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Despite record deficit, budget seen as honest

The Finance Ministry October 9 managed to cut a huge public finance deficit for 2001 that threatened to reach 50 billion crowns ($1 billion), and stick to an original promise to keep the deficit just under 4% of GDP at 37.8 billion crowns ($745 million).
The 2001 state budget [overall public sector budget] figures released at a press conference after a special cabinet meeting set the deficit in public finances for 2001 at 3.94% of GDP. Average inflation in 2001 is projected at 7% and the average unemployment rate should stand at 16.5%.
Global financial institutions such as the International Monetary Fund and the World Bank have said that Slovakia must meet its set economic targets, such as the budget deficit as a percentage of GDP, to inspire investor confidence in the country's economy and demonstrate the government's commitment to sticking to economic reform programmes.

The Finance Ministry October 9 managed to cut a huge public finance deficit for 2001 that threatened to reach 50 billion crowns ($1 billion), and stick to an original promise to keep the deficit just under 4% of GDP at 37.8 billion crowns ($745 million).

The 2001 state budget [overall public sector budget] figures released at a press conference after a special cabinet meeting set the deficit in public finances for 2001 at 3.94% of GDP. Average inflation in 2001 is projected at 7% and the average unemployment rate should stand at 16.5%.

Global financial institutions such as the International Monetary Fund and the World Bank have said that Slovakia must meet its set economic targets, such as the budget deficit as a percentage of GDP, to inspire investor confidence in the country's economy and demonstrate the government's commitment to sticking to economic reform programmes.

Despite the fact that the projected 2001 public finance deficit is the highest in the short history of independent Slovakia, government officials have characterised it as well balanced, and have explained that the unusually high deficit was a result of a recent decision to include all state expenditures on the budget draft.

The final figures, however, left analysts disappointed, and claiming that the government had taken a number of development programmes out of the budget, including highway construction and financing to decrease the debt of social insurance company Sociálna poisťovňa. The programmes had originally been planned to be financed through the budget in 2001, but would now be omitted from the state's fiscal balance sheet, thus keeping the official expenditure target at a level demanded by international observers.

"The public sector deficit would have been 5% of GDP [had they not done this]," said Ján Tóth, senior analyst with ING Barings bank in Bratislava.

He added, however, that the government may still decide to put these projects back in the final budget figures some time next year. "If, however, the deficit figures look good, at some point next year the government will support some of the development programmes it had originally said it was planning," Tóth explained.

The most positive aspect of the 2001 budget draft, for many critics, was the government's decision to include many expenditures on its official tabulations that had in previous years been hidden from scrutiny. For the first time, this year's government budget will be widened to include state funds such as road and agricultural agencies, privatisation bodies as well as municipal budgets and the finances of social insurance institutions.

Finance Minister Brigita Schmögnerová said that this newfound transparency was a cornerstone of the budget, and that the government would, through such tactics, have more control over budget expenditures in the coming year. "We want to make sure that the budget expenditures are more effective, so we have to know exactly how each crown will be spent," the minister said.

According to Martin Barto, head of strategy at state-owned bank Slovenská sporiteľňa (SLSP), including state funds in the government budget would indeed put more pressure on the cabinet to use taxpayer money more efficiently. "The 2001 budget draft that the government has put forward at least takes a step towards a more transparent picture of public finances," Barto said.

At the end of 1999, government officials agreed that almost all bolts on the revenues side of the budget had been shot and the key to meeting fiscal targets in 2000 was to limit public sector expenditures through efficient reform of state administration, pension and health insurance systems, and improvements to schools and agriculture funding.

The draft for 2001, however, envisages further increases on the revenue side, with the government planning to raise payments for medical insurance from 13.7% to 14% and company contributions to social insurance from 27.5% to 28%.

However, analysts have said that the budget revenues have been underestimated. "The government didn't take into account some aspects of economic development in Slovakia next year, mainly revenues from VAT from an overall growth in the prices of consumer goods. It has also underestimated revenues from corporate income - corporate sector profits should increase next year," said ING's Tóth.

On the expenditures side, subsidies for mortgages, something considered by many experts as vital to boosting housing construction in Slovakia, will be dropped from 6% to 5%, while similar payments to people saving money for flat or house construction through the construction savings fund will also fall from 30% to 25%.

Some ministers have said that they would welcome further reforms aimed at cutting budget expenditures, such as the public sector reform proposed by the office of Deputy Prime Minister for the Economy Ivan Mikloš that would see more than three billion crowns saved in an overhaul of state administration.

Privatisation Minister Mária Machová said October 10 that the 2001 state budget should have included the reform. "The budget draft doesn't reflect the findings of the state administration audit [carried out by Mikloš's office earlier this year - ed. note], which called for a considerable drop in public sector expenditures as a government priority. This is not good," she said.

Barto, too, argued that a lack of will within the government to limit public sector expenditures, especially in the health care, agriculture and education sectors, was still evident in the proposed budget. "The government seems to be continuing on a path of uncontrolled spending which is reminiscent of a socialist state," he said.

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