FinMin shows first budget draft

THE FINANCE Ministry has introduced a draft bill for the most significant law of the year - the 2015 state budget. While Prime Minister Robert Fico, whose ruling Smer party will face parliamentary elections in less than two years, is optimistic, pointing to Slovakia’s positive economic developments, economic analysts and the opposition say the budget is not ambitious enough and does not reflect potential threats resulting from the Ukraine-Russia conflict and the related sanctions.

Finance Minister Peter KažimírFinance Minister Peter Kažimír (Source: TASR)

THE FINANCE Ministry has introduced a draft bill for the most significant law of the year - the 2015 state budget. While Prime Minister Robert Fico, whose ruling Smer party will face parliamentary elections in less than two years, is optimistic, pointing to Slovakia’s positive economic developments, economic analysts and the opposition say the budget is not ambitious enough and does not reflect potential threats resulting from the Ukraine-Russia conflict and the related sanctions.

“We believe that we are a country that is on a growth trajectory,” PM Fico told Slovak Television in response to the introduction of the first draft of the state budget for next year. “There are plenty of good, positive indicators.”

The Finance Ministry projects total state budget revenues for 2015 at €13.81 billion and expenditures at €16.69 billion, leaving the state budget with a deficit of €2.88 billion. This means a reduction in the deficit and in revenues and expenditures compared with 2014. For 2014, revenues are projected at €14.11 billion, expenditures at €17.39 billion and the deficit at €3.3 billion. The ministry introduced the draft state budget for 2015 and the draft general government budgets for 2015-2017 on August 15.

The general government deficit for 2015 is projected at 2.49 percent of the gross domestic product next year, which would be a decline from this year’s 2.64 percent. According to the general government budget for 2015-2017, the gap should narrow further to 1.43 percent of GDP in 2016 and to 0.39 percent of GDP in 2017.

The figures are based on macroeconomic forecasts from June, i.e. the GDP growth of 2.4 percent in 2014 and its acceleration to 3 percent in 2015 and 3.5 percent in 2016 and 2017.

“Exports will be driven by the growth of the economies of our trade partners, while also household consumption supported by the growth of real wages will began to contribute more significantly to economic growth,” the Finance Ministry writes in the document, adding that the increased confidence and purchasing power of consumers results especially from better conditions on the labour market, as well as low inflation. “Investments in new production capacities in the automotive industry, along with highway construction, will contribute to the revival of domestic demand.”

The ministry expects that the growth of prices will achieve a record low in 2014. It expects the annual growth of consumer prices to slow down to 0.3 percent, while real wages are growing in 2014 the fastest since 2008.

The gross debt of the general government should drop only by hundreds of a percent and should, in effect, stagnate for the third year at 55.4 percent of GDP. The deficit is expected to shrink more in the following years. In 2016 it should drop to 53.4 percent and in 2017 to 51.4 percent of the country’s economic output.

The draft budget counts on preserving the current value added tax (VAT) rate at 20 percent, as well as the planned extension of the duty to use electronic cash registers and the introduction of a withholding tax for monetary and non-monetary transactions by pharmaceutical firms. The Finance Ministry estimates these measures will bring €311.4 million to state coffers. The draft is also influenced by the constitutional law on budgetary responsibility, which does not allow an increase in expenditures due to last year’s exceeding the debt brake limit.

The draft budget of the general government for the years 2015-2017 includes, for the first time, Železnice SR, the railway operator in Slovakia, as Eurostat, the EU statistics office, is introducing a new methodology to assess debt and deficits. This will increase consolidated general government expenditures by €266 million in 2015 compared with the previous year.

The cabinet is required to pass the draft budget and advance it to parliament by October 15, and the budgets of the individual ministries are expected to change.

“We want to fulfil [budgetary] goals on the side of revenues, especially by improving the success of the collection of taxes and keeping VAT revenues,” Alexandra Gogová, spokesperson of the Finance Ministry, told the Slovak Radio. “On the other hand, expenditures will be reduced also thanks to the continuation of the reform of the public administration.”

Responses of analysts

Analysts view the draft budget as too optimistic, given that the economy of Germany, Slovakia’s biggest trade partner, contracted during the second quarter of 2014 compared with the first quarter. They also see it as not ambitious enough, while they do not expect the government to have courage for more radical steps and cuts during the 2016 election year.

“Slovakia will feel the influence of the retaliatory trade between the EU and Russia only later and indirectly via the slower demand for our products abroad,” Marek Gábriš, analyst with ČSOB, told the Pravda daily.

Juraj Bárta, economist with Slovenská Sporiteľňa, told the Hospodárske Noviny daily that Slovakia always responds to economic slowdowns with a slight delay.

“Thus it [the decline] may also negatively surprise us soon, too,” said Bárta.

Peter Goliaš from th economic think tank INEKO points out that the government wants to achieve its goals especially via reduction of its expenditures by over €700 million.

“It will save more significantly on co-financing of EU funds, but to the detriment of investments,” Goliaš told Hospodárske Noviny.

On the other hand, Juraj Valachy, analyst with Tatra Banka, sees the 2015 state budget as insufficiently ambitious, when the budget deficit decreases by only 0.15 percent.

“During times when we expect 3-percent economic growth, I perceive such a decline only as a statistical error,” Valachy told Hospodárske Noviny. According to him, the government has not fully tapped current opportunities.

Vladimír Baláž, prognosticator of the Slovak Academy of Sciences, also perceives the draft budget as insufficiently ambitious.

“It heads towards a balanced budget, but only a very little,” Baláž told the Sme website. “This has only confirmed to me that politics have outweighed economic measures.”

Baláž agrees with the government’s efforts to increase revenues, as Slovakia in relation to GDP has one of the lowest revenues in Europe. He told Hospodárske Noviny that better tax collection is one way to increase the state’s revenues.

Radovan Ďurana, analyst with the economic think tank INESS, noted for the Sme website that the budget proposes a reduction of the state budget deficit by only €76 million and will remain at about €2 billion.

“The current government is excellent in increasing taxes and fabricating one-off measures,” said Ďurana. “Consolidation of expenditures certainly does not cause any pain to Slovakia’s GDP.”

Opposition criticizes the bill

The Christian Democratic Movement (KDH) believes that the draft state budget for 2015 is based on incorrect estimates and is as a whole unrealistic.

“Raising taxes and fees and increasing the indebtedness of citizens is not a good trend and it is also far from a solution to the current and urgent economic and social problems of Slovakia,” said KDH chairman Ján Figeľ, as cited by the TASR newswire.

The KDH points out that VAT will not decrease from 20 to 19 percent as expected and taxpayers will pay tax licenses for the first time in 2015 for the 2014 tax period. It also does not like that the government plans to use fewer EU funds. Instead of €3.2 billion, Slovakia will get only €2.4 billion.

“This is to the detriment of Slovakia’s needs, especially the backward regions,” said Figeľ. “This will impact the most the fields of competitiveness and economic growth, transport and improvement of environment.”

Ivan Švejna of the opposition Most-Híd sees the draft budget as teetering on thin ice due to external risks which Slovakia cannot affect.

“The draft budget is a kind of fly-away beyond reality,” Švejna wrote in his memo. “It is rather based on the wishful thinking of its authors than on a real matter-of-fact estimate.”

He especially sees the 3-percent growth of GDP predicted for 2015 as too optimistic with respect to the current economic-political situation and its impact on Slovakia as well as Germany.

Ministry budgets

Most government ministries will have to contend with lower budgets for next year. The Foreign Affairs Ministry, however, has a bigger budget projected for 2015, planned at almost €120 million, which is an increase of more than €4 million over this year’s budget, TASR wrote.

Slovakia’s defence expenditures should continue to be more than 1 percent of GDP; in 2015 they should account for 1.04 percent of GDP or €803.8 million, the SITA newswire wrote. This sum includes, apart from the Defence Ministry’s budget, other defence-related expenditures. This year defence expenditures are planned at 1.03 percent of GDP, or €750.5 million.

The Interior Ministry’s expenditures are projected at €2.075 billion, up 1.21 percent, or €24.9 million. Expenditures of the Ministry of Labour, Social Affairs and Family are planned at €2.24 billion, up 6.01 percent or €127 million. The Agriculture Ministry will also get more than in 2014. Its budget is projected at €1.18 billion, up €75.8 million or 6.84 percent. The Environment Ministry should see a 63.5-percent growth in expenditures to €652 million thanks to an inflow of EU funds and co-financing from the state budget.

The budget of the Ministry of Transport, Construction and Regional Development is projected at €2.06 billion, a drop of 8.81 percent or €199 million compared with 2014. The Economy Ministry should go with €293.9 million next year, a decrease of €120 million, or 29.1 percent. The Finance Ministry estimates that revenues flowing into public health insurance will be lower by €16.6 million in 2015 compared with the current year and will stay at €4.27 billion in 2015. The Ministry of Education, Science, Research and Sports will have a budget of €1.47 billion. Expenditures are projected to be lower by 1.12 percent or €16.6 million compared with 2014. The Justice Ministry’s expenditures are planned to be cut by 2.96 percent or €9.34 million to €306 million. The Culture Ministry should get €173 million - €9.96 million or 5.46 percent less than in 2014.

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