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Budget deficit down in Q1

SLOVAKIA closed the first quarter of 2011 with a preliminary state budget deficit of €655 million, one third less than in the same period in 2010. The Finance Ministry said the improved figures are due to an increase in revenues and cuts in expenditure and pointed to the austerity measures adopted by the Iveta Radičová government that took power last summer. Analysts say fulfilment of the government’s budgetary target, a reduction of the state budget deficit to 4.9 percent of GDP this year, is on track, but note that month-to-month changes in tax revenues warrant attention.

SLOVAKIA closed the first quarter of 2011 with a preliminary state budget deficit of €655 million, one third less than in the same period in 2010. The Finance Ministry said the improved figures are due to an increase in revenues and cuts in expenditure and pointed to the austerity measures adopted by the Iveta Radičová government that took power last summer. Analysts say fulfilment of the government’s budgetary target, a reduction of the state budget deficit to 4.9 percent of GDP this year, is on track, but note that month-to-month changes in tax revenues warrant attention.

“A glimpse solely at the deficit for the first quarter gives a relatively optimistic view, as the three-month central budget shortfall narrowed by 33.4 percent compared with the same period a year ago,” Vladimír Vaňo, chief economist at Volksbank Slovensko, told The Slovak Spectator. “However, closer scrutiny of this preliminary result is needed in order to assess adequately the trend in this year’s public finance and its structural health.”

Vaňo pointed out that the monthly results in terms of cumulative shortfalls present a rather volatile picture for the first three months of the year: at the end of January, the budget shortfall was worse than a year before, after February it was less than half of the 2010 result, and after the first three months the result was one third better than it was last year.

“Purely from a managerial viewpoint, such wide gyrations in any quantifiable results could cast doubt on whether the process under consideration is under control,” said Vaňo.

Expenditure during the first quarter of 2011 amounted to €3.407 billion and was 2.5 percent lower than during the same period of 2010, according to the Finance Ministry. It stated that expenditure was affected by compulsory items which do not reflect the real policies of the government. After removing items like repayment of state debt, coverage of the deficit of social security provider Sociálna Poisťovňa, and other items, the Finance Ministry calculated the basic budget expenditure as being €2.059 billion, down 6.2 percent year-on-year. Meanwhile, revenues rose by one tenth year-on-year to €2.752 billion. Transfers from the EU were the main driving force behind the increase: receipts from this source increased by two thirds year-on-year. Tax revenues remained roughly at last year’s level, according to the Finance Ministry.

“The state budget closed the first quarter of 2011, when compared with the same period of 2010, relatively well,” VÚB Banka analyst Andrej Arady told The Slovak Spectator. “It is possible to say that the drop in the deficit can also be ascribed to austerity measures adopted by the cabinet. From the viewpoint of expenditures, omitting items which do not take into consideration the policies of the cabinet, it is possible to observe that the state’s plan to save on basic expenditures in the operation of the state is being met. These decreased by more than 6 percent year-on-year; and after taking into consideration the increase in prices [the figure] was even higher.”

Analysts see the lower expenditure and, on the other hand, the more significant increase in revenue as lying behind the slowdown in the growth of the deficit.

“Narrowing of the first-quarter deficit by one third was a result of a 9.6-percent increase in quarterly revenues compared with the same period a year ago and an annual decrease in budget expenditures by 2.5 percent compared to the same period last year,” Vaňo said, pointing out that the quarterly collection of revenues amounted to only 20.9 percent of the full-year target. “A closer look at the domestic sources of state budget revenues causes eyebrows to be raised even further. Total tax revenues for the first three months of the year were down by 0.5 percent compared with the same period a year ago.”

This, according to Vaňo, means that the development of the major domestic tax revenue sources in the first three months of the year merits increased attention, at the very least.

Arady agreed that from the viewpoint of budget revenues, tax revenues have not fulfilled expectations so far. But these may be affected by several factors, for example pre-stocking, a time shift in transfers of payments, or by a reduction in consumption, he said.

According to Radovan Ďurana of the INESS economic think tank, three months are too short a period on which to base an evaluation of the year-end deficit.

“Details of expenditures are known so far only for February 2011 and this is too little to make a proper assessment,” Ďurana told The Slovak Spectator, adding that tax revenues at the beginning of the year are also influenced by various side effects, such as Christmas and pre-stocking and that as result he would not want to make any early assessment. “Attention should be paid to collection of VAT, which has been occurring at a slower pace.”

According to Ďurana, the Finance Ministry forecasts that by the end of 2011 an extra €814 million should have been collected compared to 2010.

“Alongside this, taking data from the Finance Ministry, expenditure by the state should decrease by €700 million,” said Ďurana. “This is certainly positive when compared with the previous cabinet of Robert Fico. On the other hand, the cabinet in 2011 has to face higher expenditure linked to the state debt and subsidies to the social security provider. After taking into consideration these factors, the contribution of taxpayers is significant. To ascribe the drop especially to savings would be inadequate.”

Vaňo sees fulfilment of the budget plan as being well on track.

“As long as the risks of revenue shortfalls in some of the major revenue items are accompanied by timely and commensurate expenditure restraints, fulfilment of the budget seems to be well on track,” said Vaňo. “But still the question remains whether the looming revenue shortfalls are only temporary in nature or whether they might suggest a menacing trend that would require additional cost-cutting initiatives.


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