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BUSINESS/ANALYSIS

Expenditure reform holds the key to Slovakia's economic success

SINCE my recent commentary on the need for a strong 2004 budget (The Slovak Spectator, December 1-7, Vol 9 No 46), many people have asked me why Slovakia needs to reform almost every area of government spending. The answer is straightforward: Like every Slovak citizen, the government has to allocate its limited revenues among many competing needs. And so it has to make sure that its money is spent as efficiently as possible.

SINCE my recent commentary on the need for a strong 2004 budget (The Slovak Spectator, December 1-7, Vol 9 No 46), many people have asked me why Slovakia needs to reform almost every area of government spending. The answer is straightforward: Like every Slovak citizen, the government has to allocate its limited revenues among many competing needs. And so it has to make sure that its money is spent as efficiently as possible.

The government has embarked on a very ambitious budget reform program. Many of these reforms require sacrifices, but also can yield important benefits. To reap these benefits, it is necessary to design the reforms in a way that cuts wasteful spending on lower priority projects and devotes resources to productive investment that can increase incomes and improve living standards.

What are some areas of public expenditure in which reform is necessary?

Public Administration. Government employment in proportion to the population is high by comparison with that of other countries. In addition, salary scales make it hard to attract and retain skilled personnel. The ongoing reform aims to reduce overstaffing and improve the quality of public services.

Health. Total health spending is comparable with that of other countries, but spending on pharmaceuticals, as well as the number of hospitals and hospital beds, is very high by international standards. There is also a chronic problem of arrears. The recent introduction of co-payments should help restrain demand for health services. The government is also preparing a comprehensive reform strategy, including the redefinition of the scope of the basic benefits package.

Education. Spending on education is not high when compared with that of other countries. Moreover, the spending efficiency is low and the declining fertility rate is not reflected in the structure of the system. For example, while kindergartens are underused, universities cannot meet the growing demand for places in the classroom. Thus, the system needs to be upgraded by rationalizing and gradually shifting resources from the lowest to the highest levels.

Social Welfare. The system is serving objectives other than the basic task of poverty relief, such as family policy. The pursuit of multiple objectives has resulted in the poor allocation of benefits. The reform that started earlier this year has already provided significant savings, thanks especially to tighter eligibility criteria and improved enforcement.

Pensions. The financial position of the pension system will worsen as the population ages. The country also faces the problem of abuse of disability pensions. The reform of the first pillar of the pension plan that has already been approved and the planned introduction of a second pillar to the plan are steps in the right direction, although the plans to increase the retirement age are more ambitious.

Agriculture. This is an area where reform is going in the wrong direction. Although the role of agriculture in the economy has been declining, spending on subsidies is increasing sharply; in fact, this is the only area where government spending is increasing substantially as a share of GDP. This, in part, reflects the broad guidelines given by the Common Agricultural Policy, but the government has the final decision on the size of agriculture subsidies. It is thus troublesome that this windfall to agricultural producers - which does not enhance the growth potential of the economy - takes place in the context of severe spending restrictions in other areas. A different set of spending priorities arguably could contribute more to potential growth. Moreover, some of the spending on agriculture could also be more usefully applied to help those most affected by the ambitious fiscal reforms.

Railways. The lack of spending limits has resulted in losses being financed by budgetary transfers and borrowing with government guarantees. In recognition of these problems and in light of the decline in the demand for railway services, initial steps toward restructuring the railways have been taken and the government has assumed a large stock of the railways' debt. It is important to complete the restructuring and impose constraints on spending.

The government is right in making the reform of public expenditures a priority in order to restore fiscal sustainability. The 2004 budget, now under discussion in the National Council, would take an important step in this direction by reducing public spending and giving an impetus to expenditure reforms. An increase of incomes and standards of living is possible only with bold reforms that enhance Slovakia's growth potential. To this end, expenditure reforms are key to Slovakia's economic success and smooth integration into the European Union.


(The author is the Resident Representative of the International Monetary Fund in Slovakia)

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