Mammoth tax shortfall

A LONG-DELAYED forecast about Slovakia’s overall tax revenues for 2010 is now out and it has a frontal blow that will generate a huge headache for the future centre-right government: this year the state will collect €1 billion less in income and payroll taxes than the outgoing government of Robert Fico had originally projected.

A LONG-DELAYED forecast about Slovakia’s overall tax revenues for 2010 is now out and it has a frontal blow that will generate a huge headache for the future centre-right government: this year the state will collect €1 billion less in income and payroll taxes than the outgoing government of Robert Fico had originally projected.

The latest prognosis released by Slovakia’s Finance Ministry more than 10 days after the parliamentary election now confirms earlier mounting doubts about the government’s ability to actually meet its 5.5 percent year-end deficit target for 2010. Many economic analysts have been suggesting for several months that the deficit hole in the state budget would far exceed 6 percent of GDP. According to preliminary figures, Slovakia’s public administration budget had a deficit of almost 6.8 percent of GDP in 2009. Now, the 2010 budget deficit is predicted to reach 6.98 percent.

The originally planned tax revenues for 2010 stood at €16.776 billion but the most recent tax collection prognosis by the Finance Ministry now forecasts only €15.726 billion. Economic experts are saying that the new government will need to go down the path of significant spending cuts. Political leaders from the centre-right parties are saying that the tax collection numbers are worse than they had expected.

Many of Slovakia’s towns and villages are already living with a worst-case tax revenue scenario and they claim that without immediate help from the state they will no longer be able to cover their operational costs and pay wages to their employees. The massive flooding which recently hit several regions of Slovakia has made the situation of some municipalities in those areas particularly dire.

Overall, Slovakia’s municipalities are dealing with a shortfall from income taxes of €228 million in comparison to the tax revenues that were available to them last year.

Slovakia’s towns and villages receive revenues only from income taxes paid by private individuals, not by businesses. The municipalities get 70.3 percent of these personal income taxes, the regions receive 23.5 percent and 6.2 percent goes to the state government.

Compared to the actual amount collected in taxes in the January-May period of 2009, this year’s revenues from income taxes on private individuals over the first five months dropped by 30.1 percent, which means a sum of €186.4 million, Helena Poláková, spokeswoman of the Association of Towns and Villages of Slovakia (ZMOS), told The Slovak Spectator.

The full-year prognosis for personal income tax revenues for 2010 amounted to €1.134 billion and according to Poláková, the amount collected in the first five months accounts for only 38.1 percent of the projected amount.

“The shortfall of revenues from income tax collection was eased by an agreement with the state to provide a special subsidy of €33 million from the state budget to cover the shortfall,” Poláková said.

But even combined with that special subsidy the annual prognosis for revenues from income taxes of private individuals is being covered at only 41 percent for the first five months of 2010.

Poláková said towns and villages received only 42 percent in March and 71 percent in April and that the tax collection stood at 51 percent in May and so far in June the collection rate is only 25 percent of what it was in the same period last year.

“The impact of the financial and economic crisis has affected all towns and villages in Slovakia mainly by the fact that they have seen their revenues from income taxes on individuals dropping significantly,” Poláková told The Slovak Spectator. “We admit that it could prevent towns and villages from meeting their basic roles, for example, keeping the deadline for paying wages to employees in local governments.”

Buzitka, a village close to the town of Lučenec in southern Slovakia, received tax revenue in June of only €1,150 from more than 500 inhabitants, the Sme daily reported, writing that the municipality might have to close the local school, turn off street lights and shutter the kindergarten. Buzitka also needs funds to repair its roads after damage from flooding.

Poláková said that the expenses for flood remediation work which were covered from municipal budgets have already reached millions of euros and these expenditures are deepening the threat of financial disaster in towns and villages that experienced flooding.

The State Secretary of the Finance Ministry, Peter Kažimír, reported that local governments spent more money in 2009 than in 2008. But Poláková responded that both the revenues and expenditures of the municipalities were higher last year than in 2008.

“The reason was the contribution of a boost from the drawing of finances from [EU] Structural Funds and the success of development programmes which were part of the anti-crisis measures,” Poláková said.

ZMOS stated that it is seeing a certain willingness on part of the Finance Ministry to help shorten the term of transferring money to municipalities from revenues collected in income taxes in July. This July, municipalities and regions will receive the money by one week earlier.

“ZMOS also proposes that the [state] government consider reallocation of funds within particular operational programmes and to transfer them to investment measures after the floods,” Poláková said.

The towns and villages are also asking that funds to cover flood-related efforts be immediately covered by the Finance Ministry from the state coffers in the form of advance payments which would be fully accounted for later.

“With the current procedure, there is a danger that these finances would get to the villages only at the end of the year or next year, which together with the impacts of the crisis could cause the real collapse of the system of financing and insolvency for many of the most-affected municipalities,” Poláková told The Slovak Spectator.

“ZMOS is also demanding that systematic measures for flood prevention be reflected in the government’s program statement,” Poláková said.

The Union of Towns of Slovakia (ÚMS) is also requesting that the future state government cover the shortfall in income taxes that municipalities are facing from their share of the overall revenue. The vice-president of ÚMS has warned that if towns and villages are forced to use up all their reserves this year some municipalities might go bankrupt next year.

The governing council of the Association of Mayors of Local Governments (APUMS) has also stated that the revenues received by municipalities only from personal income taxes makes it impossible for local governments to fulfil their basic roles, and that local financing of schools and social services and covering basic operational costs are endangered as well, according to a news release from APUMS.

APUMS is calling on the newly-elected state government and other competent bodies to devise an immediate solution to the shortfall in financial resources and is demanding that necessary funds are transferred to towns and villages in the quickest possible time period.

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