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EC: Slovakia's projected deficit a concern for 2014

THE EUROPEAN Commission has expressed concern with the Slovak Finance Ministry’s budget for 2014, essentially disagreeing with a ministry forecast that it will keep the deficit below the 3 percent cap for eurozone members and thus far preventing the country from tapping the so-called investment exemption to improve infrastructure and prime the economy.

THE EUROPEAN Commission has expressed concern with the Slovak Finance Ministry’s budget for 2014, essentially disagreeing with a ministry forecast that it will keep the deficit below the 3 percent cap for eurozone members and thus far preventing the country from tapping the so-called investment exemption to improve infrastructure and prime the economy.

After evaluating the draft budget plan, the EC forecast a deficit of 3.2 percent of GDP, well above the 2.8 percent deficit the Finance Ministry said its spending plan will generate. The EC also suggested Slovakia might have trouble reining in deficits in the long run, concluding that a “permanent correction of the excessive deficit cannot be guaranteed”.

Speaking on the sidelines of a meeting of EU finance ministers the same day the EC evaluation was made public on November 15, Finance Minister Peter Kažimír said he found little that concerned him in the EC report.

“There was praise with respect to the developments seen by the end of 2013,” he told the TASR newswire. “The good news is that the European Commission sees that we can manage 2013 at 3 percent or even under”.

But it is deficits for future years that raised EC concerns. This is the first time the EC had examined individual member state budgets as part of new economic governance rules put in place in the wake of the eurozone crisis. Much like Kažimír, leaders from other member states sought to play down some of the EC’s findings, which often differed from projections made by the member states themselves.

“It is reassuring that no draft budgetary plan has been found in serious non-compliance with the obligations of the Stability and Growth Pact and that it is not necessary to request revised budgetary plans,” read an EC statement accompanying the release of the reports.

Spain and Italy drew the biggest criticisms from the Commission. The EC predicted that at least five countries – Finland, Italy, Luxembourg, Malta and Spain – look set to break provisions of the Stability Pact, some to surpass public debt limits rather than the annual deficit cap of 3 percent of GDP.

“In a number of cases, there is scope for significant improvements,” said Olli Rehn, the European commissioner for economic and monetary affairs.

According to EC estimates Slovakia would breach the 3 percent annual GDP threshold, but as the forecast indicates it will do so by just two-tenths of a percent, the country is considered to be within striking distance of the goal.

“Slovakia at this stage cannot be considered a country eligible to apply for an investment exemption since it is still subject to an excessive deficit,” the EC concluded.

That exemption allows eurozone members to temporarily surpass spending regulations on infrastructure projects co-funded by the European Union. In short the provision is meant to reward countries adhering to budget rules, by allowing increased spending on infrastructure and thus priming economies with construction jobs and the like. For Slovakia, achieving the exemption is likely to be worth about €500 million. To do so it must escape the EC deficit monitoring mechanism. Another evaluation in the spring will determine whether this occurs.

“It is in our interest to get out of it,” Kažimír said. “The fact that right now we do not have the investment exemption does not preclude the fact that this requirement will be addressed again.”

The EC budget evaluations did not include Cyprus, Greece, Ireland or Portugal, as all those countries are already tied into prescribed reform programmes as part of bailout agreements with international lenders. Slovakia was among several countries that had made “little progress” in implementing structural reforms.

The Finance Ministry projected a €3.39 billion deficit for 2014, as compared with an estimate of €3.1 billion this year. Public debt is set to increase to 56.8 percent of GDP from 54.3 percent this year, before reaching 56.4 percent in 2015 – all these numbers fall well below the Stability Pact’s 60 percent cap. Among affiliated changes to tax policy next year, is a plan to cut corporate tax rates from 23 to 22 percent. The budget is based on an assumption of the economic growth of 2.2 percent next year as compared to the projected 0.8 percent this year.

The EC’s evaluation found that Slovakia’s budget consolidation efforts in 2014 are focused on increasing revenues rather than lowering costs, essentially disagreeing with the amount certain planned reforms will save the state.

“It's up to us now to convince representatives of the Commission as well as people here at home that we’re capable of saving resources through the reform of public administration,” Kažimír said.

Eurozone finance ministers were set to meet again on November 22. This is the third time they will meet within two weeks as they seek to negotiate new banking regulations before the end of the year.

The day before the EC reports were issued, official figures showed that third quarter growth in the eurozone had dipped to just 0.1 percent, down from 0.3 percent the quarter before. Those numbers were released on the heels of a European Central Bank (ECB) decision to cut its benchmark interest rate to 0.25 percent in an attempt to spur additional growth. At the same time, the annual rate of inflation in the common currency area fell to 0.7 percent in October, according to Eurostat, the lowest level in four years and one well below the ECB’s target rate of 2 percent.

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