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1998 state budget hides record deficit figures

Faced with a massive 1998 projected budget deficit, expected by financial analysts to be over 50 billion crowns ($1.5 billion), the Slovak government on October 21 did the next best thing to cutting expenditures - it changed its accounting procedures to conceal the unpleasant truth from the public. The newly-calculated 'fiscal deficit' excludes the costs of debt servicing (estimated to reach 41 billion Sk in 1998), and at 5 billion Sk, has been called "Slovakia's lowest since 1994" by Finance Minister Sergej Kozlík.
Not everyone has been taken in by the sleight of hand. Opposition politicians have called the budget deficit forecast "unreal," while even some high-level government officials have admitted that the true figures are alarming. But with national elections approaching, the government has balked at making dramatic changes to either public expenditures or the efficiency of tax collection mechanisms.


Making peace. NBS governor Vladimír Masár reaches out to Prime Minister Vladimír Mečiar with Finance Minister Sergej Kozlík smiling on.
Pravda

Faced with a massive 1998 projected budget deficit, expected by financial analysts to be over 50 billion crowns ($1.5 billion), the Slovak government on October 21 did the next best thing to cutting expenditures - it changed its accounting procedures to conceal the unpleasant truth from the public. The newly-calculated 'fiscal deficit' excludes the costs of debt servicing (estimated to reach 41 billion Sk in 1998), and at 5 billion Sk, has been called "Slovakia's lowest since 1994" by Finance Minister Sergej Kozlík.

Not everyone has been taken in by the sleight of hand. Opposition politicians have called the budget deficit forecast "unreal," while even some high-level government officials have admitted that the true figures are alarming. But with national elections approaching, the government has balked at making dramatic changes to either public expenditures or the efficiency of tax collection mechanisms.

Debt, debt, go away

"[Prime Minister Vladimír] Mečiar cannot preclude that he will be the winner of the next elections," said Brigita Schmögnerová, Vice Chairman of the Party of Democratic Left (SDĽ). "So he doesn't want to commit political suicide - he will go to the brink with his fiscal policy, but he will not actually jump off."

Financial experts warn, however, that the projected 1998 budget deficit has brought the government perilously close to the edge. Schmögnerová said that the fiscal shortfall "will exceed 50 billion Sk for the first time in our history. It's kind of a magical figure."

Peter Staněk, state secretary at the Finance Ministry, said that "our budget for 1998 forecasts about a 45 billion Sk deficit," and added that the government was seeking to contain the political damage that such figures might cause. "The government is advertising [this] as only a 5 billion Sk fiscal deficit," he said, "and concealing the fact that a further 40 billion will be required to service our foreign debt."

Kozlík has said that the division of the budget complies with the rules of the International Monetary Fund (IMF), which allows the budget deficit to be registered only in a fiscal form, exclusive of repayments of the state debt's principal. But Schmögnerová claimed that the new fiscal deficit simply was "politically more admissible," and that the government had been looking to get rid of a very hot potato, namely debt servicing costs.

Foreign loans accumulated by the current Slovak government between 1994 and 1996 to finance past budget deficits mature in 1998, and threaten to cripple state finances. Statistics show that until the end of June 1998, only 4.4 billion Sk of loans come due. But in the following months the figures soar to politically damaging heights - in July a further 5.4 billion Sk must be repaid, followed by 9 billion in August, 7.8 billion in September and 14.4 billion in October.

Schmögnerová linked the government's desire to move elections from September to June 1998 with the schedule of loan principal repayments for that year. "Moving elections from September to June shows us that [the government] expects very serious developments in the economy," she said.

Too little money for big projects

Staněk conceded that he was worried by the projected 1998 budget deficit. "The National Bank of Slovakia thinks this [45 billion Sk] is a stupid figure, and I have spoken very hard with Mečiar, telling him no deficit greater than 25 billion Sk. We just don't have the resources to finance the planned budget. But with the start of electioneering for next year, we are seeing the start of political influence."

The deficit crisis, according to Staněk, was partly a matter of extravagant public sector expenditures. "I have said again and again that we cannot pay for big projects in rail, highway, telecom and energy sectors all at once," he said. "These things must be done in stages, but my own point of view is somewhat different from that of government ministers."

Staněk's analysis is borne out by Ministry of Finance figures. 1998 budget expenditures, exclusive of principal payments on government loans, are set to rise by 5.8 percent to 184 billion Sk ($5.5 billion). The increase is mainly due to higher spending on social programs (up 1.2 billion Sk) and highway construction (up 2.5 billion Sk). According to an official at the Construction Ministry, the government plans to spend 150 billion Sk on its highway construction project through 2005, and to cover its expenses through foreign loans and state bond issues.

Schmögnerová agreed that the 1998 budget draft "has made no corrections regarding infrastructure projects," and said it was simply an extension of political objectives. "This budget reflects government priorities very well," she said. "The main intention was to make their position in power more stable," she added, citing a new law that is increasing expenditures on civil servant salaries "by between 4 and 4.5 billion Sk. It is clear that [the government] is trying to consolidate their support."

Tax incomes too small

The original draft of the 1998 budget was finished in July 1997, but had to be revised when the government withdrew its amendment to the Income Tax Act on October 16. The law had proposed a reduction in both personal and corporate income taxes. "It would have reduced budget revenues by 12 to 15 billion Sk," said Kozlík, whose ministry is now preparing seven or eight new tax amendments, and is introducing changes that would increase the efficiency of tax collection.

Kozlík explained that the changes are aiming to correct the problem of non-payment by moving "control powers up one level, to regional tax offices, [so] that inspectors will not live in the same areas as the businessmen inspected."

For Schmögnerová, however, centralizing tax collection powers would not solve the main problem, which was collusion between large companies and government officials to avoid tax obligations. "Most big companies have enough contacts with the government to get out of paying the full amount of tax," she said.

The ultra-left Workers' Association of Slovakia (ZRS), a junior coalition partner, announced two weeks ago it would ask the Finance Ministry to reveal companies that had been excused from paying taxes, debts and interests this year, saying the intention was to find out why state budget revenues this year are lower than planned. But the ministry said the ZRS has so far not followed up on its initiative.

Without government leadership, corporate fiscal discipline continues to slacken. "What is very striking," Schmögnerová noted, "is the sharp decrease in planned revenues from [corporate] taxes," adding that the 1997 budget had called for 40 billion Sk in income from corporate taxes, whereas the 1998 draft is counting on just 27.8 billion Sk.

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