Deficit pains growing in Slovakia

THE DARK cloud of growing public finance deficits is hanging over many EU countries and the European Commission is warning that by the end of the year it might bring some additional pressure on member states to take action against their deficits.

THE DARK cloud of growing public finance deficits is hanging over many EU countries and the European Commission is warning that by the end of the year it might bring some additional pressure on member states to take action against their deficits.

European Economic and Monetary Affairs Commissioner Joaquín Almunia said that by the end of the year the commission will trigger excessive deficit procedures against several EU member countries, including Slovakia.

The excessive deficit procedure begins when a member country exceeds the annual 3 percent limit of public deficit as a proportion of Gross Domestic Product. Sanctions might be assessed against violating countries according to the European Commission’s website.

It is now clear that Slovakia will be unable to keep its public finance deficit below 3 percent of GDP.

The State Secretary of the Finance Ministry, Peter Kažimír, has confirmed that the public finance deficit in Slovakia is likely to reach around 6 percent of GDP by the end of 2009 and that the country might be able to reduce the deficit to within the 3 percent limit only in 2012.

“We want to start consolidation immediately next year, even if it is difficult for us, because it is an election year,” Kažimír said, as quoted by the public service Slovak Radio. “We see the goal to get under the 3 percent ceiling in 2011 as something very, very ambitious. It means that 2012 seems more realistic to meet this goal.”

The state budget deficit reached €1.108 billion at the end of June, up from €832 million in May, the Finance Ministry reported on July 1. The deficit has now exceeded the sum planned for the whole of 2009 (€1.009 billion). Market watchers suggested the decline in Slovakia’s GDP, predicted at a negative 6.2 percent for 2009, would result in a shortfall in state revenues of about €2.5 billion.

The Slovak parliament approved the general government budget at the end of last year, projecting a deficit of 2.1 percent of GDP for 2009. But that figure is sorely out-of-date.

Senior analyst with the VÚB Bank Martin Lenko said that the latest estimate of the public finance deficit at 6 percent seems realistic while his bank has revised its estimate to stand at 6.2 percent.

The reasons Lenko sees behind this development are the “drop of tax revenues, mainly from VAT, and the reluctance so far of the government to cut its spending”.

“The economic crisis in the world has impacted Slovakia more significantly than the most pessimistic scenarios had assumed,” Eva Sárazová, an analyst with Poštová Banka told The Slovak Spectator.

The 2009 public finance deficit estimate of her bank stands at 5.4 percent of GDP along with an estimate of a 5.6 percent contraction in the overall economy.

“The prediction by the Finance Ministry [of a deficit] at 6 percent of GDP is slightly more pessimistic, but the ministry also has a more pessimistic estimate for GDP in 2009,” Sárazová said.

The government estimates that next year the public finance deficit could account for 5 percent of GDP.

Sárazová says getting close to the 5 percent deficit level is only possible if the government strives for more significant savings on the spending side.

“On the other hand, if the current trend of spending continues, we see a tendency to end up close to or even above the 6 percent limit,” Sárazová said. “But also, savings should be applied where it is possible and meaningful. We see possibilities, for example, in more transparent public procurement and also in the re-evaluation of some social goals.”

Any kind of indebtedness creates risks and conditions for imbalances in the future, Lenko told The Slovak Spectator.

“It will be important how the government decides to reduce this deficit in the future and how it will make savings since the estimates of economic growth for the upcoming years do not suggest any rapid revival and therefore no fast growth in revenues for the state coffers,” he added.

Lenko does not think that the government has much time to begin reducing the deficit.

“Not much time is left,” Lenko said. “The government, based on its statements, plans to modify the budget revenues by tax hikes. The other option is savings on the expenditure side.”

Sárazová suggested that in times of economic downturn a higher government deficit can be acceptable but only if the money is spent on meaningful goals which help the Slovak economy now and also in the future.

“Money should not be wasted through some short-term measures that do not have a large-scale impact,” said Sárazová.

Sárazová agreed that Slovakia will this year fail to keep the closely-monitored 3 percent Maastricht deficit limit but was also quick to add that Slovakia will not be alone since several other European countries are also seeing their public deficits swell.

A higher annual public finance deficit means a larger public debt for these countries and each country will have to pay off their debt, she added.

“There are countries which are already struggling with large government debt and they have to reach for different measures, for ones unpopular with citizens, such as higher income and payroll taxes,” Sárazová said. “A more indebted country is less attractive in the eyes of foreign investors.”

According to Sárazová, it is not easy to reduce the public finance deficit and thus the public debt of a country during an economic downturn and she finds it regrettable that in times of fast economic growth in Slovakia there was not more significant paying down of the public debt, “through which we would have secured a certain reserve exactly for this more critical time.”

After European countries start recovering from the economic crisis the fulfilment of the Maastricht criteria of annual deficits of no more than 3 percent of GDP and public debt of no more than 60 percent of GDP will be more carefully watched by the EU, she added.

In 2008, the public debt of Slovakia stood at €18.6 billion, which is 27.6 percent of GDP.

“Based on our estimates, the public debt of our country should increase this year to 33 to 35 percent of GDP,” Sárazová said.

While income tax reductions and cuts to mandatory payroll taxes were the prescription that opposition parties and many economists said they would write for Slovakia’s aching economy, Finance Minister Ján Počiatek, under the pressure of a growing public finance deficit is now toying with the idea of some tax hikes. More taxes on alcohol and gambling would be the first target if the idea turns into a plan, he suggested.

Počiatek said on July 8 that Slovakia’s current tax system only works well in good times since it is based solely on a growth model and that some changes to the country’s tax system might need to be discussed soon.

“I wouldn’t rule out anything,” Počiatek said, as quoted by daily Sme. “But it is all about calculations, so we will see.”

He also confirmed that several options are being considered.

Local media on the same day published reports that Počiatek told the Financial Times daily that the Slovak government is not considering modifications to its income tax rates; that perhaps only taxes on gambling and alcohol would go up.

Počiatek’s statements came on the same day that the Slovak Statistics Office released a package of gloomy data on the country’s industrial production in May, which showed a 23.9 percent year-on-year fall. Slovakia’s industrial production has now slumped by 23.7 percent over the first five months of 2009 in comparison with last year. The statistics office attributed the decline mainly to the global economic downturn.

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