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Cabinet ducks spending cuts despite deficit danger

RATHER than cut spending in an election year to avoid overshooting its budget deficit target, the government has decided to focus on raising state income.
At a special session of cabinet on April 25 ministers elected not to put quarterly caps on state spending or make any significant expenditure cuts.
Instead, said Agriculture Minister Pavol Koncoš during a break in talks, the government would push for extra state budget income through raising revenues, and would avoid passing laws that might increase spending.

RATHER than cut spending in an election year to avoid overshooting its budget deficit target, the government has decided to focus on raising state income.

At a special session of cabinet on April 25 ministers elected not to put quarterly caps on state spending or make any significant expenditure cuts.

Instead, said Agriculture Minister Pavol Koncoš during a break in talks, the government would push for extra state budget income through raising revenues, and would avoid passing laws that might increase spending.

While the Finance Ministry had predicted before the budget meeting that the government might run up a deficit Sk26 billion higher that the Sk36.8 billion target agreed with the International Monetary Fund (IMF), Deputy PM for Economy Ivan Mikloš said after the session that the forecast had been "overestimated".

Mikloš said the measures agreed on by cabinet would cut the likely budget overshoot to Sk10 billion, or about 4.5 per cent of GDP compared to the 3.5 per cent goal.

Martin Barto, senior economist at the Slovenská Sporiteľňa bank, said the cabinet's decision to increase revenues rather than cut spending had been "predictable" with elections about four months away.

The elections are considered crucial to Slovakia's future, with the HZDS opposition party, considered incompatible with Slovakia's integration efforts, leading in the polls.

"The markets have to take into account that elections are coming, and that they are the most important thing," said Barto. "The government's approach could have been expected - they started with the least painful measures, but if the budget doesn't develop well they will have to take tougher action."

Barto said his bank was now expecting a budget deficit that was Sk10-12 billion higher than planned, or between 4.5 and 4.7 per cent of GDP.

"What they have done [focus on income] is not a bad approach," the analyst continued. "They needed higher efficiency in collecting revenues, greater discipline from tax payers. But I'm almost sure they will eventually have to start some spending cuts as well."

Among the income measures proposed, said Koncoš, was a law now in parliament to make supervision of alcohol production more strict. The minister said tax arrears for alcohol manufacture had reached Sk6.7 billion, having grown Sk2.7 billion since 1998. "The Agriculture Ministry has long been asking the Finance Ministry to make tax collection more strict and prevent tax evasion, but they have so far refused," Koncoš said.

The government also proposed not to embark on some spending projects, such as the Govnet information system worth Sk700 million.

Among the weak areas remaining in the budget, however, are Sk4.7 billion in planned revenues from the central bank that will now not come after the bank had a worse-than-expected year in 2001 because of lower interest rates.

Other planned income that is now doubtful include Sk4.5 billion from the sale of telecom licenses, Sk2.8 billion from dividends from companies where the state holds a stake, and Sk1 billion from the sale of Bratislava's Hotel Fórum. Income tax revenues are expected to show a Sk2.6 billion shortfall.

Mikloš, asked before the session if the original deficit target could be met, said: "I think it is realistic to maintain the public finance deficit at a level that doesn't threaten economic balance, and that doesn't put pressure on interest rates or the currency. That's the most important thing."

However, following the meeting, National Bank Governor Marián Jusko expressed just such fears, saying if the deficit increased "this could put devaluation pressure on the crown and increase interest rates." Jusko said he was disappointed spending had not been cut, and called the income measures "non-binding in nature".

Finance Minister František Hajnovič is to submit a more complete report on the state of the budget to the government in May.

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