May 3, 2020 (10:48)

Can the budget of Slovakia ensure the implementation of the Prime Minister’s action program?

According to our experts, the economic component of the 4-year program of government actions put forward by Prime Minister Igor Matovič, which was promulgated on April 20, 2020, is contradictory (in particular, regarding interagency cooperation), does not contain details of measures aimed at implementation of formulated commitments and data regarding the financial support of achieving the declared goals.

 

The negative outlook for the Slovak government’s ability to fulfill its commitments is primarily due to the expectation of a significant underperformance of the budget revenues for 2020 in the context of the economic crisis, which is developing in the Slovak Republic against the backdrop of the global recession.

 

The State Budget of the Slovak Republic for 2020, adopted on December 3, 2020, provides for GDP growth by 2.3%, unemployment rate at the level of 5.8%, inflation at the level of 2.1%, revenues at the level of EUR 38.9 billion, expenditures at the level of EUR 39.4 billion, budget deficit at the level of 0.49% of GDP or EUR 480.4 million, external public debt amounting to 46.8% of GDP.

 

As a result of 2019, the budget deficit amounted to 1.3% of GDP, while external public debt rose to EUR 45.2 billion or 48% of GDP.

 

Expectations for non-compliance with the 2020 budget parameters were laid down at the stage of its development (the real budget deficit was estimated by an expert from 1 to 2% of GDP), as traditionally the normative indicators of the budget deficit of the Slovak Republic and the level of external public debt are subject to political manipulation. Thus, for the last 5 years, with the exception of only 2017, the actual budget implementation results (economic balance) have been worse than planned.

 

As a result of the financial and economic crisis of 2008, in 2011, a law on budgetary responsibility was adopted in Slovakia, under which a state budget with a deficit of more than 0.5% is not allowed to be adopted, and in the case of an increase of external debt indicators in the range of 50-60% of GDP, a mechanism for the correction and personal responsibility sanctions have to be put in place (the Minister of Finance is obliged to provide the Parliament with a written justification of debt growth and a debt reduction plan). If external debt rises to more than 60% of GDP, the government must get a vote of confidence from the Parliament. Starting from 2018, the law provides for an annual reduction of the sanctioning limit from 50 to 40% over the period up to 2027.

 

We expect that by 2020, the budget deficit may reach 9% of GDP, and Slovak external debt can account for at least 60% of GDP.

 

Despite the government’s anti-crisis measures, which stimulate the economy up to EUR 2 billion (2.2% of Slovakia’s GDP in 2019), the decline in business activity associated with counteracting the spread of the COVID-19 virus may lead to the shortfall in budget revenues at the level of 7% of taxes and fees planned for 2020.

 

On April 21, 2020 the European Commission approved the measures of the government of Slovakia aimed at maintaining jobs and supporting self-employed persons for a total of EUR 2 billion. The measures are designed to provide support to up to 400,000 workers and up to 300,000 self-employed persons, and include state funding of a part of employers’  wage and social security contributions, as well as assistance to self-employed persons whose income has fallen due to quarantine.

 

The wage subsidy scheme provides for a compensation for each employee in the amount of EUR 180 in April 2020 and during the following months of quarantine in case a company has a 20% profit loss of its activity; if the revenues decreased by more than 40%, the amount of compensation increases to EUR 300; if the losses of the company are more than 60%, the compensation is EUR 420; and when the income decreased by more than 80%, the compensation amounts to EUR 540.

 

The rules approved by the government also provide for compensation of 80% of an employee’s salary in companies whose business activity has been forcibly terminated. The maximum amount of compensation per employee is limited to EUR 1,100.

 

The main problem of the Slovak state budget will be the loss of value added tax and tax on entrepreneurial activity, which according to the results of 2020 may reach 14% of the expected indicators and may amount to between EUR 3.7 to 4.2 billion.

 

Under these circumstances, achievement of a balanced budget in 2024, as prescribed by the 4-year program put forward by Prime Minister Igor Matovič, while implementing other program goals, primarily social programs, is unrealistic.

 

Given the unfavorable global economic situation, the financial policies of the authorities of the Slovak Republic, as well as economic losses associated with counteracting the spread of the COVID-19 virus, the 2020 state budget implementation rates are unlikely to be achieved.

 

At present, the possible deficit of the state budget of the Slovak Republic on the results of 2020 is estimated at 9% of GDP, and the growth of external public debt is possible at the level of up to 60% of GDP. The economic recovery at the level of 2019 is expected in the medium term.

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