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FINANCE MINISTRY PROPOSAL CALLS FOR DECREASED EXPENDITURE, INCREASED REVENUE

Budget draft receives warm welcome

The Finance Ministry has submitted a draft budget proposal for 2003 that, if approved by parliament, will reduce state spending, set realistic deficit goals and improve government transparency, say financial analysts.
The draft budget, signed by Finance Minister Ivan Mikloš on October 18, calls for scrapping or reducing planned civil service pay rises, limiting state expenditure in the social sphere and raising excise taxes on tobacco products and value added tax on other goods and services (see box below).

The Finance Ministry has submitted a draft budget proposal for 2003 that, if approved by parliament, will reduce state spending, set realistic deficit goals and improve government transparency, say financial analysts.

The draft budget, signed by Finance Minister Ivan Mikloš on October 18, calls for scrapping or reducing planned civil service pay rises, limiting state expenditure in the social sphere and raising excise taxes on tobacco products and value added tax on other goods and services (see box below).

Ministry officials say their proposal will leave Slovakia with a 2003 budget deficit of Sk51.6 billion ($1.7 billion), or around 4.5 per cent of gross domestic product (GDP), within range of EU recommendations.

"It is a demanding and realistic state budget," said Mikloš, adding that it is Slovakia's first to adopt the European Union's ESA 95 rather than International Monetary Fund (IMF) standards. This means that costs related to bank restructuring have been included in the budget, unlike previously when the charges were not calculated as state expenditure.

"Another thing that makes this budget different from those in the past is that no one-time incomes are included, nor are any problematic income sources," said Mikloš, referring to previous accounting guidelines that included privatisation proceeds as government income.

Both the exclusion of bank costs and the inclusion of one-off privatisation gains elicited disapproval during the first Mikuláš Dzurinda government.

Local and international observers complained that Slovakia's state budget did not reflect either realistic income or true expenditure.

"Up until now, some costs were hidden, and some non-systemic incomes were included, which was the subject of criticism," said UniBanka analyst Viliam Pätoprstý.

"IMF methodology had different goals, for example [it didn't include] the costs of cleaning up the bank sector. Now there will be clearer information for those who are filling the budget," he added.

Besides including Sk10.7 billion ($240 million) in bank restructuring costs in the 2003 budget, Mikloš said that privatisation proceeds will be used to pay down government-backed loans due next year, mostly to Slovak electricity provider SE, one of the last major state firms still to face privatisation, and the state railway companies.

"Income from privatisation will be aimed only at loan guarantees that the state will have to pay in 2003," said Mikloš.

"This budget does not foresee any new state loan guarantees. The limit on state guarantees is one quarter of that for 2002 and we are confident that this budget contains realistic estimates of income," he added.

While many analysts agree with Mikloš's assessment of the budget as "realistic", plans to reduce state expenditures in the area of construction and mortgage lending, in addition to social services and public sector wages may prove unpopular.

The proposed budget would reduce state bonuses for deposits into construction funds from Sk4,000 to Sk3,500 ($90 to $80) and lower state support of mortgage lending from 4.5 to 3.5 per cent of loan value.

In addition, said Mikloš, "this budget proposal predicts lower costs in the social sphere of Sk6 billion to Sk7 billion ($136 million to $159 million)," referring to Slovakia's still unreformed health, pension and unemployment systems.

However, he said, "we will discuss this with the government and with the Labour Ministry to see if it is not too ambitious a goal in the first year of instituting reforms and cutting costs.

Mikloš said the government will save Sk1.461 billion ($33.205 million) by rolling back scheduled wage increases for the police force, the intelligence service, the military, public officials, judges and prosecutors.

"Measures that we are suggesting, if they are accepted and realised, will not mean a halt, but only a slowdown in the growth of public sector wages," he added.

Although Mikloš has admitted that a balanced budget is still years away, the increased fiscal discipline of his budget proposal has given analysts hope that the goal is reachable.

"[The budget] is another good contribution to establishing balance in the area of public finance, where it had looked like Slovakia would have major problems in the coming years," said Pätoprstý.


Measures in the proposed budget

* Slowing public sector wage growth, including police, fire department and customs office; reducing government employment
* Raising value-added taxes from 10 per cent to 23 per cent on items including restaurant services, cargo transport and civil construction, except flats
* Increasing excise taxes on tobacco, while cancelling an ammendment transfering tobacco tax revenue to health service
* Lowering state support of construction and mortgage lending
* Limiting state payments to unemployment and welfare systems

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