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FinMin seeks to legalise artificial revenues

For the last two years the government worked with funds beyond the budget, although they were not officially forecast.

Finance Minister Peter Kažimír(Source: TASR)

Circumventing the official forecasts in budgeting revenues is set to be legalised based on a draft legislation authored by the Finance Ministry.

The cabinet would legally raise revenues in the budget beyond official forecasts in following years after the ministry submitted an amendment to the act on financial regulation of the public administration. While the draft law allows authorities to work with numbers that are not contained in the prognoses of the Tax Forecast Committee (DV), experts perceive such efforts as an attempt to legalise an illegal practice already in use.

“The government included additional revenues in the budget which the DV did not approve the previous two years, and therefore reduces transparency in making the budget,” Peter Goliaš of the Institute for Economic and Social Reforms (INEKO) think tank told The Slovak Spectator.

Artificial revenues

Through the draft law, which is currently under interdepartmental review, the ministry aims to legalise additional tax and levy revenues in the budget which are not accounted for in the official budget prognosis that the DV publishes several times a year. For 2016, the government pushed through additional revenue of €250 million more than the official forecasts, although the appropriate legislation is still not in place.

In addition, the draft amendment shifts legislation closer to unified reporting of budgetary data in the budget and raises attention to the efficiency of public expenditures, Finance Ministry spokeswoman Alexandra Gogová said.

Former finance minister Ivan Mikloš strongly criticised the proposed law, saying that the ministry is raising revenues beyond what is found in the budget approved by the government and what is in line with the macroeconomic and fiscal forecast.

The amendment weakens and deforms the system that has worked since 2003, Mikloš told the Sme daily.

The Budgetary Responsibility Council (RRZ), the government’s advisory body, expects an increase in budget transparency, comparability with the real data published by the Statistics Office and better quality of the monitoring of ongoing development. However, the draft law allows the rule that higher tax revenue should be restricted to only 1 percent of cash expenditures of the state budget to be avoided, said RRZ chair Ivan Šramko.

The new law would allow the use of all additional revenues that will come from the favourable macroeconomic development for additional expenditure.

“This will delay the consolidation of public finances, with negative consequences for the long-term sustainability of thereof,” Šramko told The Slovak Spectator.

Radovan Ďurana of the Institute for Economic and Social Studies (INESS) think tank said the changes would create indirect pressure on the DV to be more optimistic in prognoses.

Experts from the F. A. Hayek Foundation do not expect the amendment to cause any radical chaos in public finances. The approved budget is always just a plan on both income and expenditure sides, said Matúš Pošvanc, director of the F. A. Hayek Foundation.

“The budget chapters are hungry enough to consume all new revenues,” Pošvanc told The Slovak Spectator.

The brake

To prevent mindless spending, the draft law suggests a built in brake to restrain the government from spending non-existent funds. If the government planned artificial revenues and also spending of €200 million and it selects only €100 million over the year, it could spend only that €100 million, Goliaš said.

“The risk remains that political pressure will be stronger and the government will spend the budgeted revenues although they will not flow to the state budget,” Goliaš said.

This money will only be possible to draw after revenues are confirmed by the DV, Gogová noted.

Missing ceilings

Current legislation does not reflect the European Commission’s (EC) requirement to form the budget according to realistic budgetary prognoses.

Moreover, the draft law is in defiance of EC and OECD recommendations on the introduction of binding expenditure ceilings, according to the RRZ.

Expenditure ceilings were meant to be introduced in 2012 under Mikloš but have not been established yet. Although their existence is implied in the act on fiscal responsibility, noted Šramko.

Ďurana agrees that the proposed changes are in contradiction to the responsible approach to manage public finances, which are meant to look three to four years ahead. This approach obliges ministries to define their priorities and keep them long enough, he said, making ceilings a necessary element of any new rules.

“An unexpected increase in revenue cannot, therefore, become prey to greedy ministers,” Ďurana said, adding that it should either be used for predefined objectives or to reduce the deficit.

Goliaš too sees that the government is opening a legal way to spend money rather than reduce the deficit, thus reducing the chance that “we will use good times to prepare for future crises and consequences of population ageing”.

Other shortcomings

The draft also does not distinguish whether additional revenue would have only non-legislative or even a legislative character. It is not clear how the DV will revise its June estimate of revenues in September in response to released budget expenditures, Šramko said.

“If the reserve is mentioned in the state budget and the legislative obligation to maintain the cash deficit is followed, higher tax revenue of another entity than the state budget might not lead to their utilisation,” Šramko said.

Ďurana worries that extra revenues might be misused for pointless and unaddressed rebates and Christmas bonuses.

“Even if the revenues were used for priorities of the government, they would return to unplanned expenditures which would reduce effectiveness of these resources,” Ďurana said.

Boosting revenue

In the long term, experts talk about the need to establish a tax calendar for the excise tax on cigarettes which clearly prepares the sector for a gradual increase in taxes, Pošvanc opined.

“The state benefits from the fact that consumers in a wholesale increase do not seek to circumvent the tax liability by fleeing to less taxable products, in this case the black market,” Pošvanc said.

Ďurana proposes expenditure ceilings, compulsory expenditure prioritisation and calculation of value for money on the widest possible basis.

Goliaš emphasised better detection and punishment of tax cheats as an effective measure to improve tax collection. He added that the government might substantially increase public scrutiny by choice, for example in regular publication of rankings of companies according to paid taxes or amount of VAT refunds.

“The Bašternák affair indicates the fact that Slovakia still has a large reserve in this sphere,” Goliaš said.

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