Saturday, August 16, 2008

Slovak Public Finance Not Consolidating Anymore

General government deficit in Slovakia should reach 2.2% of GDP this year according to the latest estimate of the Ministry of Finance. Vis-a-vis the 2008 budget, this is a small improvement of 0.1 percentage point. With respect to the last year's result (a 2.2% deficit), however, it is a stagnation in the process of public finance consolidation. The stagnation comes even after the private pension pillar was open for half a year in 2008 and thousands left for the state pay-as-you-go system, bringing their savings into the state Social Insurance Company. According to earlier statements of Prime Minister Robert Fico, this year's public finance deficit should have narrowed to below 2.0% of GDP.

In addition, for the first time in years, the actual collected end-year tax revenues might be smaller than projected. After seven months of the year, state budget revenues of SKK 186.6 billion have been collected, which is only 53.6% of projected end-year total. Last year at the end of July, the number stood at 59.7%, which is slightly more than 7/12 of the total. Cumulatively, as a result, the state budget ended up in a minute deficit of SKK 614 million (€ 20 mil), which is the worst result in four years, despite still booming economy. Last year at this time, the state budget recorded a surplus of almost SKK 4 billion.

Major factor to blame is the collection of VAT, the dominant source of public finance, which is frozen at last year’s levels, even though retail sales grew by an average of 14% in current prices during the first six months of the year. The fiscal trend, representing a negative change from previous years, should theoretically limit the government in its proposals for generous spending policies. As of now, the restricting effect cannot be observed however.

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