According to the preliminary data, the state budget deficit in the first two months of 2021 was EUR 661 million, which is almost a quarter of the projected deficit for the whole of 2021. The deficit would be smaller (EUR −128 million) without considering COVID measures.
The monthly cost of COVID measures with a direct effect on the state budget balance was EUR 65 million in February, which is one of the lowest monthly costs since the beginning of the COVID epidemic. In the first two months of 2021, the total direct effect of COVID measures totalled EUR 538 million, mostly on the expenditure side (EUR 522 million).
The total direct effect of COVID measures since March 2020 has been EUR 2.963 billion, and the total cost of such measures, taking into account the potential effect of guarantees on the state budget results, liquidity loans and deferred credit payments, EUR 3.494 billion.
In December 2020, 71,200 employees were involved in job retention measures, which is 8.9% of all employees and less than a half compared to April and May. Basic income was disbursed to 33,600 self-employed, which is around a third of all self-employed, while the share was around 45% in spring last year.
Being undertaken due to the epidemiological crisis, the extensive measures are reflected in the significant increase in general government expenditure, while general government revenue has also seen a substantial decline due to the restrictions imposed on a range of economic activities resulting in a severe economic downturn. The deterioration of public finances is predominantly a result of measures implemented for the mitigation and limitation of the consequences of the epidemic, however, some expenditure categories not directly related to the crisis, such as labour costs and spending on goods and services, have also increased rapidly. During the crisis, the position of public finances worsened to a greater extent than the EU average, which in the context of less favourable economic trends and accompanying risks highlights the importance of the comprehensive and targeted adoption and implementation of measures.
The state budget deficit in 2020 was EUR 3.5 billion (7.6% of projected GDP), and would amount to 2.5% of GDP if the direct effects of COVID measures were not taken into account. Without considering the COVID measures, expenditure increased by 6.5%, which implies an expansion, which is nevertheless smaller than expenditure growth forecast in the revised budget. In its assessment of the revised budget for 2020, the Fiscal Council already noted that the projected expenditure levels were not realistic and do not represent a suitable basis for planning in 2021. Additionally, under the anti-corona packages certain measures were introduced that do not address the consequences of the crisis or fail to do so properly, which also structurally worsens the position of public finances. Given the expected major importance of EU funds and related general government investment for the recovery of economic activity in the upcoming years, it is particularly worrying that the outturn of both categories lagged behind the plans in 2020. In 2020, the ZZZS recorded the highest deficit so far. The high expenditure of ZPIZ was balanced by the general government transfer, which was larger by a quarter compared to 2019, while the surplus in local government budgets was primarily the result of stronger growth in income tax revenue due to higher lump sum expenditure.
In the first three quarters of 2020, the general government deficit was EUR 2.6 billion (−7.7% of GDP). In its October 2020 Draft Budgetary Plan, the government estimated the deficit in 2020 at EUR 4 billion (–8.6% of BDP). The outturn for the entire year remains uncertain: according to the cash flow methodology, the situation at the end of the year deteriorated and will also be affected by the payments for COVID measures in 2021 earmarked in the preceding year. At the end of the third quarter of 2020, the gross general government debt stood at EUR 36.7 billion (78.5% of GDP), EUR 5 billion more than at the end of 2019. Net borrowing has continued from the end of the preceding year into the beginning of this year primarily with the issue of long-term bonds, for which the required yield-to-maturity is close to 0%. In the first three quarters of 2020, the year-on-year deterioration of the general government balance in GDP in Slovenia was the fifth largest and the deficit ratio was the eighth largest in the EU. With a similar drop in revenue, the expenditure growth (12.9%) was considerably higher compared to the EU average (7.7%). The debt-to-GDP ratio is smaller than the EU average ratio; however, compared to the period before the beginning of the current crisis, the increase in the debt-to-GDP ratio in Slovenia ranks in the upper third of EU Member States.
The Eurosystem’s exceptionally accomodative monetary policy ensures favourable financing conditions of the greater needs of countries to mitigate the consequences of the epidemic. The harmonised economic policy with the general escape clause at the EU level provides for a fiscal expansion aimed at the direct mitigation of the crisis consequences and the restoration of long-term economic potential. Furthermore, the proper targeting and effectiveness of measures, which determine the pace of economic growth and the capacity to maintain fiscal sustainability after the end of the crisis, are crucial at the national level. Otherwise, the room for fiscal policy manoeuvre will be reduced during the exit and after the end of the crisis.
According to provisional data, the state budget deficit amounted to EUR 434 million in January 2021, and without the effect of COVID-related measures the state budget would have had a slight surplus (EUR 36 million).
The monthly cost of COVID-related measures with a direct effect on the state budget balance was EUR 472 million in January. The January expenditure for this purpose represents more than half of the budgeted COVID-related expenditure for the whole of 2021. The total direct effect of these measures since March 2020 has been EUR 2,896 million.
According to available data, a much smaller share of the working population was included in job preservation measures in the second wave of the epidemic than in the spring of last year.
Along with the further increase in public expenditure relating to COVID-related measures, the Fiscal Council calls on economic policymakers to actually focus one-off measures on mitigating the direct consequences of the epidemic. As a matter of fact, doubt is arising as to the justification of certain payments of employee bonuses. With the further expansion of the population groups receiving a solidarity bonus, the need to address structural problems through deliberate systemic changes and not through one-off solutions should be emphasised. The increase in expenditure not directly related to the epidemic also reduces the room for manoeuvre for an appropriately targeted fiscal policy after the end of the epidemic.
In accordance with the Fiscal Council’s expectations, the state budget deficit in 2020 was EUR 3.5 billion and therefore smaller than the revised budget projections (EUR 4.2 billion).
The scope of all implemented COVID measures in 2020 amounted to EUR 2.9 billion and to EUR 2.4 billion for the measures having direct effect on general government balance. The actual impact so far is much smaller than estimated by the government when the anti-corona legislation was adopted, however it still contributed significantly to the deterioration in public finances.
The Fiscal Council again calls on economic policymakers to ensure that the measures to mitigate the consequences of the epidemic are transparent, temporary and truly focused on ameliorating the direct effects of the epidemic. Stimulatory policies should be aimed at strengthening the long-term economic potential and maximising effectiveness in the absorption of EU funds. This remains a key challenge in the future course of fiscal policy, since last year the actual revenue from EU funds on the one hand and investment expenditure on the other hand again significantly lagged behind the projections from budget documents.
The Fiscal Council will regularly publish an overview of the outturn of the state budget and COVID measures in its monthly publication, provided that such data will be available. The comments on the state budget outturn refer to the daily data available at: https://proracun.gov.si/#.
Due to the changing demographic structure, the long-term sustainability of public finance in Slovenia is exposed to many risks. The amendments to the pension legislation adopted in 2019 only led the situation to deteriorate, while appropriate compensatory measures have not yet been adopted. The proposal of the seventh anti-corona package (ACP7-PKP7 in Slovene version) contains a provision on the possibility of facilitating the termination of employment contracts of persons who fulfil the conditions for entitlement to an old-age pension. Such measures could contravene the requirements to ensure the long-term sustainability of public finance and the tendency to prolong the employment of older workers, as the increase in life expectancy in conjunction with the same retirement age worsens the ratio between contributions and expenditure of the pension fund. Maintaining a predominantly public pension system that sufficiently protects pensioners therefore requires constant adaptation, with the extension of working life being among the least painful solutions for both pensioners and employees paying contributions. The ACP7 also includes several measures to resolve the existing issues of certain groups, which should be tackled with sustainable solutions rather than with one-off expenditure.
In the current uncertain conditions, expansionary fiscal policy is counter-cyclical and, as such, appropriate in the light of available forecasts. However, the planned expenditure of the general government sector in the coming years is high and therefore exposed to significant risks, especially related to their effectiveness. At the same time, the current situation should not be exploited for implementing measures that structurally worsen the public finance position. The envisaged accelerated investment activity should strengthen long-term economic potential as much as possible. This would ensure that the burden of significantly increased government debt during the crisis will not be too heavy in the future. Otherwise, when the crisis is over, the room for manoeuvre in the context of future reversals of the business cycle will be reduced and it will be difficult to ensure the long-term sustainability of public finances.
The Fiscal Council notes that the conditions set out in the Fiscal Rule Act that enable exceptional circumstances to be enforced, given the available data at the time of drafting this assessment are fulfilled this year and next, while for 2022 this cannot be unequivocally confirmed.
The fiscal projections in the proposed budget documents continue to be significantly marked by the effects of measures to limit the consequences of the COVID-19 epidemic. As early as in March 2020, the Fiscal Council noted that the conditions stipulated by the Fiscal Rule Act for a temporary deviation from achieving medium-term fiscal sustainability were met, and that, in these circumstances, it would pay special attention to fiscal developments excluding the direct effects of COVID-19 measures. Such an analysis of the given fiscal projections shows that the general government deficit will increase significantly next year due to expenditure growth almost doubling. The increase in investment expenditure is expected to be particularly pronounced and the growth in other expenditure is also expected to be much higher than the growth of the long-term economic potential.
According to the Fiscal Council, the proposed scope and structure of fiscal incentives are optimistic, while their actual implementation could entail a number of risks. In the event of a projected significant increase in investment, risks relate to their efficiency and thus to the actual short-term and especially long-term effect on economic activity. The projected high growth of other expenditure not related to COVID-19 measures poses a risk to the structural position of public finances. In addition to the uncertainties associated with the forecasts of macroeconomic and fiscal aggregates, the Fiscal Council also explicitly highlights the risks arising from economic policy measures. Some discretionary measures already adopted and announced that are not directly related to the epidemic may worsen the structural situation of public finances.
As in most other countries, the general government debt is expected to increase significantly in the crisis and temporarily exceed 80% of GDP. An increase in debt during a period of low interest rates and the expected recovery in economic growth may still be acceptable. However, it becomes risky if debt before the interest rate are normalised again is not used mainly to increase economic potential. It is therefore essential that all funds earmarked for financing the projected expenditure, both grants and loans, are spent effectively in finding solutions that will have the highest multiplying effect and enable the sustainable growth and development of the economy.