criteria."

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