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State debt to be 'capped' by law

FISCAL irresponsibility might bring down future governments in Slovakia if a new constitutional law to cap state debt is approved by parliament. The draft legislation, presented on October 4, would set an initial limit on public debt at 60 percent of gross domestic product (GDP), with a gradual reduction in the ceiling from 2018 of 1 percentage point per year until it reached 50 percent of GDP. If a government were to hit the 60-percent debt ceiling, it would face an automatic no-confidence vote in parliament.

Illustrative stock photo(Source: SME)

FISCAL irresponsibility might bring down future governments in Slovakia if a new constitutional law to cap state debt is approved by parliament. The draft legislation, presented on October 4, would set an initial limit on public debt at 60 percent of gross domestic product (GDP), with a gradual reduction in the ceiling from 2018 of 1 percentage point per year until it reached 50 percent of GDP. If a government were to hit the 60-percent debt ceiling, it would face an automatic no-confidence vote in parliament.

Observers said the initiative, which is rare in uniting the ruling coalition and the opposition, is the right move – but should be only a first step to achieving responsible fiscal policies.

The authors of the idea say that the draft was created as a preventive measure and that it would be better if debt were never to approach the limits.

“The debt brake is being drafted as a draft constitutional law so that we never have to use it,” said Ľudovít Ódor, one of those behind the law and an adviser to the prime minister on financial affairs, as quoted by the SITA newswire.

The law would also trigger a series of preliminary steps as debt approached the limit.

The finance minister would have to table a sound explanation when debt reached 50 percent of GDP, along with proposed solutions for its reduction. If the debt then grew to 53 percent, the government would be obliged to adopt a package of measures to reduce it, as well as to freeze state salaries. At 55 percent, spending would be frozen in the next fiscal year. If the debt reached 57 percent of GDP, the government would be obliged to table a balanced budget.

Nevertheless, a deep recession, a bank bailout or the need to tackle the effects of a major catastrophe would trigger an exemption from the sanctions, which could apply for up to three years.

The main opposition party, Smer, said it is open to supporting the constitutional draft. The party’s deputy chairman, Peter Kažimír, said Smer would still propose some changes, but described the law as a necessary measure for Slovakia.

“We are talking about a law which would deserve the support of all 150 members of parliament,” Kažimír said, as quoted by SITA.

After installing this debt brake as the first step, the second move should be to introduce caps on spending, according to Radovan Ďurana of the economic think tank INESS.

“This rule will be ambitious if it forces the government to manage the state with a surplus, since only in that case will it be possible to reduce debt as a share of GDP,” Ďurana told The Slovak Spectator. “I consider the fact that the deputies are proposing a transition period with a higher cap on debt an expression of their unwillingness to yield to the new rules from the very beginning and from my point of view it disqualifies this as an expression of their desire to really manage things efficiently.”

According to Ďurana, such a high reserve is not necessary for such a long transition period.

“At first sight it might seem insufficiently ambitious, but I think it was set correctly,” said Vladimír Tvaroška, State Secretary of the Finance Ministry, in an interview with the Sme daily. “One has to realise that sanctions for the government in upcoming years will start applying at 50 percent.”

Tvaroška notes that the state budget for next year assumes public debt at 45.7 percent of GDP, while in 2014 debt is forecast to be 46.8 percent of GDP. If the crisis is deeper or if more funds are needed to bail out some other European countries, then Slovakia might reach the 50-percent limit relatively fast, he added.

“Though the proposed law is good news, I do not consider it to be correct that there will be a constitutional ‘right’ for debt to remain at 40 percent of GDP,” said Ďurana, adding that it is unfair to future generations who might not benefit from the debt and would only do so if it arose because of capital spending with long-term added value. He said this is not the case for Slovakia since the country’s debt has emerged mainly from routine spending.

Deficits in just the past two years have deepened Slovakia’s public debt to almost €27 billion, or 41 percent of GDP, noted Poštová Banka analyst Eva Sadovská.

“The state owes approximately €5,000 per capita but we account for only three-tenths of a percent of the total debt of the EU,” Sadovská told The Slovak Spectator. “All this puts Slovakia among the less indebted economies of the union. Nevertheless, we still consider a debt cap to be the right step.”

Sadovská regards keeping the limit at 60 percent of GDP, which is also the maximum set by the Maastricht Treaty, as realistic, and said she does not consider the gradual lowering of this level after 2018 to 50 percent as problematic either.

“Public debt grows in times of recession,” Sadovská said. “At such times, state revenue are endangered and the public finance deficit deepens, followed by the public debt.”

Sadovská sees a risk in the uncertain outlook for global economic development and consequently for Slovakia too.

“It is important to grasp the need to create reserves in times of stronger economic growth,” Sadovská said. “Then it is slightly easier to handle the crises. We had such a chance when we were known as the central European tiger, but we slightly wasted this chance.”

Ďurana sees risks in what he called the unwillingness to admit the bad condition of the public finances and the subsequent unwillingness to save on expenditures.

“The current government has so far made cuts only in the running of the state, but refuses to cut ineffective transfers to the public,” Ďurana said. “In the event of a deepening recession within the EU, this would lead to high deficits.”

Another risk, according to Ďurana, is posed by the continuing problems of the eurozone, and the problems that this could cause in raising debt in financial markets to finance the deficit.



As for additional measures that could help to tame the debt, Ďurana listed strict debt caps, which would restrict the government in increasing spending when designing state budgets based on forecast tax revenues, and would require the government to post a surplus over an election or economic cycle.

The draft, however, also includes other tools to tackle the state debt and make fiscal policies more transparent. These include the option of establishing a Council for Fiscal Responsibility, which would function as an independent body and would be financed by the central bank, the National Bank of Slovakia (NBS), according to SITA. The independent three-member council would consist of experts: one would be nominated by the government, one by the president and the third by the governor of the NBS. The nominations would be subject to approval by parliament.


The council would look at the fiscal impact of legislative proposals, and keep an eye on the development of public finances.

Ďurana said he does not think that the council is technically necessary, but said that its institutionalised and personified form could act to place more pressure on the executive branch and parliament.

“The decisive factor will be how active and politically independent the council will be,” Ďurana said.


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