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Mikloš, NBS circle wagons on new deficit target

DESPITE having increased the projected 2002 fiscal deficit by about Sk10 billion, or from 3.5 to 4.5 per cent of gross domestic product, Deputy Prime Minister for the Economy Ivan Mikloš has said fears of a runaway budget deficit and fiscal crisis have been exaggerated.
Following a Finance Ministry warning in April that Slovakia's fiscal deficit could grow Sk26 billion beyond the previous estimate of Sk36.8 billion, Mikloš announced on June 10 that the possible shortfall had been overstated, and that updated budget figures showed fiscal overruns of only Sk8 to Sk10 billion past the official target.
He added that the government had won the support of the International Monetary Fund for the revision, which he said would not increase pressure for currency devaluation or boost the country's troubling trade deficit, as Slovak media had recently claimed.

DESPITE having increased the projected 2002 fiscal deficit by about Sk10 billion, or from 3.5 to 4.5 per cent of gross domestic product, Deputy Prime Minister for the Economy Ivan Mikloš has said fears of a runaway budget deficit and fiscal crisis have been exaggerated.

Following a Finance Ministry warning in April that Slovakia's fiscal deficit could grow Sk26 billion beyond the previous estimate of Sk36.8 billion, Mikloš announced on June 10 that the possible shortfall had been overstated, and that updated budget figures showed fiscal overruns of only Sk8 to Sk10 billion past the official target.

He added that the government had won the support of the International Monetary Fund for the revision, which he said would not increase pressure for currency devaluation or boost the country's troubling trade deficit, as Slovak media had recently claimed.

"I have to say that last week's [fiscal deficit] hysteria was not justified," said Mikloš, following a meeting of the cabinet's key economic officials.

Mikloš said that state budget income might be Sk5 to Sk7 billion below the official target, partly because income from sales of state assets had been mistakenly included in the original budget, while budget expenditures might be Sk3 billion higher than forecast because of unforeseen spending on social security.

He added that in addition to higher-than-expected tax income, the state had firmed up other revenue streams.

"For example, the Ministry of Post, Transportation and Telecommunications has confirmed it should get Sk4.5 billion from the sale of UMTS [third-generation mobile telecoms] licenses as planned. Moreover, a surplus from the waste recycling fund could create revenues for the state budget and, thus, lower risks," he said.

Mikloš said the government would do "everything possible" to keep the fiscal deficit below 4.5 per cent of GDP.

"After discussions with the International Monetary Fund we came to the conclusion that it might be complicated to keep the fiscal deficit at the originally planned level of 3.5 per cent of GDP. But we have to do everything possible to avoid crossing the 4.5 per cent level," said Mikloš.

In a sign of support for the new targets, the National Bank of Slovakia (NBS) published a revised monetary programme last week taking the new deficit estimations into account.

"The NBS, in line with our expectations, expects that this deficit level should not threaten overall economic stability. Nor should it create pressure on interest rates or on the Slovak crown exchange rate," Mikloš said.

The prospect of increased government spending in the run-up to September's parliamentary elections had raised fears of a ballooning fiscal deficit. While the revised government figures have raised fewer eyebrows among analysts, many continue to urge fiscal restraint regardless of perceived political imperatives.

According to Ľudovít Ódor from the Slovak Rating Agency, "the end of a political cycle in every country brings fiscal expansion, and we are not an exception. The current number is not the important thing; what is important is to make sure that this trend is not long-term."

"Public finances should be directed towards balance, which is not the present situation. Very little has been done regarding mid-term planning of the fiscal deficit," he added.

Istrobanka analyst Marek Senkovič agreed, adding that "if our economy grows by the current pace [around 3.5 per cent], the state budget should create a surplus, or should be balanced at zero, because a growing economy produces higher taxes and so on.

"Deficit public financing would be tolerable if the economy was declining, or only growing by one per cent."

Senkovič also warned that loans needed to cover the deficit would use funds that could be more effectively applied to the broader economy.

"First, the state will have to borrow to cover the debt, and loans are not free - you have to pay interest, and payments are increasing every year. This year alone the government has paid Sk40 billion in interest.

"Furthermore, every state budget deficit deprives businesses of money they could get from banks, which of course prefer providing their money to the state, thus withdrawing money from the system," said Senkovič.

The NBS, however, has played down deficit fears after some sharp warnings to the government last month. As Jusko said last week, "a deficit higher or lower by Sk10 billion can not create pressure on domestic demand or foreign trade developments."

Senkovič, however, noted the government's failure to achieve either its 1998 promise of a balanced budget, or the 3.5 per cent of GDP deficit figure agreed on with the IMF last fall. He said the broken deals could have severe economic effects.

"In general, a government that does not stick to its promises sends a negative signal to foreign countries and economic bodies, which might be less apt to lend money and will become more cautious," he said.

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