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MINISTER MIKLOŠ SAYS EU FUNDS DICTATE THE NEXT THREE YEARS' ALLOTMENTS

Finance Ministry tightens budget belt

THE FINANCE Ministry has published its latest plans for the state coffers over the upcoming three years.
The three-year draft state budget for 2005 to 2007 has immediately raised concerns among the ministries and affected institutions.
Though some ministries are disappointed by the low amount they will get from the state pocket, Finance Minister Ivan Mikloš is confident that the budget is modern, effective, and will encourage economic growth in Slovakia.

THE FINANCE Ministry has published its latest plans for the state coffers over the upcoming three years.

The three-year draft state budget for 2005 to 2007 has immediately raised concerns among the ministries and affected institutions.

Though some ministries are disappointed by the low amount they will get from the state pocket, Finance Minister Ivan Mikloš is confident that the budget is modern, effective, and will encourage economic growth in Slovakia.

"We are submitting a modern European budget. It is based on the European ESA 95 methodology. It creates a premise for the introduction of the euro by 2009 at the latest. This budget is fully founded on a three-year and programme-based [method of] budgeting," Mikloš told the press.

According to the ministerial proposal, the overall budget incomes in 2005 would reach Sk289.9 billion (€7.2 billion) while expenses would account for Sk353.9 billion (€8.8 billion).

The state budget deficit for next year would thus be Sk64 billion (€1.6 billion). In ESA methodology, the public finance deficit should be at 3.8 percent of the gross domestic product (GDP).

The finance ministry predicts a gradual increase of budget income in 2006 to Sk311.2 billion (€7.7 billion) and in 2007 to Sk337 billion (€8.4 billion). Budget expenditures should rise as well, reaching Sk372.3 billion (€9.2 billion) in 2006 and Sk392 billion (€9.7 billion) in 2007.

In these years the public finance deficit should reach 3.9 percent and 3.0 percent of GDP, respectively.

This year incomes are projected at Sk232 billion (€5.8 billion) and expenditures at Sk310.5 billion (€7.7 billion). The public finance deficit in 2004 is envisaged at 4.0 percent of GDP.

In the budget proposal for next year the Finance Ministry planned Sk11.3 billion (€280 million) for the priority projects of individual ministries. It seems that the fight for the largest portion of the state money outside of general administration funds has only just begun.

Before the budget proposal was completed, the Slovak ministries submitted their funding requests for priority projects to the Finance Ministry; an amount that surpassed the planned budget sum by more than Sk20 billion (€496 million).

The Finance Ministry refused the majority of the requests. Mikloš said the ministry did so only after talking with the other ministries, but many of them have already expressed their disappointment.

The ministry has so far proposed Sk7.6 billion (€188 million) for priority projects and it still has not allocated Sk3.7 billion (€91.7 million).

"The government will decide on the allocation of the rest of the money," said Mikloš.

Projects for infrastructure, highway construction, railway modernisation, education, and science - falling mainly under the Transport and Education Ministries - got the largest share of the amount already allocated.

However, even those ministries did not get as much as they hoped.

"The priorities are mainly in infrastructure, universities, support of entrepreneurship, regional development, and the environment," added the finance minister.

"The year 2005 is the first full year of our membership in the European Union and this fact significantly determines where the major hikes [in allocated amounts] are. As it is in our interest to fully use EU resources, we have to share in the financing of these projects and this fact increases [budget] expenditures," he continued.

The Transport Ministry thus got the highest amount, Sk2.2 billion (€54.5 million), although it requested almost Sk7 billion (€173.5 million) for priority projects. "The EU can help us significantly not only in highway construction but also in railway modernisation," explained Mikloš.

On the other hand, EU funds were behind the decision to allocate no priority money to the Environment Ministry, despite its request for Sk2 billion (€49.6 million).

"The Environment Ministry might be an example where an increase in 2005 will be 71.2 percent, but of course, only if the plan of using EU funds is fulfilled," said the finance minister.

Although the second largest amount of money will go to the Education Ministry, it is not content either.

"The budget in such a form is not acceptable to us," Monika Múrová, the spokeswoman of the Education Ministry, told public television broadcaster STV.

The Education Ministry wanted Sk4.2 billion (€104.1 million) but will get Sk731 million (€18.1 million) for regional schools. However, education will receive another Sk500 million (€12.4 million) for universities and science that will flow directly to these fields and not through the ministry.

The budget proposal has raised strong protests from the Agriculture Ministry and farmers. Originally, the ministry's demand for priorities stood at Sk3 billion (€74.4 million) but the Finance Ministry decided to allocate it nothing.

Katarína Czajlíková, the spokeswoman of the Agriculture Ministry, said they would insist on finding additional resources to increase direct payments to farmers to 60 percent of the EU average. According to the budget, this fraction of the average will reach only 42.5 percent in 2005; this year it is 52.5 percent.

The Slovak Agriculture and Food Chamber (SPPK) considers the budget unacceptable. Its main reason is the decreasing amount of direct payments. The SPPK will try to reach an agreement on changes during negotiations with political parties, representatives, and MPs.

"If they are not successful, regional governments have not ruled out the possibility of farmers' discontent resulting in their taking action to generate pressure, because this is about the financial issues of Slovak agriculture and the country as a whole," Stanislav Nemec, spokesman of the SPPK, told The Slovak Spectator.

If the budget plan goes through, it will affect the public through a halt next year in the Finance Ministry's subsidies to interest rates for mortgage loans. This year the subsidy represented 1 percent.

The amount planned to support apartment construction was moved from mortgage loans to the State Fund for Housing Development and to other tools of the Construction Ministry that mainly support the poor.

"The package of money for apartment construction was not decreased. It was only restructured after consultations with the Construction Ministry," said Vladimír Tvaroška, the state secretary of the Finance Ministry.

Mikloš added that the Finance Ministry also considers the mortgage market strong enough that this step will not endanger its further development.

"We do not need to subsidise the interest rates, as they are already low," he said.

Banks do not have the same opinion. "If the subsidy is completely abolished, for sure, it will not be good. But if the state supports, for example, investment in mortgage securities, that would be a solution. We will negotiate it with the ministry," Regina Ovesny-Straka, the president of the Slovak Bank Association told The Slovak Spectator.

She also stressed that subsidies for interest rates were not common in other parts of the world.

"But in Austria, for example, there was support for investments in the mortgage securities in the form of tax incentives," she added.

However, Mikloš thinks the budget is not restrictive, as, in general, expenditures are growing significantly, although their share of GDP is decreasing.

"The growth of public expenditures in 2005 compared to 2004 represents 10.3 percent during 3.3 inflation. The majority of these expenditures are connected with accession to the EU and using European funds, payments to the EU budget, or the co-financing of projects," said the minister.

The state budget proposal is set on a prognosis of GDP growth in 2005 of 4.5 percent and inflation at 3.3 percent. The country should produce a total GDP of Sk1,400 billion (€34.7 billion) in 2005.

According to the Finance Ministry the unemployment rate should reach 16.6 percent and the current account deficit of the balance of payments should be 1.6 percent of GDP.

The proposal is set on a tax and payments burden 8.1 percentage points lower than the average in European Union countries, while the tax burden alone is the lowest among all EU members.

The Finance Ministry does not think that there is room to further decrease taxes. However, it has not ruled out cuts in payments to social funds in the future.

The government should discuss the budget proposal at its regular meeting in the last week of August. The Finance Ministry hopes that the cabinet will approve the budget by September 22 so that it can get to the parliament by October 15, as the law requires.

If the parliament passes the proposal, only the budget for 2005 will be obligatory, while the proposals for 2006 and 2007 will have a recommendatory character.

"This budget is based on the lowest tax and payment burdens among the EU countries. It creates conditions to further decrease the public finance deficit, indebtedness of future generations, and expenditures in relation to GDP.

"It is and will be a tool for further quick and sustainable economic growth and for the growth of Slovakia's competitiveness, as well as a tool for catching up to developed countries and their economic and living standards," said Mikloš.

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