July 29, 2022 (01:11)

Long-term sustainability of public finances as a problem for Slovakia

The unfavorable global economic situation and the high dependence of the Slovak economy on exports may cause an economic recession in Slovakia, which will last, according to preliminary estimates, until 2025. According to the Ministry of Finance of the SR, as of 01.07.22, according to the results of 2022, the country’s GDP is expected to grow by only 1.7% (with an average in the EU of 2.7%), and inflation is expected to be at least 12% (with an average in EU 8.3%). According to the results of 2021, the Slovak public debt increased to 63% of GDP.

The main risks for the Slovak economy are the deterioration of the long-term sustainability of public finances, the impact of the war in Ukraine and the energy crisis. Slovakia is classified as the second economy among EU member states with the worst level of long-term sustainability of public finances, after Slovenia. To return to a sustainable state, Slovakia’s public finances need to limit spending at the level of 10.6% of GDP.

According to the methodology of the European Commission, long-term sustainability is measured by the S2 indicator, which shows how great is the need for consolidation measures in relation to GDP, in order to stabilize the public debt in the future.

The country will face a high risk of public finances in the medium and long term. This state of affairs leads not only to the current state of public finances, but also to long-term prospects. The main risk factors are future costs associated with demographic changes and population aging, as well as low labor productivity in Slovakia.

The implementation of the Slovak government’s existing plans to “rehabilitate” public finances and introduce spending limits related to long-term sustainability in 2023-2024 is hindered by uncertainty regarding the situation around Ukraine and the consequences of the war. In these conditions, the economic recession in the EU complicates the refinancing of Slovak public debt. There is a threat of fragmentation of the monetary union and the demands of investors on the refinancing rate may increase significantly for countries with weak public finances.

Our experts consider the formation and approval of the budget for 2023 by October 15 to be the main task of the Slovak government, the implementation of which will have a direct impact on the stability of the government coalition in the country’s parliament. The document envisages reducing the deficit to 2.4% of GDP, which will require an additional limitation of government spending by 1 billion euros. At the same time, the state budget of Slovakia for 2021-2023 years envisaged a gradual reduction of the deficit to 6.2% of GDP in 2022 and to 5.7% in 2023 from the level of 8.1 billion euros (or 9.4% of GDP ) in 2021.

Consolidation measures are expected due to an increase in the tax burden on the so-called “Top 100” companies in the energy, financial, telecommunications and gambling industries. Additional revenue from increased taxation of regulated types of economic activity can amount to 225 million euros, gambling – 85 million euros, alcohol – 77 million euros, the operator of the GTS company Eustream – 76 million euros, the oil industry (Slovnaft refinery, Transpetrol – operator of the Druzhba oil pipeline) – 24 million euros. The cumulative economic effect of these measures does not exceed 500 million euros.

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