EC report warns of fiscal risks

GROWING budget risks must be dealt with if predicted economic growth over the next 18 months is not to be threatened, the European Commission (EC) has warned in a new report.
In the midst of growing concerns over a possible massive overshoot of the Slovak state budget deficit this year, the EC has told the government that the economy will grow by as much as 4.2 per cent in 2003, but only if a tight rein is kept on public finances.
"Strict control of expenditures and the implementation of measures against budget risks are unavoidable if budget targets are to be fulfilled," the EC said April 24 in its regular spring economic outlook for EU candidate states.

GROWING budget risks must be dealt with if predicted economic growth over the next 18 months is not to be threatened, the European Commission (EC) has warned in a new report.

In the midst of growing concerns over a possible massive overshoot of the Slovak state budget deficit this year, the EC has told the government that the economy will grow by as much as 4.2 per cent in 2003, but only if a tight rein is kept on public finances.

"Strict control of expenditures and the implementation of measures against budget risks are unavoidable if budget targets are to be fulfilled," the EC said April 24 in its regular spring economic outlook for EU candidate states.

The warning came just a day before cabinet delayed a decision on measures to be taken to ensure the Sk38 billion planned budget deficit is kept to.

The government had been expected to agree to a series of measures to reduce public spending, such as scaling back a planned 14 per cent rise in public sector wages and investments in highway construction.

Last month the International Monetary Fund (IMF) warned that the budget deficit could almost double from a planned 3.5 per cent of GDP to as much as 5.5 per cent while the Finance Ministry has said the budget could run over by as much as Sk26 billion.

Any overshoot would destroy government chances of fulfilling its promise to the IMF that it would keep its budget deficit at Sk38 billion this year and meet a condition of a World Bank loan that the deficit is kept to 3.5 per cent of GDP.

However, with parliamentary elections only months away, some analysts have suggested the government is unlikely to be willing to implement any austerity measures.

"There are tensions in the fiscal deficit but what else can be expected five months away from an election?" said Tomáš Kmeť of Slovenská sporiteľňa.

In its report the EC urged the government to press ahead with the measures and other economic reforms, despite the pressures of an approaching election.

"Our prognosis is based on the prediction of the continuation of strong reforms set out by the government, despite the approach of September elections," the report said. It also warned that inflation could jump rapidly in 2003 on the back of government delays in price deregulation.

In its report the EC said inflation would rise from 4.1 per cent to 6.8 per cent next year as the next government is forced to pick up the pace of price deregulation again after this September's elections. Cabinet had previously decided that price rises before elections, set out in a plan drawn up at the start of its term, were not to be implemented.

However, despite its concerns the EC remains confident that if the government continues with reforms all key economic indicators can be improved.

The commission forecast economic growth rising from 3.6 per cent this year to 4.2 per cent in 2003. Unemployment will drop only slightly from this year's 19 per cent to 18.8 per cent, but the trade and state budget deficits will fall to 9.3 and 3.7 per cent of GDP from 10.1 and 5 per cent respectively in 2002.

The predictions in the Commission's report were largely in line with those of many domestic analysts. However, some said the fears over a growing budget deficit were exaggerated and that inflation would not rise worryingly in the short to medium term.

"What the EC has identified as concerns are concerns, but they are not big enough problems in the short term to create a crisis," said Kmeť.

"The government hasn't stuck to its plan with the deregulation of prices and inflation will probably rise to between 6 and 7 per cent next year. But the government is committed to deregulating the energy sector by 2005 and so after that inflation will develop normally, without great problems."

The EC's prognosis for growth in Slovakia was largely in line with that for all 10 former communist countries seeking entry to the European Union.

The Commission said it expected slower economic growth for the 10 states in 2002 due to the effects of last year's slowdown in the global economy, but said growth in the central and eastern European region would rise to 4 per cent in 2003 from an estimated 2.9 per cent this year.

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