Based on publicly available data and its own estimates, the Fiscal Council assesses that some provisions of the proposed Act Amending the Pension and Disability Insurance Act, which is currently the subject of public debate, could have significant long-term impact on the sustainability of public finances. It therefore calls on the Government to transparently present the calculations of total long-term fiscal consequences and the calculations of long-term fiscal consequences of individual provisions of the proposed Act in the course of public debate, and particularly when preparing the draft of this document in further procedures.
The general government was in balance in the first quarter of 2019 whereas in the same period last year it recorded a surplus of 0.4% of GDP. This change reflects, in particular a further acceleration of expenditure growth, which is mostly of a structural nature and linked to higher growth in expenditure on compensation of employees and to higher social transfers. At the same time a relatively high increase in investment expenditure continued. The high growth in revenues stemmed mainly from the continued favourable economic and labour market conditions. The deterioration of the primary balance was even more pronounced, which shows that the reduction in interest expenditure continues to play an important role in maintaining a relatively favourable nominal balance. In spite of the deterioration of the balance in the beginning of the year, the Fiscal Council estimates that the 2019 Stability Programme objectives are achievable. In this context, we recall that even if the stated objectives are achieved, the structural primary balance will continue to decline in 2019. This indicates the continuation of expansionary and pro-cyclical fiscal policy, which is inappropriate in the current macroeconomic situation according to the estimates of the Fiscal Council.
In the first quarter of the year, the general government debt decreased to 67.9% GDP. This decrease is primarily attributable to economic growth and the primary surplus of the general government balance, but their contribution decreased on the previous year due to a weaker growth and a lower surplus.
Economic growth is slowing down in line with projections. On the basis of current output gap estimates and trends in other indicators that we use to determine the cyclical position of the economy, we assess that the economy begins to phase into the mature stage of the business cycle. At the same time, cost and price pressures are gradually increasing as a result of supply-side restrictions in the labour market thus increasing risk to export competitiveness. Further risks arise from uncertainties in the international environment, notably in relation to trade disputes.
The Fiscal Council considers that the increase in macroeconomic risks requires greater prudence in the conduct of fiscal policy. Attention is drawn here to the fact that the current proposals for measures do not place enough emphasis on their fiscal effects, particularly with a view to achieving long-term sustainable public finances.
In accordance with the provisions of the Fiscal Rule Act the Fiscal Council made an assessment of the executed general government budgets’ compliance with the fiscal rules in 2018. The Fiscal Council assesses that the 2018 fiscal policy was neutral since the structural balance did not change, although it should have been restrictive in view of the economy’s cyclical position.
Favourable macroeconomic conditions were reflected in the further considerable and broad growth of general government revenue. The increase in revenue exceeded the increase in expenditure, which means that the surplus in the general government balance widened and amounted to 0.7% of GDP. The decrease in interest expenditure played an important role in this respect because the increase in the surplus of the primary general government balance was smaller. The share of gross debt in GDP was further reduced.
The Fiscal Council assesses that the fiscal rules were mostly complied with in 2018; apart from high revenue conditioned primarily by favourable cyclical conditions, this was enabled by the increase of some non-tax categories. The medium-term fiscal objective under the EU rules was achieved in 2018, but only if the allowed deviation is taken into account. The domestic rule referring to general government expenditure was not complied with because the expenditure exceeded the benchmark of the adopted medium-term framework. The decrease in the share of general government debt in GDP was appropriate in 2018.
In addition to favourable macroeconomic conditions, the general compliance with the fiscal rules was also due to the fact that certain measures with unfavourable structural fiscal implications were postponed to future years because of political uncertainty. In the future, the achievement of the medium-term balance over the period of an economic cycle, as provided by the Constitution, will require more than the annual achievement of the medium-term fiscal objective in line with the EU rules as structural surpluses will have to be achieved, too. These will be necessary because of structural deficits generated in past years.
The increase in the risks associated in particular with the anticipated negative fiscal implications of the demographic change further reduces the timeframe for the adoption of measures that will contribute to a more permanent improvement of public finances. Insofar as measures ensuring long-term sustainability are not adopted, this will have much more extensive and far-reaching negative implications for public finances than only a one-year deviation from fiscal rules.
Pursuant to the Fiscal Rule Act, the Fiscal Council is required to submit a report on its operations in the past year to the National Assembly of the Republic of Slovenia by the end of May each year. The aforementioned Act, adopted in June 2015, identifies the Fiscal Council as an independent and autonomous state authority responsible for drawing up and publishing assessments of the budgetary policy’s compliance with fiscal rules. The Fiscal Rule Act also defines how to implement Article 148 of the Constitution of the Republic of Slovenia, which lays down that revenues and expenditures of the general government budgets must be balanced in the medium term without borrowing, or revenues must exceed expenditures.
The present report is the first one to describe the operations and the activities of the Fiscal Council throughout the entire calendar year. The Fiscal Council became operational at the end of March 2017, after its members were appointed by a two-thirds majority vote by the National Assembly on 21 March 2017. The Fiscal Council holds that in 2018 all its obligations imposed by the legislation were duly fulfilled. The first part of the report describes the structure and various levels of operations of the Fiscal Council in the last year. In 2018, the Fiscal Council drew up all budgetary document assessments envisaged by the legislation, and at the same time responded to economic and political events that marked the past year. The second part of the report presents selected topics that the Fiscal Council examined in more detail and that constituted the basis for the opinions and assessments provided.
Challenges to the sustainability of public finances increased in 2018 due to the resignation of the Government, the interim period in which the Government did not have full powers and the pre-election campaign. In such a situation the Fiscal Council needed to draw up recommendations and opinions beyond the scope of documents directly required by law.
Despite a relatively uncertain political situation, 2018 was marked by strong economic growth and the continued consolidation of public finances. The general government revenue was boosted by a 4.5% economic growth rate, thus providing for a nominal surplus in the general government balance. This enabled Slovenia to maintain the structural balance and reduced the public debt-to-GDP ratio to 70% of GDP.
However, such results, supported by very favourable cyclical economic conditions, should not limit the search for measures to ensure societal welfare in the long term. Slovenia is increasingly facing challenges that will impact the long-term sustainability of public finances and the trends in economic potential in the future. Slovenia remains one of the EU Member States in which the general government expenditure related to population aging is expected to increase most, inter alia because the existing social protection systems are not sufficiently adapted to such a situation. A comprehensive set of measures to appropriately address these challenges should therefore be developed and adopted as soon as possible. High economic growth, facilitated by the current global economic expansion combined with historically low interest rates, will not indefinitely allow for favourable public finance trends. Therefore, it is necessary to take a prudent and cautious approach in good economic times and – in addition to addressing the long-term challenges – to look beyond political cycle horizon with the aim of building reserves to enable economic policy to respond appropriately in less favourable economic and demographic conditions.
The Fiscal Council, after reviewing the draft Ordinance on the framework for the preparation of the general government budgets and the draft Stability Programme 2019, finds that in the 2019-2022 period the expected fiscal developments are outside the bounds of the fiscal rules in 2019. From 2020 on the projections set out in the submitted documents are set near the limit values of the fiscal rules but are exposed to significant risks. These risks arise in particular as a result of various economic policy measures which have been announced and have not yet been taken into account in the submitted documents, but are also related to the macroeconomic environment. The persistence of a favourable economic developments allows for the adoption of the necessary structural measures that will ensure long-term fiscal sustainability, particularly given the increasing fiscal pressures associated with the ageing of the population.
Fiscal Council sent a proposal to meet to all the deputy groups of the current National Assembly of the Republic of Slovenia in order to present its mode of operation, basic information on fiscal rules and the importance of their implementation. The proposal reached a positive feedback among the deputy groups with Fiscal Council today meeting the deputies of SMC – Stranka modernega centra. Besides topics mentioned above, the discussion also touched the latest assessment of the Fiscal Council related to the proposed revision to the state budget for 2019.