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PROJECTED DEFICIT CUT UNDER PRESSURE FROM EU, WITH ECONOMY BOOMING

Cabinet tightens belt for 2007

THE FICO government has agreed to spend less than it anticipated next year, under pressure from the European Commission, but the prime minister says he is not happy about the restrictions on his social spending plans.
At a cabinet meeting on May 9, the government agreed to cut Sk1.5 billion from planned spending next year and to reduce the public finance deficit from 2.4 percent of GDP to 2.3 percent.

THE FICO government has agreed to spend less than it anticipated next year, under pressure from the European Commission, but the prime minister says he is not happy about the restrictions on his social spending plans.

At a cabinet meeting on May 9, the government agreed to cut Sk1.5 billion from planned spending next year and to reduce the public finance deficit from 2.4 percent of GDP to 2.3 percent.

"The EU economy is undergoing a strong period, and the European Commission is calling on all member states to consolidate their public finances more quickly, which also affects us," said Finance Minister Ján Počiatek after the meeting in explaining the change.

However, the next day, Prime Minister Fico told MPs during a parliamentary question period that the Maastrict criteria for adopting the euro currency, which his government has made the cornerstone of its economic program, are proving "extremely limiting and restricting".

Among the criteria that Slovakia must meet to adopt the currency in 2009 as planned is a requirement that the public finance deficit remain under three percent of GDP.

Fico's comments in parliament were the second time in two weeks that he has seemed to cast doubt on the country's euro aspirations. In a speech to university students in Bratislava on April 23, the prime minister said that "sometimes I get the feeling that there is some fatigue in the EU. We have to challenge that fatigue, because it could happen that they say 'enough', and Slovakia is prevented from using the euro as of January 2009 for political reasons."

But Karol Morvay, an analyst with the MESA 10 economic think-tank in Bratislava, said that such statements should be interpreted as a political message to the prime minister's supporters, rather than as a serious re-think of the euro adoption policy.

"He [Fico] has been making such comments for a long time, as if he were preparing public opinion for the possibility that Slovakia might not make it [fulfill the criteria], but luckily the Finance Ministry and the central bank take the euro much more seriously," Morvay said.

"What he is basically telling his voters is this: 'If it were up to me, I would spend more money on you, but my hands are tied'.

"He's trying to play the good uncle."


Savings


Following the practice under former Finance Minister Ivan Mikloš, Počiatek has begun preparing his first full budget by approving a deficit figure, and then negotiating how much each ministry can spend. So far it looks as if the government will have slightly over Sk350 billion to distribute, although this will be clarified at a detailed budget discussion in August.

On the revenues side, no changes are being planned for next year in terms of consumer taxes, while further reductions in the VAT rate will depend on June and September analyses of VAT income to see if the budget can afford it.

As one of the social-democratic Fico government's first steps after taking office last July, the VAT rate on drugs and medical aids was cut from the flat 19 percent to 10 percent as of January this year.

On the costs side, government ministries have made little progress towards achieving the 20 percent staff cuts urged on them by the Finance Ministry, with many not even having begun a personnel audit, and others claiming such deep cuts would leave them unable to function.

Nevertheless, Počiatek says he is determined to reduce the costs of state administration.

"While putting the budget together we will return to the topic of centralized public procurement and excess employment at ministries," he said after the cabinet session.


Making the cut


After 8 percent GDP growth in 2006, the European Commission now forecasts 8.5 percent in 2007.

"The Slovak economy is in very good shape, and it can afford deeper budget savings," said analyst Vladimír Pikora of the Czech Next Finance brokers.

Fico has been careful to stress the importance of responsible fiscal policy to his social spending plans, although it is unclear if the budget will be able to cover another round of Christmas bonuses for pensioners, which he introduced in 2006. Asked in parliament about Slovakia's economic outlook by a fellow Smer party MP, Fico said that his government had scripted "a very demanding, even a diabolic plan.

"On the one hand we want to fulfill our vision of Slovakia as a social state, while on the other hand we want to completely fulfill the Maastricht criteria," the prime minister said.

Following a meeting on April 26 with Jean-Claude Trichet, the head of the European Central Bank, Fico said Slovakia would probably fulfill the last remaining euro criterion - inflation - by August this year. Analysts said that November was a more likely date.

In March, consumer prices grew by 2.1 percent y-o-y, according to EU methodology, up from 2.0 percent in February. The target Slovakia must meet is a floating one, within 1.5 percentage points of the inflation rates of the three best-performing euro-zone economies. At the moment the target is at about 2.8 percent; the Slovak economy must beat that on a 12-month average.

Under Fico, the public finance deficit target has also been reduced from 3.4 percent of GDP last year to a planned 2.94 percent in 2007.

"These are the government's real results after almost a year in power," he said. "Stable public finances, a social approach and a thorough fulfillment of the government's plan."

However, many economic analysts have said that the Slovak economy remains strong partly because the Fico government has not yet followed through on its promises to roll back reforms launched by the previous Dzurinda administration, such as introducing a flat income tax, a capitalization pillar for the pension system, and hard budgetary constraints for the health sector.

Morvay said that Fico's room for maneuver on economic policy was being restricted by "his sponsors", as the group of industrialists who allegedly finance the ruling Smer party are known.

In particular, Morvay said, the Fico government's euro commitment is key to the fortunes of these entrepreneurs, as a failure to meet the criteria for entry would endanger their profits and prestige.

"Failure to adopt the euro probably wouldn't affect Fico's voter base, because I don't know if these people even understand what the Maastricht criteria are. But it would certainly affect his sponsors, and that is forcing him to observe some kind of discipline.

"If he abandoned the euro, his funding would dry up, although his voter base might not be affected."

Morvay said that failure to adopt the euro would leave Slovak entrepreneurs exposed to currency appreciation and further reductions in their price competitiveness.

"There is also a serious image issue involved, because if Slovak entrepreneurs start using the euro years before their Czech, Polish and Hungarian counterparts, they can use it to show their European partners they are more reliable," the analyst said.

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