The Fiscal Council has prepared a report on its operation in the past year which it is obliged to submit, pursuant to the Fiscal Rule Act, to the National Assembly of the Republic of Slovenia by the end of May each year.
The Fiscal Council estimates that in 2019 all the obligations imposed by the legislation were duly fulfilled. In 2019, the Council drew up all budgetary document assessments required on this basis and, at the same time, responded to the events related to economic policy that marked the past year. In this respect, the Fiscal Council through relevant opinions and recommendations drew attention to the risks to which the general government sector is exposed and which might jeopardise the fiscal sustainability in the medium and, even more so, in the long term. The economic and social environment were marked by declining economic growth, which was still high compared to EU, but lower than in the previous year. This has left an impact on relevant expectations and forecasts. While over the past two years we have witnessed upward revisions in economic forecasts, downward revisions have appeared in 2019. Optimism slowly diminished, and awareness of a coming recession increasingly started to prevail even in professional circles.
The Fiscal Council began assessing compliance with fiscal rules in budgetary documents in the years of strong economic activity and nominal surpluses of the general government, achieved in a relatively comfortable manner. The year 2019, to which this Fiscal Council report refers, was, it seems, the last year of the economic activity above its potential level before entering a period of longer uncertainty due to exceptional circumstances caused by the pandemic. The current fiscal rules are flexible enough to respond appropriately even in these different circumstances. Given the temporary exemption from pursuing medium-term balance in times of exceptional circumstances, they provide a solid support to fiscal policy in the medium- and-long term where decisions are made on which fiscal sustainability and, in turn, the well-being of the population now and in the future depend. Support in achieving both goals in the medium- and long-term is the guiding principle of the Fiscal Council operation.
On 24 April 2020, the Fiscal Council received the proposal for the Ordinance amending the Ordinance on the framework for the preparation of the general government budgets for the 2020–2022 period and the draft Stability Programme 2020 in order to assess their compliance with the fiscal rules. According to the assessment of the Fiscal Council of 17 March 2020, the COVID-19 epidemic constitutes exceptional circumstances, which, under Article 12 of the Fiscal Rule Act, allow a temporary deviation from the medium-term balance of public finances. In such circumstances, extensive and multi-stage fiscal measures are appropriate and necessary. The measures are more effective when they are appropriately targeted, timely and simple. Due to their extensive nature, they must be fully transparent and, with regard to fiscal sustainability, temporary and appropriately embedded in a credible medium-term framework. While recognising a high uncertainty of the depth and duration of the decline in economic activity and the actual fiscal effect of the accepted and the announced measures, we find that the measures adopted so far do not fully comply with the stated principles.
On 2 April 2020, the National Assembly approved the Act Determining the Intervention Measures to Contain the COVID-19 Epidemic and Mitigate its Consequences for Citizens and the Economy (hereinafter: the Act). International organisations recommend that measures be implemented in a rational order by addressing, as far as possible and as effectively as possible, the areas most severely affected by the epidemic at certain stages, and at the same time opening up room for economic policy in the further stages of recovering from the epidemic’s consequences. Following these recommendations, it is first necessary to provide adequate resources for the needs of the health system. In the next phase, it is imperative to preserve jobs and to ensure that the economy functions as normally as possible, thereby maintaining the long-term economic potential.
On 17 March 2020, the Fiscal Council assessed that the declaration of an epidemic in Slovenia constitutes an “unusual event” which, under Article 12 of the Fiscal Rule Act, provides to make use of exceptional circumstances for taking measures aimed at mitigating the consequences of such an event and thus temporarily derogating from the medium-term fiscal balance. In the current situation, large-scale and multi-layered effective government action to mitigate the effects of the epidemic is justified. Domestic and international institutions forecast a deep decline in economic activity due to the domestic and international dimensions of the epidemic. This year the fall in economic activity will, together with the measures taken so far, result in a high deficit and thus higher general government debt.
After reviewing and evaluating the content of the Act, the Fiscal Council estimates that the content of the measures is largely in accordance with the recommendations of international organisations and their scope is also comparable to those adopted in other countries. Despite the fact that temporary derogation from medium-term fiscal sustainability is justified and by taking into consideration the discussions during the adoption process of the Act we hereby call on all stakeholders, when adopting further measures, to follow the principle of focusing on the elimination of consequences of the pandemic in a more stringent manner as compared to the recent proceedings and to keep the measures simple and time limited. Being aware of the increased general social and economic uncertainty accompanied by considerable public finance cost of measures, we recommend thinking more carefully about when, or at what stage of the epidemic would certain measures be most effective or what will it be the right timing for potential incentive measures to revive the economy. The combination of the measures adopted and their implementation will be key in determining whether at the end of the epidemic the Slovenian economy will be in a state that allows for the fastest possible resolution of the crisis. A quick exit from the crisis, and thus the restoration of confidence, is one of the prerequisites for ensuring social security and economic well-being, as well as for ensuring fiscal sustainability in the longer term.
The Fiscal Council concluded that the declaration of the epidemic in Slovenia constitutes an unusual event under Point 2 of Paragraph one of Article 12 of the Fiscal Rule Act (ZFisP) enabling the application of exceptional circumstances to measures mitigating the consequences of such an event, and hence allowing a deviation from the medium-term balance of public finances. Before the epidemic was declared, the Fiscal Council assessed the Coalition Agreement; this assessment is, according to the established practice, published after a Government has been approved by the National Assembly. It also assesses that considering the current unusual situation, the measures noted in the Coalition Agreement will not be topical soon.
The outbreak of the SARS-CoV-2 virus will have a significant impact on macroeconomic and fiscal trends. An increase in the general government expenditure owing to the measures aimed at preventing the spread of the epidemic and limiting its adverse effects on the economy, and a decrease in revenue caused by declining economic activity are very likely to result in a deviation from the medium-term balance of public finances. This deviation is envisaged by the ZFisP and the Stability and Growth Pact in the case of an unusual event that can not be controlled. It should be provisionally reflected in an extremely expansionary counter-cyclical fiscal policy and is in compliance with fiscal rules if exceptional conditions are established, and such measures are temporary and directly connected with the unusual event. Following the end of the exceptional circumstances, Slovenian and EU legislation prescribe a procedure and a time-frame of the so-called correction mechanism to restore the medium-term balance of the general government sector.
Considering the pandemic nature of this crisis, the Fiscal Council expects that EU Member States will adopt common solutions to tackle the crisis and the fiscal measures for mitigating its consequences. The Fiscal Council therefore calls upon the Government to align its measures with those of other EU Member States and EU institutions to the greatest extent possible. When ensuring financial resources, it is important for Slovenia to minimise its exposure to financial markets.
The Coalition Agreement on Cooperation in the Government of the Republic of Slovenia 2020-2022 includes a package of measures primarily defined in general terms. These measures are to a large extent a continuation of the measures already planned by the budget documents in force and to a great extent also exceed the Government’s two-year term in office. Measures for which it is possible to define the direction of their impact on revenue and expenditure of the general government are primarily directed towards rising expenditure, although one of the declared basic goals of the Coalition Agreement is to lower public spending. The Agreement also lacks a comprehensive approach to tackling long-term challenges of Slovenian public finance. It is understandable to a certain degree that the proposed measures are not defined in detail as the new coalition has been formed in a short time-frame.
The Prime Minister elect Mr Janez Janša responded to the invitation and visited the Fiscal Council together with Mr Andrej Šircelj, the candidate for the Minister of Finance, today.
During an informal meeting the Fiscal Council expressed its views on the general government position in Slovenia. The discussion also addressed current major macroeconomic and public finance risks and the prospects of public finance adjustment in accordance with Fiscal Rule Act. Both sides underlined the importance of respecting fiscal rules in order to support medium term fiscal sustainability.
Due to the increasing number of cancellations of international meetings around the world, the difficulties with traveling and, consequently, the cancellation of some international participants at the Ljubljana conference, the conference “Long-term Sustainability of Public Finance of Slovenia”, which should be held on March 20, 2020, is postponed to autumn 2020. The exact date will be provided shortly.