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Budget deficit widens

THE CRISIS-TORN economy is making it much more difficult for the state to fill its coffers. State revenues at the end of May 2009 were considerably lower than at the same time last year and tax revenues have significantly fallen behind the government’s budget plan for 2009. Market watchers warn that given the poor national economic prospects, the planned €1 billion state budget deficit for 2009 might easily double and that the government should urgently switch to a strict savings mode.

The deficit of the social insurer has also deepened. (Source: SME)

THE CRISIS-TORN economy is making it much more difficult for the state to fill its coffers. State revenues at the end of May 2009 were considerably lower than at the same time last year and tax revenues have significantly fallen behind the government’s budget plan for 2009. Market watchers warn that given the poor national economic prospects, the planned €1 billion state budget deficit for 2009 might easily double and that the government should urgently switch to a strict savings mode.

Total state budget revenues at the end of May were 10.8 percent lower than last year, reaching €3.945 billion according to the Finance Ministry. Tax revenues, the most significant portion of state income, stood at €3.113 billion, a 13.8 percent drop year-on-year, fulfilling only 31.5 percent of the budget plan for 2009. The steepest drop was recorded in the collection of value added tax (VAT), the ministry reported.

Considering the negative forecasts in economic activity for the rest of 2009 it is likely that the state budget deficit in the upcoming months will grow further and at a faster tempo than last year, senior analyst with VÚB Banka, Martin Lenko, told The Slovak Spectator.

“By the end of the year the state deficit could be double the planned deficit of €1 billion,” said Lenko.

While over the past three years, a third of the planned budget revenues were in the state’s coffers during the first four months of the year, in 2009 only a third of the revenues have been received over the first five months, Eva Sárazová, an analyst with Poštová Banka, told The Slovak Spectator.
Budget revenues dropped in comparison with the same period last year by almost 11 percent, while spending grew by nearly 5 percent, she added.

According to Lenko, the lower collection of value added tax accounts for a considerable share of the decrease in state revenues.

As for a cure that government could prescribe for a crisis-torn economy, Lenko suggests it would be cuts in state administration spending, social programmes and public procurement.

“Steps that would ease the payroll tax burden in Slovakia, more transparent public procurement and a more flexible labour market have the potential to ease the impacts of the crisis and help the economy,” Sárazová added.

Both Lenko and Sárazová said that the state budget deficit will have a significant impact on the level of the overall deficit in public finances as well.

According to Sárazová, the continuing trend of lower revenues and higher spending means a larger than planned state budget deficit which will then be negatively reflected in the overall public finance deficit because the state budget makes up the greatest share of the country’s public finances.

“Presumably, other components of public finance, such as the social insurer and the budgets of towns and villages, will also post worse economic performances,” Lenko said. “We estimate the overall public finance deficit for 2009 at €3.5 billion, which is 5 percent of GDP.”

Sárazová’s bank predicts the overall public finance deficit for 2009 will reach 4.5 percent of GDP based on a 2.7 percent contraction in Slovakia’s economy.

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