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Draft budget could be more ambitious, analysts say

The Government sent the draft of the general government budget with a surplus for 2019 to parliament.

Finance Minister Peter Kažimír(Source: TASR)

Lacking ambition or a missed opportunity. This is how analysts often assess the draft of the general government budget for 2017-2019. While the growth dynamic of Slovakia’s economy is predicted to remain sound, the government forecasts a surplus budget only for 2019. They also see more room for consolidation of public finances.

The budget predicts the general government budget deficit will decrease to 1.29 percent of GDP in 2017 and to 0.44 percent in 2018. Slovakia should achieve the first surplus budget in 2019 when it should amount to 0.16 percent of GDP.

“This plan is realistic,” said Finance Minister Peter Kažimír after the government advanced the draft of the general government budget for 2017-2019 to parliament at its October 5 session. “Already next year we will register a primary surplus, i.e. when we deduct our debt servicing from our expenditures, we will be in surplus and not in deficit. Thus this is a confirmation that we are on the right path to a balanced budget.”

State budget for 2017

Part of the general government budget for 2017-2019 is also the draft state budget for 2017. Budgetary revenues are projected at €15.415 billion and expenditures at €17.432 billion leaving the budget in a deficit of €2.017 billion.

The budget is based on the latest forecast indicating that the government may collect €560 million in taxes next year, more than originally expected, and more than the latest macro-economic prognosis of the Finance Ministry from September. It assumes that Slovakia’s economy will grow 3.5 percent next year. The ministry expects that the negative impact of Brexit on economic growth of Slovakia estimated at 0.2 percent of GDP will be compensated for by increased exports from Slovakia. Investment activities will be supported by construction, the automotive sector and an increase in public investments.

Employment is also expected to grow by 1.5 percent and 34,000 jobs next year. The jobless rate should drop to a historical low of 8.5 percent and continue decreasing in the following years. The increase in nominal salaries will speed up to 3.5 percent, resulting in a rise of the average nominal wage to €940 a month next year, the TASR newswire reported.

The draft budget already counts on tax changes that parliament still needs to approve. These include the reduction of the corporate income tax from 22 to 21 percent, the increase of flat-rate expenses the self-employed can deduct to 60 percent with a cap at €20,000, but also the introduction of a 7-percent tax on dividends in addition to new tax duties for insurance companies.

Read also: Read also:Some tax changes satisfy, others annoy

Health care to get less, no additional pay hike for teachers

The state will allocate more money than last year to all ministries except the Health Ministry. The allocation for health care will be €1.37 billion, almost €120 million or 8.1 percent less compared to this year’s budget. The government plans to give less on its insurees, i.e. children, women on maternity leave or pensioners for which it pays compulsory health insurance, down from €1.36 billion in 2016 to €1.28 billion in 2017. On the other hand, the budget projects higher contributions to be paid by economically active people thanks to the growing economy and increasing wages, up €250.million to €3.1 billion. Thus in the end the health-care sector should have by 4.2 percent more than this year, €4.4 billion.  

Teachers cannot count on any extra increase in wages even though the Education Ministry will get €207 million or 16.9 percent more that last year. Minister Kažimír said that wages of teachers will not increase as of next year as they already received a wage hike four months in advance. In total the ministry will get €1.43 billion of which €1.24 billion should come from the state budget and €191 million would come from EU funds and co-financing from the state budget.

On the other hand, the Environment Ministry’s budget will swell year-on-year by €352 million, or 257 percent, to almost €490 million total in 2017. An overall €80.5 million of the budgeted resources are to come from the state budget, with the rest being allocated from European funds and co-financing by the state. The reason behind the growth lies mostly in the higher level of allocation of EU expenditures and co-financing, while a significant portion of money will be used for anti-flood measures.

The Defence Ministry will get almost €990 million in 2017, up €109 million or 12.4 percent compared to 2016. The ministry's expenditures are budgeted at 1.2 percent of GDP, despite the fact that a political agreement with NATO commits member countries to invest 2 percent of their GDP in defence.

The Foreign Affairs Ministry will get €112.5 million, up €6 million or 6.43 percent y/y and the budget of the Transport Ministry will increase €109 million or 5.35 percent and amount to €2.15 billion. The higher budget is a result of more EU funds and co-financing from the state budget. The Labour Ministry will get €2.2 billion, up €71.2 million or 3.31 percent y/y.

View of analysts and economists

Economists and analysts see budgetary goals of the draft state budget for 2017 as realistic, while these could have been even more ambitious especially in terms of reduction of the debt as well as the deficit.

INESS think tank analyst Radovan Ďurana points out that in 2017 state revenues from taxes and contributions should be almost €4 billion higher than in 2014. But the general government deficit should decrease only by €1 billion during the same period.

“Comparison of these figures clearly shows that ambitiousness can be said as the last thing when talking about consolidation of public finances,” said Ďurana as cited by the TASR newswire.

It is growing revenues behind the decreasing deficit.

“The government does not spend all of the growth, only a part, thanks to which the deficit is decreasing,” said Ďurana.

Economist Vladimír Baláž from the Institute for Forecasting of the Slovak Academy of Sciences believes that it is in the powers of the government to achieve a surplus budget.

“It is not a problem to achieve a surplus; it is rather a political decision,” Baláž told the Sme daily, adding that the government may again miss this goal, if it, for example succumbs to the pressure and increases wages of teachers by more than planned 6 percent.

Ďurana points out that when current conditions like zero valorisation of social benefits, historically low interest rates, absence of natural catastrophes and strong economic growth are taken into consideration, “then we have to perceive the current consolidation to be a wasted opportunity; failure of the government in efforts to achieve sustainable public finances”.  

Katarína Muchová, analyst with Slovenská Sporiteľňa, also believes that the general government budget might have been more ambitious, recalling that Slovakia has several times missed its goal to achieve a surplus budget.

“Thus the estimate for 2019 seems momentarily, as relatively optimistic,” said Muchová.

Boris Fojtík, analyst with Tatra Banka, shares a similar opinion. 

“Within the context of the current development the potential for consolidation of public finances remains unused,” said Fojtík. “Increased tax revenues compared with the original plan create space for higher consolidation as well as higher expenditures, for example in education.”

Muchová agrees adding that from the economic point of view it is suitable during good times, when the economy is thriving and tax revenues are growing, to carry out more significant reduction of the general government debt.

Slovakia unprepared for bad times

Some economists as well as representatives of employers point out risks for which the draft budget does not prepare.

“It is a question of some years or months that bad times will come,” said Rastislav Machunka, vice-president of the Federation of Employers' Unions (AZZZ) as cited by the Sme daily. “If we slip into recession, then there will be no space for stimulation [of economic growth]. Exactly during times of 3-percent growth there is space for reaching a balanced budget in order we create space for the period when there will be a need to stimulate some economic growth.”

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