RRZ says Slovakia’s govt should better take into account risks when drafting budget

The Council for Budget Responsibility RRZ, which supervises the state’s fiscal performance, said in its latest report assessing the performance of public finances in 2016 that the government should better take into account the existing risks to the budget execution when drafting the budget. The Council noted that the risks that it identified when the budget was approved have materialized and their magnitude have been higher than expected, thus having negative impact of some 2.1% of GDP on the budget. Thus, the negative risks almost fully offset the positive impact of some 2.4% of GDP stemming from higher than expected budget revenues (tax revenues were higher by EUR721m, 0.9% of GDP than planned), savings on co-financing of EU-funded projects and lower contributions to the EU budget (savings of some EUR260m, 0.3% of GDP in total), exceptional dividends as well as better fiscal management of municipalities. RRZ noted that most of the positive influences last year were only of temporary character and underlined that for a credible fiscal strategy the government should better quantify the potential risks to the budget execution when preparing the budget. The negative impacts were related to higher by EUR276m (0.3% of GDP) healthcare spending, financial corrections on EU funds drawing, lower by EUR52m revenues from sale of emission allowances. Furthermore, part of the additional expenditures was financed from budget reserves. RRZ said it continues to indicate negative risks on the budget execution from the exceptional dividends last year (some EUR156m from SPP, Eustream) saying that if this risk are taken into account, in the autumn notification of government deficit and debt the fiscal gap can be raised by 0.2pps of GDP from the April estimate for a gap of 1.68% of GDP. The RRZ also said that the lower deficit contributed to the government debt reduction, but this did not mean an increase of the net wealth of Slovakia as it was accompanied by lower income and increasing commitments to the EU budget (reimbursement for implemented in the past projects and higher advances), as well as a decrease in the value of state-owned companies (Eustream, SPP). RRZ once again recommended that the government finally sets binding expenditure ceilings to improve public finances management as required by the constitutional law on fiscal responsibility.

RRZ said that given the 2016 budget execution as compared to expectations, there were risks of failure to meet the budgetary targets for 2017. The Council has identified a number of risks that persist from previous years such as higher healthcare spending, lower dividend income and lower income from sales of emission allowances. At the same time, a positive risk is the expected higher by EUR176m tax revenues, according to the February estimate of the Financial Policy Institute IFP, a think-tank that advises the government on macroeconomic policies and sets its forecasts.

The government projects the general government deficit at 1.29% of GDP this year, down from an estimated 1.68% of GDP gap in 2016. Note that the finance ministry has previously said the fiscal gap this year may be lower at some 1.24% of GDP given current budget execution. The planned deficit for next year is slightly higher than the previous projection for 0.44% deficit. In 2019-2020 the public sector is to be balanced. The general government gross debt will continue to decline to 46% of GDP at end-2020 from 52.7% of GDP at end-2017, thus being at level outside the sanctioning thresholds of the debt brake rules, on the back of the expected faster economic growth, inflation acceleration and expected to be reported primary surpluses. Note that in its opinion on the country’s stability program, the EC said that given Slovakia’s fiscal plans, there is a risk for deviation from the requirements of the preventive arm of the SGP in 2017-2018 taken together and underlined that the authorities need to be ready to take further measures to ensure compliance with the SGP requirements in 2017 and that further measures will be needed in 2018. The EC also noted that healthcare expenditures continue to pose a risk to the long-term sustainability of public finances and recommended that the cost-effectiveness of the healthcare system is improved, including by implementing the value for money project.

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