September 7, 2021 (01:41)

Slovakia’s public debt threatens the country’s long-term economic stability

According to the report of advisory body to the Slovak Ministry of Economy RRZ namely “On the assessment of compliance with budgetary responsibility and the rules of budget transparency for 2020” (Správa o hodnotení plnenia pravidiel rozpočtovej zodpovednosti a pravidiel rozpočtovej transparentnosti za rok 2020), submitted by the organization’s secretariat to the Slovak parliament, the public debt of the Slovak Republic constitutes 60.5% of GDP, which threatens the economic stability of the country.

According to the RRZ, the debt ratio (S2 is an indicator of long-term budgetary sustainability according to the European Commission’s methodology) is currently the worst among EU member states. If the government does not take effective measures to consolidate public finances, the country’s debt could exceed 100% of GDP in 2040, 150% in 8 years, and financial markets may stop financing the Slovak Republic in 20-30 years, which threatens the state with bankruptcy.

The head of the RRZ secretariat, Viktor Novysedlák, believes that the public finances of the Slovak Republic were in unsatisfactory condition even before the 2020 crisis. The long-term sustainability indicator, which reflects the state of public finances, has been deteriorating since 2013 and has moved from a low-risk zone to a high-risk zone. During 2020, government measures to curb business activity, aimed at counteracting the spread of COVID-19, significantly complicated the economic situation and led to a further increase in public debt of the Slovak Republic by 12% of GDP.

The dynamics of the size of the public debt of the Slovak Republic in the period from 2014 to 2024 (forecast), according to the Ministry of Finance of the Slovak Republic and RRZ, is given in the table:

At present, the external debt of the Slovak Republic exceeds the largest legal limit of 60% of GDP (the upper limit of the so-called “debt brake”).

According to the results of the financial and economic crisis of 2008, in 2011 Slovakia adopted a constitutional law “On budgetary responsibility” according to which it is not allowed to adopt the state budget with a deficit of more than 0.5%, and in case of growth of public debt in the range of 50-60 % of GDP, the mechanism of correction and sanctions of personal responsibility is put into effect.

In particular, if the amount of debt reaches 48% of GDP and at the same time does not reach 51% of GDP (2019), the Ministry of Finance to send to the parliament a written justification of the amount of debt, including a proposal for measures to reduce it. If the amount of debt reaches 50% of GDP and at the same time does not reach 52% of GDP (2020), the government submits to the National Council a draft on the measures proposing to reduce debt, and salaries of government members are reduced to their salaries in the previous financial period. In the event of an increase in external debt of more than 60% of GDP, the government should receive a vote of confidence from the parliament. Starting in 2018, the law provides for an annual reduction of the limit for initiating sanctions from 50 to 40% for the period up to 2027.

Despite the requirements of the constitutional law of 2011, at present, the restriction of public expenditures is not implemented, and draft measures to reduce external debt have not been developed. The obligation of the government to apply sanctions of “debt braking” is postponed for 24 months from the date of approval by the National Council of the Slovak Republic of the government action program from 04.05.2021 for 2021-2024 (Programové vyhlásenie vlády SR na roky 2021 až 2024). From the point of view of the application of “debt braking” sanctions, according to the current legislation, this will mean that after the publication of the ratio of gross debt to GDP for 2022, in May 2023 the government must send a vote of confidence to the parliament. Given that the next elections to the National Council of the Slovak Republic with the subsequent formation of a new coalition government are scheduled for early 2024, the issue of effective sanctions against public debt becomes dependent on the political situation.

To ensure the long-term sustainability of public finances, the RRZ considers it necessary to introduce a requirement to limit public spending (depending on S2 indicator) in the constitutional law on budgetary responsibility by the end of this year.

On September 30, 2020, the Slovak government approved a draft amendment to the constitutional law on budgetary responsibility, which provides for the introduction of mandatory limits on public spending. To date, due to political reasons (additional demands by Sloboda a Solidarita, SaS), the amendment has not been approved by the parliament. In order for public funds to be used within the spending limits from 2023, they must be approved by the end of 2021. The need for their rapid approval is due to the time-consuming nature of the introduction of spending limits in the budget process.

According to RRZ experts, spending limits are an important operational and at the same time countercyclical budget management tool (as opposed to the gross public debt limit). In a period of strong economic growth, they lead to a faster reduction of the budget deficit and, conversely, during a slowdown or recession, create space for fiscal expansion. Experts point out that the current legal situation regarding the absence of mandatory restrictions on public spending violates constitutional law and believe that the current government’s priority, despite political differences among coalition members, should be to implement mandatory long-term public spending limits as soon as possible.

At the same time, according to the RRZ, a favorable factor in restoring the sustainability of public finances is the consolidation of the Slovak Republic’s commitment to implement expenditure restraint by the government program “Plan of Recovery and Sustainability of the Slovak Republic”, the process of approval of which was successfully completed on July 13. 2021.

In particular, the document provides for: strengthening fiscal discipline and budget commitments through the introduction of expenditure limits, public investment management and pension reform. These measures are part of the EU Council’s executive decision approving the “SR Recovery and Sustainability Plan” and are part of Slovakia’s legal obligations to the European Commission. Subject to their implementation, the Slovak side will be able to receive a grant of EUR 5.8 billion from EU funds over the next 6 years. Thus, the financial resources of the Recovery Plan create additional pressure to implement the measures needed to restore the sustainability of public finances.

In the medium term, the RRZ predicts that gross debt will stabilize at just over 60% of GDP due to economic recovery, accelerating the use of EU funds and a gradual reduction in liquid financial reserves.

During 2021-2022, according to the RRZ forecast, there will be a gradual increase in gross debt to 61.7% of GDP, while at the end of the 2024 the debt will reach 60.5% of GDP. This means that the amount of debt each year will be above the upper limit of the “debt brake”. During this period, the economy is expected to gradually recover and grow in 2021, which may lead to a reduction in debt relative to GDP. The favorable impact on GDP and the debt itself from the consumption of EU funds is also expected. The largest reduction in the level of public debt is expected in the last year of the forecast period, i.e. in 2023. The gradual reduction of liquid financial assets during this period should also contribute to the reduction of gross debt.

In its medium-term public debt forecast, RRZ envisages a gradual stabilization of liquid financial assets to levels that were sufficient for the general government in the past to cover liquidity needs, taking into account planned bond issues and their maturities.

Dynamics of formation and forecast of development of public debt of the Slovak Republic in the period from 2011 to 2024 according to RRZ, in % to GDP

Rapid consolidation of public finances, along with the improvement of constitutional legislation, is considered by experts as a necessity and can be realized, first of all, by reforming the pension system, abolishing a number of social packages and improving the efficiency of tax collection. Unsatisfactory public finances weaken investor confidence, increase the cost of debt refinancing, jeopardize the country’s rating, and limit investment in future growth and improvement of public services.

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