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Monday, December 4, 2023

The increase in deficits is caused by the impact of the crisis, Tóth claims

The main reason for the expected worsening of Slovak public finance deficits in the coming years is the ongoing impact of the security and energy crisis. Its consequences, both direct and indirect, will make up about half of the deficit in 2027. However, the initial situation is also a problem, especially the high structural deficit at the end of the good times even before the start of the pandemic, as well as the pre-election budget policy this year. Ján Tóth, the chairman of the Council for Budgetary Responsibility, drew attention to this in the current blog.

“Without the influence of external factors, the structural deficit would start to fall somewhere around three percent of GDP in 2027. However, the Council estimates that without additional austerity measures, there will be an additional increase in the structural deficit from the level of 4.5 percent of GDP in 2023 to a level exceeding six percent of GDP between 2025 and 2027,” calculated Ján Tóth. According to him, the structural deficit is a good indicator for the medium-term outlook of public finances. It does not include one-time or temporary measures and thus forms the “permanent” part of the deficit, which is mostly automatically carried over from one year to the next.

Burdens on public finances

The biggest burden on public finances in the next few years will be a decrease in the share of taxes by 1.5 percent of GDP, which is estimated mainly due to lagging behind the collection of consumption taxes. “This decrease (without new legislative measures) in the case of consumption taxes automatically occurs mainly in periods of high inflation, primarily because of their connection to the development of real, not nominal, consumption,” explained Ján Tóth. Due to the influence of inflation, the relative income of these taxes decreases in the long term, if it is not compensated by a legislative increase in their real rates.

The second biggest burden on the budget is represented by increased debt repayments. “This happens both through the increase of interest rates and through the increase of the debt itself. This causes an additional burden on public finances of 0.7 percent of GDP,” calculated the chairman of the Council for Budget Responsibility.

According to him, the third biggest burden is the valorization expenses for pensions. In these years, the so-called pensioner inflation is growing more significantly than overall inflation in the economy. The fourth factor is the direct consequences of increased spending on the military. The budget council’s estimate calculates annual expenditures at the level of two percent of GDP, which represents an official commitment to NATO. In times of peace, Slovakia had lower expenses in this area.

The initial condition was also a problem

The least of the significant problems for public finances in the future should be higher expenditures on energy in the public administration. “While this year it constitutes the largest burden of the mentioned factors at the level of 0.4 percent of GDP, with the normalization of prices and the increase of the nominal economy, this burden could gradually decrease to 0.1 percent of GDP in 2027,” advised Ján Tóth.

According to him, however, the level of the deficit of around six percent of GDP indicates that the initial situation was also a problem. It was caused by the so-called political cycle, i.e. pre-election budget policy in 2020 (increase by 1.9 percent of GDP) and partly also before the elections in 2023 (increase by 0.6 percent of GDP). According to Ján Tóth, the influence of the political cycle could be weakened by the recently adopted spending limits.

The head of the council warned that public debt could rise to 70 percent of GDP by the end of 2027 without consolidation. With 0.5 percent consolidation per year, it could increase more slowly to 65 percent of GDP. Considering the state of public finances, the budget council recommends consolidating at a rate of 0.75 percent of GDP per year in the coming years, which would mean an increase of almost one billion euros next year. Such a procedure would guarantee a reduction of the deficit to three percent of GDP and a stabilization of the debt below 63 percent of GDP in 2027.

Don’t overlook

The Slovak economy maintained its growth in the third quarter, but it was more moderate than in the spring period

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