Tax cuts rile Finance Minister, SDĽ party

Finance Minister Brigita Schmögnerová, a member of the socialist Democratic Left (SDĽ) bloc, led a chorus of disapproval from her party after her ministry's proposals for tax cuts were overruled by other members of cabinet August 20.
The minister, who later refused to confirm or deny speculation that she would resign over the issue, had seen her proposals on taxes dumped in favour of those of Deputy Prime Minister for Economy Ivan Mikloš, a member of Prime Minister Mikuláš Dzurinda's centre-right Slovak Democratic and Christian Union (SDKÚ).


Schmögnerová, shown above in parliament, predicts dire consequences.
photo: Vladimír Hák

Finance Minister Brigita Schmögnerová, a member of the socialist Democratic Left (SDĽ) bloc, led a chorus of disapproval from her party after her ministry's proposals for tax cuts were overruled by other members of cabinet August 20.

The minister, who later refused to confirm or deny speculation that she would resign over the issue, had seen her proposals on taxes dumped in favour of those of Deputy Prime Minister for Economy Ivan Mikloš, a member of Prime Minister Mikuláš Dzurinda's centre-right Slovak Democratic and Christian Union (SDKÚ).

Schmögnerová said that the tax cuts passed - which will see, among other things, corporate tax fall from the current 29% to 18% by 2006 - would harm Slovakia's western integration efforts by jeopardising plans to lower the fiscal deficit to 2.5% of expected GDP in 2004. Slovakia hopes to enter the EU in 2004, and must, when it joins, have its fiscal deficit at or below 3% of GDP.

"The tax cuts will endanger the government's goal to cut the state budget deficit, will prevent Slovakia from getting an investment [grade] rating - which would mean lower interest rates on foreign loans for the state as well as businessmen - and threaten the country's integration into the EU," she said.

The SDĽ rallied behind the minister, with party officials saying that they would not support the proposals in parliament (the proposals will be discussed when parliament reopens next month after its summer break) and calling a special meeting of top party representatives on August 26 to discuss the SDĽ's response to its cabinet defeat.

First cut the deepest

Adopting Mikloš's proposals, the government agreed to drop the tax rate on the lowest personal income bracket from 12% to 10%, and the rate on the highest bracket from 42% to 38%. Corporate income tax will drop from the current 29% to 26% next year, and will be cut 2% every year to 18% by 2006. The Finance Ministry had proposed only a cut in the highest rate of income tax to 40%, while it had opposed any changes at all to the corporate tax rate.

Cabinet also introduced a mutual tax of 5% for all property transfers. The Finance Ministry had proposed a 5% rate for the transfer of property with a value of less than 5 million crowns, and 8% for property with higher values.

"The proposals submitted by Deputy Prime Minister Ivan Mikloš support only big businesses and those groups with the highest incomes. The proposals submitted by the Finance Ministry were equitable and would not have threatened the fiscal deficit," Schmögnerová said.

Mikloš rejected the Finance Minister's claims. He said that neither the fiscal deficit nor Slovakia's entry into the EU would be endangered. "[My proposals] lower the tax burden for citizens just as for businesses, will heal the business environment, and will lead to more prosperity for citizens as well as firms," Mikloš said.

"A similar approach has also been adopted by our neighbours on both income tax paid by individuals and income tax paid by legal entities. Compared to them, Slovakia has the highest rate of income tax paid by individuals. Income tax paid by legal entities is 18% in Hungary, while Poland has already adopted an approach similar to that proposed by the Slovak government," he said.

Finance Ministry figures suggest that by lowering corporate tax to 26%, budget revenues would drop by 100 million Slovak crowns this year and by 4.9 billion in 2003.

Many economists, however, have praised Mikloš's proposals. Ján Tóth, senior analyst with ING Bank, while identifying the proposals as a compromise package between more radical tax cuts proposed by cabinet right wingers and the less adventurous changes proposed by Schmognerová, said the cuts would be a positive move for the corporate sector.

Investors have also backed the deputy PM's plans. František Brňák, director of the Slovak subsidiary of the German CRT Electronic firm, which invested in Slovakia in 1995, said: "Any drops in any tax area means a contribution to us."

While the business sector welcomed the government's plans some market watchers said that Schmögnerová's position had been weakened, and that she would likely resign if the proposals got parliamentary approval in September.

The loss of Schmögnerová as Finance Minister has been threatened before. Last summer she appeared to have lost the backing of her party, narrowly surviving a vote to have her removed from her post. Also, in May this year, her position looked shaky during a cabinet reshuffle. Markets reacted dramatically to the threat in 2000, but this year showed little reaction.

Some domestic analysts have argued that the loss of Schmögnerová now would have little effect on the market. The government's programme of economic reform would not be knocked off course by her departure, they said.

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