Slovak towns and regions face massive income shortfall

TOWNS and villages across Slovakia continue to face a financial crisis, with some unable to pay their bills, following a drastic fall in the income tax revenues which are their main source of income. Some municipalities are even toying with the idea of strikes, but the immediate solutions being contemplated are loans, spending cuts and layoffs.

TOWNS and villages across Slovakia continue to face a financial crisis, with some unable to pay their bills, following a drastic fall in the income tax revenues which are their main source of income. Some municipalities are even toying with the idea of strikes, but the immediate solutions being contemplated are loans, spending cuts and layoffs.

Some mayors are offering a markedly gloomy vision for their municipalities: that of financial collapse. The Finance Ministry, which will get new masters in a couple of days’ time, is trying to calm their worries by suggesting that income tax collection should stabilise in the second half of this year.

The Financial Policy Institute at the Finance Ministry has forecast an improvement in revenues from income tax paid by private persons. Revenues from personal income tax are projected to be €1.535 billion for 2010, €105.7 million less than predicted in September 2009, the SITA newswire reported.

The institute does not expect any further decline in the next few months; instead, it says, the positive effect of the freezing the non-taxable income tax base in 2010 will bear fruit.

Yet the ministry’s forecast will do little to calm municipal worries. The president of the Slovak Association of Towns and Villages (ZMOS), Michal Sýkora, said municipalities are already facing a shortfall of roughly €185 million arising from the first five months of this year, and that the situation has deteriorated further as a result of the floods which struck Slovakia in June.

The revenues of municipalities in 2011 are expected to grow to €1.804 billion, but this is still €175 million below the prognosis issued by the institute in September 2009.

Meanwhile, the Sme daily has reported that mayors belonging to Smer, the largest party in the outgoing government, have been defending the policies of the government of Smer leader Robert Fico, who declared that “we are leaving the country in a good condition”.

But Slovakia’s next finance minister, Ivan Mikloš, who previously served in the same post during the 2002-2006 government of Mikuláš Dzurinda, has said on several occasions that Fico has misled the public about the condition of the public finances.

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, or €186.4 million, ZMOS spokeswoman Helena Poláková told The Slovak Spectator in an earlier interview.

The full-year prognosis for personal income tax revenues for 2010 was €1.134 billion, according to Poláková, but the amount actually collected in the first five months was only 38.1 percent of the amount projected for that period.

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.

“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, only about 38.1 percent of predicted income tax revenue for the first five months of 2010 was received.

Poláková said towns and villages received only 42 percent of forecast revenues in March, 71 percent in April, and 51 percent in May. She said that the preliminary collection rate in June was only 25 percent of what it was in the same period last year. She confirmed that falling income tax revenue was the main factor depleting municipal budgets.

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 flood repair expenses paid out of municipal budgets have already reached millions of euros and have deepened the threat of financial disaster in those towns and villages that experienced flooding.

Finance Ministry State Secretary Peter Kažimír reported that local governments spent more money in 2009 than in 2008. But Poláková responded that municipal revenues 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 says it has detected some willingness on the part of the Finance Ministry to help shorten the time taken to transfer money to municipalities from revenues collected in income taxes in July. This July, municipalities and regions will receive the money one week earlier.

“ZMOS also proposes that the [state] government considers reallocating funds within particular operational programmes and transferring them to post-flood investment measures,” Poláková said.

The Union of Towns of Slovakia (ÚMS) is also requesting that the incoming government cover the shortfall in income taxes that municipalities are facing from their share of 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 of them could go bankrupt next year.

The governing council of the Association of Local Governments Mayors (APUMS) has also stated that municipalities’ reliance on revenue 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 payment of basic operational costs are now endangered, 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 municipal budgets and is demanding that the necessary funds are transferred to towns and villages as quickly as possible.

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