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2.9 PERCENT PUBLIC FINANCE DEFICIT MAKES BELIEVER OF MARKETS

Fico budget stays on course for euro plan

THERE have been few clearer demonstrations of the power that Prime Minister Robert Fico wields over his cabinet than the fact that the draft state budget for 2007 - although it promises spending cuts for 10 of 14 ministries - was approved unanimously.

THERE have been few clearer demonstrations of the power that Prime Minister Robert Fico wields over his cabinet than the fact that the draft state budget for 2007 - although it promises spending cuts for 10 of 14 ministries - was approved unanimously.

At a cabinet session on October 11, the socialist Fico government performed what its leader termed "a miracle", approving a 'euro-friendly' budget forecasting a public finance deficit of 2.9 percent of GDP next year, 2.4 percent in 2008 and 2.0 percent in 2009.

"This is clear confirmation that Robert Fico is a strong prime minister," said political scientist Juraj Marušiak.

"The budget is the strongest signal so far that the government is prepared to fulfill the economic criteria for entering the euro-zone," added Eugen Jurzyca, director of the INEKO economic think-tank.

In order for Slovakia to adopt the euro on schedule on January 1, 2009, the deficit figure must remain below 3 percent of GDP.

In order to fulfill the deficit target, however, the Fico government has had to abandon some of its pre-election promises for next year. The VAT rate will not be cut on food and energy, while the 19 percent flat tax remains intact. Meanwhile, the government plans to shut down some hospitals and schools, while around one-fifth of all state employees will likely lose their jobs, according to the Finance Ministry.

"It is still not certain how the coalition will respond to disappointment by its voters if it continues with a responsible budgetary policy," Jurzyca said.

The planned budget income for 2007 is Sk308 billion, while expenditures will total Sk346.9 billion. The greatest gainers for next year were the Health Ministry, up Sk3.6 billion to Sk30.1 billion, and the Labour Ministry (up Sk2.9 billion to Sk51.8 billion).

On the other hand, the Environment Ministry had its budget cut virtually in half, from Sk6.7 billion this year to Sk3.5 billion in 2007.

According to Fico the budget "on the one hand is oriented towards the people and respects the government's program manifesto, and on the other hand also gains the confidence of financial markets and maintains the stability of the Slovak crown".

On the day the government approved the budget, the Slovak crown hit a new record of 36.81 SKK/EUR. However, market analysts said the budget was only partly responsible for the surge.

"The crown received the budget news positively, but speculative capital was largely behind the strengthening," said foreign currency dealer Roman Farkaš of Tatra banka.

While the mood among analysts was generally upbeat on the budget, several criticisms and warnings were cited.

First, the Agriculture Ministry for the first time received the maximum possible subsidies for farmers under Slovakia's EU entry treaty at 70 percent of the EU average, clearly against the advice of the Finance Ministry.

"This was a decision that was taken at the level of negotiations between political parties," said Finance Minister Ján Počiatek.

On the other hand, analysts said they would have prefered to see that money go towards education.

"If this country is to be successful, its highest priority has to be education," said Martin Bruncko, the advisor to former Finance Minister Ivan Mikloš.

The Education Ministry is slated to receive Sk50.4 billion next year, up only Sk1.52 billion from 2006.

"Despite those pre-election promises, the government approved a budget in which spending on education falls from 3 percent of GDP this year to 2.8 percent the next," Bruncko said.

"We have to ask whether that money [for agriculture] couldn't have been used more effectively elsewhere, such as on schools and R&D," agreed ČSOB bank analyst Marek Gábriš.

The other reason for caution was that the budget still has to be approved by parliament, where it is due to be delivered by October 15.

Tibor Mikuš of the junior coalition partner Movement for a Democratic Slovakia (HZDS) suggested that the party MPs might not approve the budget as meekly as the HZDS cabinet ministers did.

The HZDS has been increasingly unhappy with its share of power within the coalition, and has said it especially wants more executive posts.

"The status of the HZDS in the ruling coalition has to be settled before the budget is passed," Mikuš said.

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