Trials of a Finance Minister

Finance Minister Brigita Schmögnerová believes that history has repeated itself - that Slovakia, through the 1990's, has gone through the same nation-building challenges that confronted the new Czechoslovak state in 1918.
After one year in her post, however, Schmögnerová says her tasks at the turn of the millenium are more mundane than romantic - fighting turf battles with cabinet ministers over limited state funds, and urging cabinet colleagues to take clientelism out of party politics.
The Slovak Spectator spoke with the Finance Minister about the year ahead at her Bratislava office on January 24.

Schmögnerová says she has been unfairly blamed for economic cuts.
photo: TASR

Finance Minister Brigita Schmögnerová believes that history has repeated itself - that Slovakia, through the 1990's, has gone through the same nation-building challenges that confronted the new Czechoslovak state in 1918.

After one year in her post, however, Schmögnerová says her tasks at the turn of the millenium are more mundane than romantic - fighting turf battles with cabinet ministers over limited state funds, and urging cabinet colleagues to take clientelism out of party politics.

The Slovak Spectator spoke with the Finance Minister about the year ahead at her Bratislava office on January 24.

The Slovak Spectator (TSS): How easy is it to be Finance Minister in the government of Mikuláš Dzurinda?

Brigita Schmögnerová (BS): It's difficult, not because it's the government of Mikuláš Dzurinda, but because it's a government which came after that of Vladimír Mečiar. That's why we have to restructure the Slovak economy, to reduce the state budget deficit and the overall deficit in public finances. It was clear that the first two years of this government will be dominated by these two tasks.

TSS: How does the cabinet work, especially in solving tough questions like cutting corporate tax or making cuts to the state administration?

BS: The Finance Ministry is probably the most criticized ministry in the government, because we want both to lower taxes and to increase expenditures. Achieving both of these goals at the same time is not possible. We are criticized by the business sector on the one hand, which wants lower income taxes, and on the other hand by ministries which would like to considerably increase spending on defence, education, culture, health care and so on. We are taking a beating from both sides.

The positive thing in all this is that we can explain to ministers that it's not possible, and in the end agree on a state budget that is 50 billion crowns lower on the expenditure side than they had demanded.

TSS: How did you manage to convince them?

BS: We held bilateral negotiations, but the best tactic was to get all the ministers together and make them see that if one ministry gets a bigger slice of the pie, the others get a smaller piece.

TSS: Why do some ministers find it so hard to understand simple economic arguments for the need to cut expenses?

BS: Accepting these arguments would force them to reform and restructure their ministries, which they are reluctant to do.

TSS: Many people say you prefer to avoid risk, that your tax policy especially is rather cautious. Do you agree?

BS: Last year we cut corporate income tax from 40% to 29%, something which is hard to find in any other European country. But I still think this move to cut the tax was an incompetent decision by this governing coalition. We will soon feel the results of this tax cut, and we at the Finance Ministry have always said such moves must be taken gradually over time, or they will cause significant shortfalls in state budget revenues. In approving this measure, the government did not take into account the fact that at the moment we have no reserves, and that in 2001 the state budget will no longer receive funds from the import surcharge and income tax in the amount of 18 billion crowns.

TSS: But other post-communist countries have done even more to cut taxes, for example Hungary which cut corporate tax from 36% to 18% in 1996...

BS: Hungary was a totally different kettle of fish, because their tax base was broader and their VAT rate doubled. All that occured with an inflation rate of 23%, which I think speaks for itself.

TSS: Nevertheless, you do seem to be preoccupied with the country's fiscal deficit to the detriment of measures that might attract more investment as well as boosting the domestic business sector.

BS: One of the basic ways to support the business sector and investment is to keep the budget deficit at a reasonable level. Support for the business sector also lies in keeping interest rates down, and lowering the tax burden, and these things we have accomplished.

Apart from that, attracting FDI requires suitable legislation and a strong banking sector, and in both of these areas we have begun reforms. You cannot improve public finances and keep stability without significant structural changes. From the tax point of view we have already done the most we can for foreign investors, who now get a five-year, 100% tax holiday, and a 50% cut for the next five years. Investors also don't have to pay customs duties. Those are big incentives, and as far as fiscal incentives go, it's different to imagine other ones than those we now have in place. If foreign investors are still hesitating, they have other reasons.

Being Finance Minister in Dzurinda's government is "difficult," Schmögnerová says.
photo: TASR

TSS: Are you feeling the pressure from the IMF or the World Bank to meet your macro-economic targets? BS: As far as pressure goes, we have been pushing ourselves hardest of all. It simply wasn't possible to continue as we were going in 1996, 97 and 98, which was proven by the fall in our currency last year, in high interest rates and in the loss of the trust of foreign investors.

TSS: But hasn't the World Bank made the issue of a more than 400 million USD adjustment loan for bank restructuring conditional on your meeting your budget targets?

BS: Normally, this kind of loan is conditional on a contract with the IMF, but we have come far enough that we'll very likely get the loan without this IMF contract. The trust we have won from the World Bank shows that we have been successful in beginning steps to stabilize the economy.

TSS: How much will exists in the cabinet to make the cuts to the civil service you have promised, for example a 10% decrease in civil service jobs?

BS: This reform is a two-track project: on the one hand, we are reducing current expenditures, and on the other hand the ministries must come up with their own plans for internal reform. After negotiations with the ministries, the target figure was reduced from 10% to about 7%, because most ministers simply refused to accept such deep cuts.

In the education sphere, reforms will reduce the number of schools, which is something I wanted to see begin to happen last year. It will now take effect at the outset of the coming school year [September 2000], and will both reduce expenditures and motivate teachers by reducing their workloads.

In the health sector, reform will be more complex and bring changes to the health insurance system, drug policy and to the leadership of health care institutions. It is tough getting political support to do this.

TSS: The most significant piece of legislation to have been approved last year - the Bankruptcy Law - is still nowhere near parliament. When will it be passed?

BS: The law seems to be more complicated than we originally realised. It should have been prepared by the Justice Ministry, but it was the Finance Ministry which ultimately took care of it. The new law significantly improves the position of creditors in the bankruptcy process and corporate restructuring. When we presented this legislation to the Legislative Council [a senior government body which must approve bills before they go to cabinet for discussion] we encountered many signs of reluctance and ignorance, but as the bill is now in its second reading at the Council, it could now reach government in the very near future and should be approved by parliament some time in February in accelerated legislative proceedings.

The law requires an additional 20 other legislative changes to be made, which is difficult work. These changes include amendments to the Tax Law, the Commercial Code and the Civil and Criminal Codes, all of which will be approved at the same time as the Bankruptcy Law in accelerated proceedings.

TSS: Your mother party, the SDĽ, has recently been associated with shady dealings at the SE electricity producer, while you yourself wrote a letter to the media saying you felt government parties were in danger of being held hostage by organised interests. Have recent events made your position in the SDĽ more difficult?

BS: I don't think that issues at the SE define the nature of the SDĽ, and if political parties were to be graded on a scale of clientelism and corruption, the SDĽ would receive a good mark.

TSS: Why then do so many people say that SE 'belongs to' the SDĽ, while the SPP [gas distributor] belongs to the SDK and so on?

BS: It's simply not true. The coalition government as a whole controls the functioning of state firms, and decisions about these firms are taken as a consensus of the cabinet, as opposed to how Vladimír Mečiar ran things.

TSS: Why do you think you should get a better grade than other parties

BS: The SDĽ has no significant connections with business groups. We were financed [during the election campaign] by a wide range of small businessmen who contributed small amounts, which was good for us because we didn't have to promise them big rewards. However, this doesn't mean that everything is exactly as I would like to see it. I know of at least one accusation that we haven't managed to disprove so far, which is our connections with SE.

TSS: Why haven't you been able to refute allegations of corruption with SE?

BS: (pause) That is an interesting question.

TSS: Is it because, as Prime Minister Dzurinda is fond of saying, 'the fish smells from the head?'

BS: (pause) I can say there is some truth in this suspicion. But this matter should be explained by those who have connections to this affair.

TSS: Who are these people?

BS: You're pushing me too hard. Let's look at it this way - there is always some room for business groups to finance political parties. But I can tell you there is a vast difference between left and right wing parties on this matter, which is why intitiatives to solve the issue should come from the right rather than the left of the political spectrum. I would much rather give them [political parties] several million crowns more from the state budget, and finance them legally, than hear these rumours.

TSS: As a left-wing Finance Minister, do you feel personally responsible for the decline in the SDĽ's voter preferences?

BS: Our position is difficult in that the economic restrictions we've had to make mostly hit SDĽ voters. This is the reason our voter preferences have been decreasing. I think that right-wing parties are doing quite well these days because the situation in the business sector is quite good at the moment.

The worst thing about this all is that we still haven't made clear we are only correcting the mistakes made by the previous government, and as a result I have been included among those who are held responsible for the current situation. As far as my position in the party goes, I have been branded with guilt by people looking for someone to blame for pushing through tough but necessary legislation. Obviously, if it didn't hurt the country's economy, we would provide many more incentives and support to poor people, but at the moment this might endanger the government's medium-term economic targets.

That said, the SDĽ has not yet been a strict as it should have been on the unemployment issue, nor has it been tough on corruption, which we might say does not fall into our voter profile. We have to be extremely careful to watch the coming privatisations to make sure the mistakes of the previous government are not repeated.

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