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Slovakia's 2004 Budget: Needed step and a clear opportunity

SLOVAKIA will join the EU in less than six months. This membership will boost growth in Slovakia and eventually - given supportive policies - the country could catch up to the living standards of its EU partners.
At the same time, Slovakia's reputation abroad is now very positive. Many observers have come to regard Slovakia as the most reform-oriented economy in central Europe.

SLOVAKIA will join the EU in less than six months. This membership will boost growth in Slovakia and eventually - given supportive policies - the country could catch up to the living standards of its EU partners.

At the same time, Slovakia's reputation abroad is now very positive. Many observers have come to regard Slovakia as the most reform-oriented economy in central Europe.

It is in this context - securing the full benefits of EU accession and increasing investor interest - that the passage of a strong budget for 2004 is crucial.

Why does Slovakia need lower fiscal deficits? An obvious reason is Slovakia's aspiration to full European integration, including euro membership, which will require reducing the general government deficit below the Maastricht limit of 3 percent of GDP.

Perhaps more importantly, the underlying goal of fiscal policy should be to support real convergence toward EU living standards, by fostering strong economic growth that can be sustained year after year. A permanently lower public finance deficit would help stabilize the public debt below 50 percent of GDP and, together with declining interest rates, help reduce the debt-service burden.

Fiscal consolidation would also help overcome the legacy of missed fiscal targets in past years and build credibility and confidence in the policy-setting environment. These factors are critical to attracting foreign direct investment and, together with the deepening of structural reforms, will lay the basis for strong growth.

Slovakia has made a good start towards locking in lower fiscal deficits. The 2003 fiscal deficit target of 5 percent of GDP should be within reach if government spending is kept in check.

How to complete this task? Slovakia still needs to undertake difficult - but not impossible - expenditure reforms. The challenge facing Slovak policymakers will be to seek out the reforms that both reduce the public finance deficit and support economic growth over time.

With tax reform already in effect from next year, meeting the Maastricht fiscal deficit criterion will depend on significant, permanent savings on the expenditure side. And while it is necessary to avoid wasteful spending on lower priority public investment projects, unduly suppressing investment risks damaging growth.

Thus, fiscal consolidation will need to be achieved through lasting reductions in current spending programmes. International experience has shown that fiscal adjustments that relied on durable cuts in untargeted subsidies and transfers, and on the reduction of overstaffing in the public sector, proved to be the most lasting, and contributed to sustained growth.

The draft budget for 2004 envisages a reduction in the general government deficit to 3.9 percent of GDP and incorporates an appropriately ambitious reform agenda. The budget depends on reforms across many areas - not least tax, health care, social benefits, labour, and civil service. Moreover, this is the time to address new spending pressures that are already evident, ranging from the need for EU-related spending to the impact of population aging, especially on pension spending.

The Slovak economy is on the right track. Approval of a strong budget for 2004 - underpinned by the approval of difficult but needed reforms - should support Slovakia's integration into the EU and cement its reputation as a reformer and a place to invest. The end result will be higher living standards for all Slovaks.


Edited by The Slovak Spectator

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