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Budget cuts dragged on growth last year

CONSOLIDATION measures adopted in recent years have negatively affected the Slovak economy, but growth was not significantly reduced, according to the latest report of the Financial Policy Institute (IFP), published on July 15.

CONSOLIDATION measures adopted in recent years have negatively affected the Slovak economy, but growth was not significantly reduced, according to the latest report of the Financial Policy Institute (IFP), published on July 15.

As for the excessive deficit procedure, the government in 2009 pledged to reduce the deficit below 3 percent of GDP by 2013.

“If no measures had been taken, last year’s deficit would have reached 4.9 percent of GDP,” the TASR newswire quoted IFP. “According to the latest estimates, consolidation measures amounting to €1.6 billion were required to achieve the final balance of 2.8 percent of GDP.”

To reach a deficit of 2.8 percent of GDP, the government introduced measures amounting to 2.2 percent of GDP, €1.6 billion in 2013. However, just a small part of the measures, specifically 0.7 percent of GDP, directly affected GDP, and therefore fiscal consolidation decreased economic growth by less than 0.2 p.p. in 2013.

Slovakia has seen three periods of fiscal consolidation - between 1993 and 1995, 2003 and 2005, and 2011 and 2013. The IFP stated that despite significant consolidation efforts during the second of these periods, economic growth accelerated.

“This was due, in particular, to a positive situation in the world economy, Slovakia’s accession to the European Union, structural reforms, and also a low starting level for the economy,” said the IFP. According to the Institute, the consolidation that began in 2011 reduced economic growth by between 1 and 1.8 percentage points.

The results of the IFP analysis indicate that consolidation in terms of expenses affects the growth of the economy more than consolidation related to incomes over a one-year period. In the intermediate or long term, however, spending measures slow the economy down less than revenues.

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