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THE EC THINKS SLOVAKIA COULD HAVE MORE AMBITIOUS PLANS FOR ITS PUBLIC DEFICIT

Slovakia plays it safe

THE EUROPEAN Commission (EC) commended the Slovak government for its recent economic reforms, but considers its plan to decrease the public finance deficit not ambitious enough.
The EC recently assessed the convergence programmes of all new EU members, which present the stance of these countries on their prospects of meeting the Maastricht criteria and adopting the euro. The EC said the Slovak programme was one of the most realistic.
The programme for 2004-2007 targets the reduction of the public finance deficit to 3 percent of gross domestic product (GDP) by 2007 from 3.6 percent of GDP in 2003.

THE EUROPEAN Commission (EC) commended the Slovak government for its recent economic reforms, but considers its plan to decrease the public finance deficit not ambitious enough.

The EC recently assessed the convergence programmes of all new EU members, which present the stance of these countries on their prospects of meeting the Maastricht criteria and adopting the euro. The EC said the Slovak programme was one of the most realistic.

The programme for 2004-2007 targets the reduction of the public finance deficit to 3 percent of gross domestic product (GDP) by 2007 from 3.6 percent of GDP in 2003.

Intermediate deficit targets are 4 percent of GDP in 2004, 3.9 percent in 2005, and 3.9 percent in 2006.

At the same time, the government predicts GDP growth at 4.1 percent in 2004, 4.3 in 2005, 5 percent in 2006, and 4.7 in 2007.

The EC also qualified the convergence programmes of the Czech Republic, Malta, and Cyprus as realistic. Hungary and Poland, however, have been too optimistic about their macroeconomic outlook. According to Brussels, Poland is too positive about their expected growth of investments and private consumption.

"Slovakia has recently implemented far-reaching and impressive public finance reforms," says the EC in its assessment, published on June 24.

However, it continues, "In an environment of robust growth, the envisaged deficit reduction of a mere 0.6 percentage of GDP over four years does not look very ambitious. In addition, it is back-loaded."

The Finance Ministry does not share the EC's opinion on the pace of reducing the deficit.

"We agree with the EC that a further decrease of the deficit is needed. And we are confident that it is the best thing we can do for the sustainable and dynamic development of the economy.

"However, we do not think that we are not ambitious. Slovakia, in contrast to many other countries, significantly reduced the deficit in year-on-year comparison in 2003 and it will continue to decrease it," Peter Papanek, the spokesman of the finance minister, told The Slovak Spectator.

The EC said that the numbers do need to be seen from a broader prospective. First, Slovakia has overcome a relatively large deficit reduction from 2002 to 2003 of 2.1 percentage points of GDP. Second is the expenditure-based nature of adjustment.

The third factor represents the introduction of a funded pension pillar in 2005, which will lead to a re-direction of social security contributions and hence a revenue decrease for the government in general. Fourth is the increase in public investment over the programme horizon.

"We have to look at the whole picture," said the Finance Minister Ivan Mikloš for the news of television channel TA3.

"If we look only at this period - from 2003 to 2007, it really might appear to be slow because it presents only a drop from 3.5 percent in 2003 to a planned 3 percent in 2007.

"But first you have to see the year 2002, when the decrease was significant - from 5.7 percent to 3.5 percent. And you also have to see that the deficit will include the costs of the pension reform as well.

"The [pension reform] costs will pump up the deficit by 1 percent [currently, the pension reform costs are not included in the deficit]. Thus it may appear that we will go from 3.5 percent to 3 percent during four years, but, in fact, the pension reform increases it by 1 percent," added Mikloš.

He also emphasised that the Slovak economy needs large public investments in some sectors, mainly in education, science, and infrastructure, otherwise it could endanger the long-term competitiveness of the country.

However, the minister agreed with the main recommendation of the EC that the money saved should be used to decrease the deficit even faster in the event that economic development is more positive than forecasted. "And it looks like it could be more positive," he added.

The EC sees the main risks that could endanger the country's convergence programme in the lack or delay of reform implementation, or from any backtracking on already implemented reforms.

These threats are becoming even more significant as the Slovak government is struggling to win the needed number of deputies to support its reforms in the Slovak parliament.

"The Ministry would be happy if the preparation of the state budget outlook was not a political issue. We will oppose legislative proposals that would lead to increasing the deficit. The ministry wants to use public sources carefully; we do not want to shift the burden onto the next generations," said Papanek.

He added that the Ministry wants to introduce a controlled system in the budgetary rules that would determine the process of setting the state budget. The system would ensure that the parliament would be allowed to vote on proposals creating possible additional budget burdens only after the ministry issues a statement on the proposal.

The amendment to the law on budgetary rules is currently in parliament.

"I hope it will be accepted," said the minister.

The EC considers the low deficit one of the main conditions for adopting the euro and an inevitable condition for surviving the whole project of the European common currency.

Public finance with a high deficit represents a great risk to the whole economy and dampens the business environment. A high deficit is generally caused when governments waste money, resulting in inflationary pressure, as there is more money in the economy. Central banks then usually try to suppress inflation by restrictive monetary policy, which results in high interest rates, more expensive loans, and less space for private investments.

The low deficit is a difficult task not only for the new EU countries but also for the EU15. The two biggest countries of the euro-zone, Germany and France, have exceeded the 3 percent deficit limit determined by the EU Growth and Stability Pact for three years in a row. Additionally, many EU countries consider the criteria of the pact too tough and are now talking about new rules.

"Yes, the rules are tough, but I think it is necessary. They should not be changed. We can only discuss the fact that the rules could be more flexible - they could be stricter in times of economic expansion and in economic recession, on the other hand, growth could be supported by a bigger deficit. Thus establishing only greater flexibility, not easier rules... We have to see that weak fiscal discipline in the EU countries could endanger the project of the common currency," said Mikloš.


Plans for decreasing the share of public finance deficit in percent of GDP in the convergence programmes of Visegrad Four countries
Country 2003 2004 2005 2006 2007 2008
Slovakia -3.6 -4.0 -3.9 -3.9 -3.0 -
Czech Republik -12.9 -5.3 -4.7 -3.8 -3.3 -
Hungary -5.9 -4.6 -4.1 -3.6 -3.1 -2.7
Poland -4.1 -5.7 -4.2 -3.3 -1.5 -


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