Slovakia: Not even planned balanced budget to help budget sustainability – RRZ

After capping of the retirement age, not even the government-declared balanced budget over the next three years would be sufficient to achieve long-term sustainability of public finances, the fiscal responsibility council RRZ says in its assessment of the medium-term budgetary objectives (MTOs) for 2019 – 2022. According to Council chairperson Ivan Sramko, additional measures equal 1.3% of GDP would have to be adopted beyond the set goals of the government in order to achieve sustainability, taking into account capping of the retirement age. This would mean achieving a structural surplus of 1.5% of GDP until 2022 and maintaining it above 1% of GDP over the next twenty years. Sramko underlined that adopting the necessary measures now would create fiscal space through the debt reduction to absorb the costs of ageing, thereby spreading these costs more evenly over time without having a significant negative impact on the living standard of the present and future generations. Note that NBS Governor Peter Kazimir (former FinMin) commented on Tuesday that the path of Slovakia to the historically first balanced budget could become complicated. The central bank estimates that without the adoption of additional measures, this year’s budget may end up with a deficit of 0.7% of GDP instead of the planned zero. Kazimir noted that the balanced budget this year was planned under the assumption of 4.6% GDP growth, which is now expected to be significantly lower (3.3%), as well as against the backdrop of a change in basic fundamentals.

RRZ also noted that the government has worsened its MTOs for the coming years to the lowest permissible threshold for euro area members – to structural deficit of 1.0% of GDP from a structural deficit of 0.5% of GDP. According to the Council, the government has insufficiently taken into account the need to ensure long-term sustainable public finances, including the national balanced budget rule. RRZ recalls that this rule, which has been enshrined in national legislation on the basis of the so-called Fiscal Compact allows the MTO to be released from 0.5% of GDP to 1.0% of GDP only if public debt is well below 60% of GDP and the risks of long-term sustainability are low. In addition, the goal was relaxed during the approval of retirement age capping, which significantly increased the estimate of future aging costs. Sramko noted that according to the current assessments of the RRZ and the EC, the risks associated with long-term sustainability are not low and have increased even more after the inclusion of the retirement age impact. Moreover, he noted, the easing of the MTO is in contrast to the assumptions and main budgetary targets set by the government for 2020-2022 in the Stability Programme, namely that compliance with the initial MTO is a necessary condition for the achievement of government-set budgetary targets.

RRZ also identified significant risks when assessing the Stability Programme with the planned balanced budget would not be achieved without additional measures. According to the RRZ, the general government deficit may reach 0.9% of GDP in 2019, mainly due to excessive expenditure growth and overestimation of non-tax revenues. In the years ahead, without additional measures, the deficit would reach 0.6% of GDP in 2020 and then fall to 0.4% of GDP in 2021 and 2022. Sramko noted that the estimate does not include the effects of the measures that were submitted to the parliament, adding that moreover, their final form may change and thus their negative impact without additional compensatory measures may further increase the general government deficit estimates for 2020 – 2022.

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