Favourable fiscal trends continued last year, but structural indicators, the position in the economic cycle and increased risks require increased caution in running fiscal policy and the adoption of measures to address long-term challenges. The general government sector recorded a surplus of 0.8% of GDP in the three quarters of 2018, which was mainly driven by economic growth, the favourable labour market situation and the related strong increase in the general government revenue, in particular tax revenues. The growth in primary expenditure (which excludes interest expenditure) gradually increased, whereas the policies outlined and the measures already taken suggest a further increase in primary expenditure growth in 2019 and consequently a possible deterioration in the structural balance. The high surplus of the state budget in eleven months of the last year is, in addition to favourable economic conditions, largely due to one-off factors. This fact is, according to the Fiscal Council, necessary to take into consideration in drafting the revised 2019 budget, in particular when designing policies with a permanent impact on the level of expenditure.
Economic growth last year remained high, but it slowed down in line with the forecast. The Fiscal Council estimates that the peak of the economic cycle was achieved at the transition from 2017 to 2018. Risks to an even more significant slow-down in growth in 2019 than the forecast on which the latest budgetary documents are based are increasing. The risks stem, in particular, from uncertainties in the international environment, which may have a significant impact on the economic situation in a small open economy such as Slovenia’s.
The Fiscal Council believes that 2019 should be used for drafting and adopting measures that adequately address long-term challenges, in particular in relation to demographic changes, and contribute to a sustainable improvement in public finances and to an increase in economic potential. Fiscal measures may be taken both on the expenditure side, where there are possibilities for streamlining, as well as on the revenue side, where a more efficient tax system should be ensured. With a structural increase in expenditure, in particular regarding labour costs, greater efficiency in the public sector should also be ensured.
The proposed Ordinance Amending the Ordinance on the Framework for Preparing General Government Budgets for the 2018–2020 Period, which was received for assessment by the Fiscal Council, relates solely to 2019. Thus the framework does not reflect the fiscal policy orientation for the next few years, as required by the law. As a result, Slovenia currently has no credible and consistent medium-term budgetary framework.
Having examined the proposed framework, the Fiscal Council has established that the set expansionary fiscal policy for 2019 is pro-cyclical and that as such it would not be in line with the law. The anticipated nominal surplus, which is expected to decrease in comparison with 2018, and the decrease in the general government debt to GDP ratio will mainly be the result of the current high economic growth. This would again lead to a structural deficit, which would cause Slovenia to fall short of ensuring medium-term sustainability of its fiscal policy.
The implementation of fiscal policy in this manner would represent a missed opportunity to create manoeuvring space for action when economic conditions deteriorate. The creation of reserves in the currently still favourable economic conditions is necessary due to the continued relatively high debt level and the expected negative fiscal impact of demographic changes. Moreover, caution in budgetary planning is essential due to the high level of uncertainty in the international environment, the prevailing negative risks regarding the future economic growth and the limited possibilities for reducing interest expenditure.
In the Fiscal Council’s opinion, policies should be formulated in the very next stages of budgetary process in order to ensure structural fiscal balance in 2019 already. In addition, the Government should, on the adoption of the Stability Programme next spring, present its policies aimed at comprehensively addressing long-term challenges. At the same time, a comprehensive framework for preparing the general government budget for the 2019–2022 period should be adopted.
Members of the Fiscal Council were confirmed by the Parliament in March 2017, with 2018 being the first full calendar year of Fiscal Council’s operation. At this occasion, Fiscal Council organised a consultation with experts on public finance and on economic policy. The consultation was attended by Anže Burger, PhD, Boris Majcen, PhD, Matjaž Novak, PhD, Jure Stojan, PhD, Janez Šušteršič, PhD and Boštjan Vasle, MSc.
The discussion provided views on the performance of Fiscal Council and on tasks and challenges, which will in view of the participants be faced by the Fiscal Council in the future. The guests evaluated the performance of Fiscal Council in general as positive and stressed the importance of its independence and the quality of its opinions.
According to participants and in view of limited human resources, Fiscal Council should avoid broadening the fields it covers by its analysis, while it should more systematically use all available communication channels through which it reaches the public and impacts the public opinion. Related to this, most speakers stressed a need for the Fiscal Council to improve its visibility also via educating general public about the need for sustainable public finance and about the associated fiscal rules as well as about the institutions that assess their implementation. Fiscal Council should also contribute to the general discussion on the main orientation of fiscal policy, in part through tighter co-operation with related institutions. Some discussants also proposed the Fiscal Council to engage in external evaluation of its performance after several years of operation.
On 6 December 2018 Fiscal Council hosted a delegation of International Monetary Fund (IMF) within its regular annual visit to Slovenia.
Members of the IMF delegation presented alternative ways of tax restructuring to the Fiscal Council, which was followed by a short discussion on main issues related to this topic.
On 23 October 2018, the Fiscal Council hosted a delegation of the International Monetary Fund (IMF) within its regular annual visit to Slovenia.
The purpose of the visit was to exchange views on the current and expected fiscal position of Slovenia and the medium-term fiscal policy challenges. The discussion focused primarily on the Fiscal Council’s evaluation of the fiscal risks and key priorities for fiscal policy.
The members of the Fiscal Council also informed the IMF’s representatives about recent experience on the position and role of the Fiscal Council in the budgetary process.
The Draft Budgetary Plan is an important document in the context of the coordination and monitoring of economic policies in the EU in which Member States are required to present the main guidelines on the fiscal targets and measures for the coming year prior to the adoption of budget documents in national parliaments.
The document submitted to the European Commission and the Eurogroup by Slovenia has been drawn up based on the scenario of unchanged policies. This is understandable and acceptable, as the new Government of the Republic of Slovenia only recently took office. The Draft Budgetary Plan also takes into account the new IMAD forecasts that indicate a somewhat more significant slowing of growth in economic activity than in spring. For the above reason and due to a relatively high level of uncertainty in the international environment, the principle of the Fiscal Rule Act, which requires precaution in planning and assessing the scope of general government revenue and expenditure, must in particular be taken into account while drafting budget documents. Slovenia will have to draw up an updated Draft Budgetary Plan in compliance with the proposed amendment to the Framework for the drafting of the general government budget and the proposed amendment and/or the revision of the national budget. In accordance with the Fiscal Rule Act, the Fiscal Council is not obliged to give an assessment of compliance with fiscal rules in the Draft Budgetary Plan. Such an assessment would only make sense if the whole package of budget documents were assessed simultaneously.
Even in the spring assessment of the Stability Programme – 2018 Supplement, the Fiscal Council pointed out that the indicated non-compliance with the fiscal rules in the coming years requires that new measures be adopted as soon as possible after the formation of the new government. Moreover, the Stability Programme – 2018 Supplement was also drafted based on the scenario of unchanged policies, due to the Government’s resignation. Neither the Stability Programme nor the current Draft Budgetary Plan include measures that would guarantee medium-term and long-term fiscal sustainability and therefore compliance with fiscal rules. Accordingly, the Fiscal Council expects the Government to submit a comprehensive and coordinated set of budget documents in the coming months that will present such measures in a transparent manner.