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Deficit shrinks after cabinet session

The huge budget deficit threatened by the Finance Ministry for 2001 was revealed as a hollow threat following a special cabinet session as the government tried to head off what Finance Minister Brigita Schmögnerová had said could be a 70 billion crown shortfall, four times the level planned for this year.
The 2001 budget figures that were released at a press conference after the cabinet meeting on April 26 set the public finance deficit for 2001 at between 3.5% and 4% of GDP - 32.5 to 37.2 billion Slovak crowns ($823 million).
On the eve of the cabinet session analysts said that the initial huge figure was released to force other coalition members into debate on the thorny question of whether to opt for drastic cuts in expenditures and vital public sector reform or introduce new taxes like monopoly and real-estate tax and re-launch discussion on boosting revenues.

The huge budget deficit threatened by the Finance Ministry for 2001 was revealed as a hollow threat following a special cabinet session as the government tried to head off what Finance Minister Brigita Schmögnerová had said could be a 70 billion crown shortfall, four times the level planned for this year.

The 2001 budget figures that were released at a press conference after the cabinet meeting on April 26 set the public finance deficit for 2001 at between 3.5% and 4% of GDP - 32.5 to 37.2 billion Slovak crowns ($823 million).

On the eve of the cabinet session analysts said that the initial huge figure was released to force other coalition members into debate on the thorny question of whether to opt for drastic cuts in expenditures and vital public sector reform or introduce new taxes like monopoly and real-estate tax and re-launch discussion on boosting revenues.

However, after a two hour session, Schmögnerová said that except for the tax from monopoly profit the government, had decided not to introduce any new taxes.

Schmögnerová said that GDP growth is predicted at 3.2 to 4.5% - at current prices 930 billion Slovak crowns ($20.5 billion). The average inflation in 2001 should range between 6.8% and 7.2% and the average unemployment between 13.1% and 14.8%. According to the minister, budgetary revenues in 2001 should be 183.8 billion Slovak crowns ($4.06 billion) and the budget deficit should be approximately 22 billion crowns ($479 million).

The figures failed to draw any gasps of surprise from analysts. "GDP growth, inflation and unemployment are compatible with figures which we have been operating with," said Michal Kustra, an equity analyst with Tatra Banka.

However, Kustra pointed out that there was a potential risk on the expenditure side of the budget. "There might be some concern on the side of expenditures but at the same time the government will receive money from the privatisation of the state-owned banks as well as companies like Slovak Telecom, Slovak Gas (Slovenský plynárenský priemysel) and Transpetrol. It is just about what will be more - expenditures or revenues," Kustra said.

To keep privatisation revenues flowing the government, according to Kustra, cannot allow the privatisation process to slow down. "If privatisation slows down it will be a real threat for the budget," Kustra said.

Minister Schmögnerová last year had pushed for the introduction of a new set of taxes, including a special tax for cars, to counter a fall in corporate income tax to help overcome the potential risks of a huge budget deficit.

However, this was ruled out by the Deputy Prime Minister for Economy Ivan Mikloš, who raised objections against the introduction of new taxes during the April 26 session. He said that there was no need to increase the tax burden in Slovakia because the total tax burden ranks among the highest in the world. "It hampers the development of business and the creation of new jobs," Mikloš said.

According to Kustra, taxes that the Finance Ministry was planning to introduce would not have helped lower the budget deficit. "When we consider taxes, like the car tax, that would have brought only about 2.5 billion Slovak crowns into the state budget - it isn't much. Here we are certainly talking about the need for more money to help in decreasing the deficit," Kustra said.

However, the cure for worries about the budget deficit lies in the cutting of budget expenditures through the public sector - a priority for Mikloš.

At the end of 1999, analysts and government officials agreed that almost all bolts on the revenues side of the state budget had been shot and that the key in the year 2000 should be to limit public sector expenditures through pension and health insurance reform, and improvement of the system of funding for schools and agriculture.

However, Schmögnerová's Party of the Democratic Left (SDĽ) has long maintained its stance against any widespread reform in the public sector, especially cuts in the number of state employees which has since been lowered to about 5% from a planned 10%. Analysts believe that the time has come for the Finance Minister to accede to the Deputy Premier's policy.

According to Juraj Renčko, an advisor to the Finance Minister any immediate results in public sector reform cannot be expected. "Bank and corporate sector restructuring and reform of the pension system are dominant economic reforms. It's clear that the entire public sector reform is important but in the near future we cannot expect substantial changes in this field," he said.

Analysts claimed that there may be a deeper political issue at play in the Finance Ministry's rejection of sector reform.

"These reforms would take privileges away from supporters of the leftist political parties. I think that there isn't enough political will within the government to put all important reforms into practice," said head of strategy at Slovenská Sporiteľňa bank Martin Barto.

Róbert Prega, an equity analyst with Tatra Banka, said that there may be serious problems in the government coalition in getting all of its members to support the idea of public sector reform and cut budget expenditures. "I believe that this is more of a political than an economic issue," said Prega.

He added that reforms in the health, education and agriculture sectors are essential political steps to be made.

According to equity analysts, discussions concerning the 2001 state budget started soon enough to solve the problems with budget expenditures. "It's good that the government is discussing the budget issue now because cuts in expenditures ought to be made either this year or next," said Ján Tóth, an analyst with ING Bank in Bratislava.

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