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Tax shortfall creates fiscal headache

THE STATE will have to fill a gap of €233 million caused by weaker-than-predicted tax revenues if it wants to push the public finance deficit under 3 percent of gross domestic product (GDP) in 2013, as required by Slovakia’s EU obligations. The Finance Ministry’s Financial Policy Institute (IFP) has scaled down its previous estimates for tax and payroll tax revenues for 2012 and 2013 by approximately 0.2 percent and 0.3 percent of the GDP, respectively, “without considering the positive impacts of the consolidation package on part of the revenues”.

THE STATE will have to fill a gap of €233 million caused by weaker-than-predicted tax revenues if it wants to push the public finance deficit under 3 percent of gross domestic product (GDP) in 2013, as required by Slovakia’s EU obligations. The Finance Ministry’s Financial Policy Institute (IFP) has scaled down its previous estimates for tax and payroll tax revenues for 2012 and 2013 by approximately 0.2 percent and 0.3 percent of the GDP, respectively, “without considering the positive impacts of the consolidation package on part of the revenues”.

In response to the new prognosis, which assumes that the state will collect €233 million less in tax and payroll tax revenues next year, Finance Minister Peter Kažimír said that the government will try to find the missing money in its own coffers as opposed to imposing further tax hikes.

“The shortfall of €230 million represents 1 percent of the tax and payroll tax revenues of the state, so no dramatic change of situation [will] appear,” Radovan Ďurana of the INESS, economic think tank, told The Slovak Spectator. “Such a shortfall could be relatively easily covered by savings in the public administration.”

The drop in expected tax and payroll tax revenue in comparison to the July estimate was primarily caused by a revision of the macroeconomic prognosis, a drop in corporate tax revenues in 2011 and moderately lower VAT collection, the IFP commented on September 27.

The cabinet of Robert Fico is scheduled to discuss the draft state budget for next year soon, leaving the finance minister with little time to figure out where he will get the money.

“I guarantee however, that in the submitted laws on income taxes we will not draw up additional proposals for tax hikes,” Kažimír told a press conference on September 27, as quoted by the SITA newswire, adding that spending should be curbed or non-tax incomes boosted.

Kažimír envisions that local governments should help as well, while he said he would request that mayors take a stricter approach to spending.

Nevertheless, the finance minister siad that the state remains geared towards keeping the budget deficit within the defined limit of 3 percent of GDP in 2013.

“I see risks mainly on the revenue side,” said Ďurana, adding that 2009 showed that a slowdown in the EU can significantly impact the public finance balance. “Also for this reason it would be more appropriate if curbing the deficit relies on cutting expenses and not increasing revenues.”

The IFP has also calculated the impact of the consolidation measures and thus compared to its July estimate increased the outlook for tax and payroll tax revenues by €139 million, or 0.2 percent of GDP this year and by €978 million, or 1.3 percent of GDP, in 2013, according to the official release.

The ministry is leaving its estimate for economic growth in 2012 unchanged at 2.5 percent, arguing on September 18 that the takeoff of new export capacities in the car manufacturing industry was unexpectedly fast in the first half of the year. The economy should grow by 2.1 percent in 2013, the ministry said.

Nevertheless, Ďurana of INESS said that the drop in tax revenue and the weaker outlook for the economy are strong enough reasons for not increasing tax rates. On one hand the expected increase of tax revenue will not necessarily be fulfilled, which would threaten consolidation, and on the other hand higher taxes might lead to a faster outflow or halt investments, he said.
“In public administration spending however, there are still potential savings worth €1 billion,” Ďurana said.

Changes to tax laws

Meanwhile, in line with its previous declarations, the cabinet of Robert Fico has approved an increase in corporate income tax from 19 to 23 percent. Individuals earning more than €3,246 per month will see their income tax rate go up from 19 to 25 percent, which effectively puts an end to Slovakia’s 19-percent flat tax, at times considered one of the country’s biggest strengths in the eyes of foreign investors. The draft is still awaiting approval by parliament, but given the ruling Smer’s overwhelming majority, it is expected to sail through with ease.

A special extra 5-percent income tax rate will apply to selected constitutional officials such as MPs, government members and the president, the TASR newswire reported. For the self-employed, a cap on their 40-percent lump-sum, tax-deductible expenditures is also to be introduced, with the upper limit projected to stand at €5,040 per year, or €420 per month, with Prime Minister Robert Fico commenting that this will affect 13 percent of self-employed people, SITA reported.

“The corporate tax hike will indirectly impact every citizen since it will impact all employers and producers and thus all consumers,” Ďurana told The Slovak Spectator. “Also banks and international [business] owners might re-evaluate the scale of their business in Slovakia, which might lead to a decline in the availability of services in Slovakia.”

According to Ďurana, the tax hike will limit job creation and will in fact only benefit the government, as it will not have to opt for unpopular or necessary saving measures.

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