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Stop-gap tax hikes postpone VAT debate

The goal of finding an substantial source of additional revenue for the state budget again eluded the Slovak cabinet at its April 14 session. The meeting broke up with the announcement that the government had approved several small charges, but had been unable to agree on a major tax hike.
The government remains divided over whether to reimplement a surcharge on imports - a measure that some ministers claimed would harm Slovakia's chances of acceptance into western bodies - or raise the nation's Value Added Tax (VAT) rate on basic food items, a move the political left has rejected as a betrayal of socialist principles.
The cabinet is under pressure to resolve the issue quickly. The 1999 state budget expects a fiscal deficit of 15 billion Slovak crowns ($360 million), but financial analysts with institutions like the International Monetary Fund (IMF) have said that the government's budget revenue projections are too optimistic, and warn that the final deficit figure may be much higher unless additional sources of revenue are found.


Trucks laden with goods wait in long lines at the Slovak-Czech border. Recently freed from import surcharges, the shippers of such items may have to pay again if the left-wing of the Slovak government gets its way. Others argue for a hike in the VAT tax to fill the budget gap.
photo: TASR

The goal of finding an substantial source of additional revenue for the state budget again eluded the Slovak cabinet at its April 14 session. The meeting broke up with the announcement that the government had approved several small charges, but had been unable to agree on a major tax hike.

The government remains divided over whether to reimplement a surcharge on imports - a measure that some ministers claimed would harm Slovakia's chances of acceptance into western bodies - or raise the nation's Value Added Tax (VAT) rate on basic food items, a move the political left has rejected as a betrayal of socialist principles.

The cabinet is under pressure to resolve the issue quickly. The 1999 state budget expects a fiscal deficit of 15 billion Slovak crowns ($360 million), but financial analysts with institutions like the International Monetary Fund (IMF) have said that the government's budget revenue projections are too optimistic, and warn that the final deficit figure may be much higher unless additional sources of revenue are found.

Latest cuts, hikes

The government's most recent moves to keep the fiscal deficit under control fell into two categories: cutting state spending on social welfare and making minor adjustments to road and gas taxes.

Deputy Prime Minister for Economy Ivan Mikloš told a news conference following the April 14 meeting that Slovakia's social safety net was "ineffective, expensive, demotivating... and often abused."

Mikloš reported that Labour Minister Peter Magvaši had been asked to provide in May a list of suggestions for reducing the cost of providing social welfare. "The results of postponing or refusing unpopular measures to stabilise the economy are in the end even worse and more antisocial," he explained.

Mikloš also announced that the government had approved an increase to the excise tax on hydrocarbon fuels by 1,000 crowns ($25) per ton, a move that will raise consumer gas prices by about one crown per liter. Mikloš said the hike would generate about 1 billion crowns in budget revenue.

The cabinet also approved a road tax that will affect all drivers. Mikloš said the tax would bring up to 2.5 billion crowns into the budget. To date, the road tax has been imposed only on cars used for business purposes.

Basic issues remain

Despite the measures approved on April 14, independent analysts and government officials themselves agree that substantial cost-cutting and tax hikes are still necessary if the macroeconomic targets outlined in the 1999 state budget are to be met.

The cabinet has pledged to keep GDP growth at 3%, inflation under 10% and unemployment at a maximum of 15%. Current Labour Office forecasts, however, now see unemployment rising to over 20% by the end of the year.

The 1999 budget also expects the fiscal deficit to fall to 2% of GDP, on revenues of 179.9 billion crowns and expenditures of 194.9 billion crowns. Analysts have said that the budget will fall short on the revenue side, and have advocated additional administrative measures to plug the gap.

Exactly what form these measures should take has occupied members of the government for over a month. In early March, Deputy PM Mikloš proposed increasing the lowest bracket of the VAT from the current 6% to 10%, but failed to gain the support of the leftist parties in the coalition - the former communist SDĽ party and the Party of Civic Reconciliation (SOP).

Instead of a VAT rise, the SDĽ suggested imposing a surcharge on imports to Slovakia; the idea was rejected by Mikloš and his conservative SDK party colleagues, along with officials from the ethnic Hungarian SMK party. An import surcharge, the conservative politicians said, would harm Slovakia's integration drive towards the Organization for European Cooperation and Development (OECD) and the EU.

Economic analysts, for their part, are divided over the merits of a VAT hike versus an import duty. Ivan Chodák, an analyst with CA IB securities in Bratislava, said that while both measures would hurt consumers by raising prices, the VAT hike would do less harm to the long-term economic plans of the government and would secure higher revenues for the budget.

Chodák also explained that an import surcharge would have to be phased out quickly, in accordance with the rules of the World Trade Organisation. "Moreover, it wouldn't be a good sign towards the OECD and foreign investors," he added.

But Martin Barto, general director of the strategy division at Slovenská Sporiteľňa, opined that the VAT hike would accelerate inflation and in turn slow GDP growth.

"A VAT tax increase, in combination with the current tax pressures [on both enterprises and citizens], would be unbearable," Barto said. "It would be much more effective to make cuts on the expenditures side of the budget."

With no political or economic consensus on the path to take, the four-party government coalition agreed at an April 13 meeting to postpone debate on the VAT and import surcharge. Martin Lengyel, spokesman for Prime Minister Mikuláš Dzurinda, said he could not say when discussion would be resumed.

In the meantime, cabinet has been looking for other ways to solve its budget problems. Finance Ministry spokesman Peter Švec said that the government had run a surplus of 1.03 billion crowns in the first quarter of 1999, but noted that this sum was 73.6 million crowns lower than the same period in 1998.

Finance Minister Brigita Schmögnerová said on April 13 that while VAT collection had improved over 1998, leading to an estimated $11 million crowns increase in budget revenues, more austere moves were being prepared. "It has to be the government's aim to maintain developments as planned [in the 1999 budget]," she said.

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