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.
The Fiscal Council notes that, given the available data and forecasts at the time of drafting this assessment, both conditions are met, which, pursuant to Article 12 of the Fiscal Rule Act (hereinafter: ZFisP), enable exceptional circumstances to be enforced and thus permit a temporary deviation from achieving medium-term fiscal sustainability. In 2021, at least one of both legally stipulated conditions is expected to be met, while for 2022 this cannot be unequivocally confirmed. These findings are not static, but depend on the given circumstances and available forecasts, which is why they are subject to uncertainties and may change in the future.
The Fiscal Council has assessed the draft revised budget of the Republic of Slovenia for 2020 and the draft Ordinance amending the Ordinance on the framework for the preparation of the general government budget for the 2020–2022 period. Due to exceptional circumstances, a temporary deviation from the fiscal rules is permitted this year, but the Fiscal Council has some significant reservations with respect to the submitted budget documents. Given such a marked deterioration in the state of public finances, additional transparency is expected from the government in the preparation of budget documents.
Taking into account the realisation so far, the expenditure in the revised budget proposal, both that related to COVID-19 and that excluding these measures, is forecast to be very high. As regards expenditure, the relatively high planned reserves have not been sufficiently explained. The state budget expenditure not related to COVID-19 measures is expected to grow much faster than last year and in the adopted budget for 2020, while, considering present realisation, its growth is expected to significantly accelerate in the last five months of the year. In the current situation it is even more necessary for economic policymakers to be aware that, despite the urgent expenditure related to the epidemic, government spending in the part that does not include this expenditure should be rational, efficient and development-oriented. This year’s increase of the upper limit of borrowing, which does not reflect the current budgetary needs in their entirety, is also not properly explained. The reservations also relate to budgetary planning, which, despite the uncertain situation, should focus on the period after the expected end of the crisis using a properly set medium-term framework.
Upon the adoption of one-off anti-crisis measures, the Fiscal Council decided to continuously monitor their fiscal impact and to regularly update its assessment. This time we are publishing the fourth assessment of the actual impact of one-off anti-crisis measures, which includes the likely final impact of the first anti-coronavirus legislative package, while the financial impact of other measures is still largely indeterminate due to their further implementation. The actual fiscal impact of measures is smaller than estimated previously upon the adoption of the legislation. The total actual value of all measures with a direct fiscal impact amounts to EUR 1.5 billion, almost half less than estimated by the Government upon their adoption. Among further measures to provide liquidity, the possibility of measures of deferred payment and payment in instalments of tax liabilities (approximately EUR 250 million) were adopted together with two guarantee schemes providing guarantees totalling EUR 2.2 billion being available, of which according to available data, guarantees amounting to only EUR 76 million have so far been issued, as well as the possibility of a deferral of payment of loan obligations. The results of simulations of all the measures show that, due to measures taken, economic activity in 2020 would be approximately 1.5% higher than projected in the scenario not involving measures.
The Fiscal Council will publish a more detailed analysis of the impact of the measures adopted to mitigate the consequences of the epidemic as part of the assessment of the revised state budget for 2020, foreseen by mid-September. The Fiscal Council expects that, as part of adopting budget documents in the coming months, the Government will produce its own assessment of the actual fiscal impact of the measures adopted in accordance with the principle of transparency and, despite further uncertainty, present in a credible way further measures to mitigate the consequences of the epidemic on economic activity and public finance.
In accordance with the transposition of Directive EU/2011/85 into Slovenian legislation, the Fiscal Council is obliged, from 2020 onwards, to assess and publicly publish the results of the assessment of deviations of macroeconomic and fiscal forecasts on a biannual basis. It has made its first such assessment, concluding that over the past four years the deviations of the forecasts of macroeconomic aggregates from the outturn of the forecasts prepared both by the Institute of Macroeconomic Analysis and Development and by the Ministry of Finance have been on average statistically consistent with the principle of unbiasedness. The forecasts are on average accurate; however, deviations occur relatively frequently, occasionally also on a larger scale. Deviations are otherwise an inevitable part of any forecast. We note that the deviations from the forecasts of both national institutions from the outturn are not significantly different from those drawn up for Slovenia by international institutions. At the same time, the differences between the forecasts of individual institutions are relatively small compared to the size of the deviations of all forecasts from the outturn. The relatively high deviations thus also point to the need for caution in the execution of fiscal policy.
When reviewing forecast deviations, we detected a few more features that need to highlighted. In forecasting macroeconomic aggregates, they refer mainly to a certain conditionality of deviations of the forecast of economic activity in relation to the state of the economic cycle at the time when the forecast was made (according to the favourable economic cycle, for example, the forecasts of economic activity have been underestimated in the last four years) and to less accurate forecasts of nominal variables, which are relevant for the preparation of fiscal forecasts. In terms of forecasts of fiscal aggregates, the overestimated forecasts of revenue from EU funds and the persistence of successive one-way deviations of the forecasts of the general government sector expenditure, which is largely underestimated, particularly stand out. This assessment of deviations also indicates the need to ensure greater transparency in the preparation of public finance forecasts and, in particular, the absence of credible medium-term fiscal planning. In connection with these findings, we also propose ways for improving the quality of the forecasts of both national institutions.
The COVID-19 pandemic and the measures for its containment have had a significant impact on the deterioration of macroeconomic results while directly and indirectly also worsening fiscal results. In the first quarter of 2020, the general government deficit amounted to EUR 739 million, which is 6.6% of GDP (in the same period last year: −0.8% of GDP), while the general government debt has increased by EUR 1.7 billion since the end of last year. In the first quarter of the year, the share of the debt in GDP increased by 3.5 percentage points, i.e. to 69.6% of GDP by the end of March. In accordance with the monthly data on the central government budget debt, the general government debt also increased in the second quarter of the year, since the net budget borrowing amounted to EUR 5.3 billion in the first half of this year.
With the slow-down in the economic cycle, the deterioration of the position of public finance was already evident by the end of last year when the revenue dropped quarter-to-quarter, while the expenditure growth dynamics remained high. In the quarter of the crisis outbreak, the year-on-year dynamics of revenues (-3.4%) and expenditure (9.5%) became even more divergent due to the economic downturn and the commencement of the implementation of measures adopted to prevent the consequences of the pandemic. Compared to 2019, lower revenue predominantly contributed to the year-on-year deterioration of the general government balance at the beginning of the crisis. On the basis of monthly data compiled under the cash flow methodology, the government position in the second quarter of the year deteriorated further as expected. In accordance with the temporary daily data the central government budget deficit alone amounted to EUR 1.9 billion in the first half of the year, while according to the data available the health insurance fund also recorded a significant five-month deficit.
In the first quarter of 2020, GDP in Slovenia fell by 4.5% in comparison to the last quarter of 2019, while on a year-on-year basis it fell by 3.4%. The pandemic had a direct impact on the activity only for a short period of time in the first quarter. The decrease in demand in the first quarter mainly reflected a significant decline in household consumption and investments in machinery and equipment; in that period the volume of international trade also dropped significantly. According to the data available, the economic downturn expectedly deepened in April. The economic climate indicator improved in May and June; it, however, remained well below the level before the pandemic. The situation in the labour market deteriorated slightly less significantly than the economic activity, due to the usual delay in the labour market response and due to the measures adopted to preserve jobs. After a relatively strong increase in the number of registered unemployed persons at the beginning of the crisis, the number of unemployed dropped slightly in June.
The forecasts for the fall in GDP for Slovenia at the annual level for 2020 range from -5.5% to -9.5%. The forecasts are exposed to considerable uncertainties with regard to the future course of the pandemic, the measures related thereto and the recovery of economic activity. According to most of the forecasts available, by the end of 2021 the GDP level is predicted to lag behind the level before the pandemic despite the growth expected next year.
Countries responded to the crisis with extensive anti-crisis measures. In countries with more fiscal space, most of the measures include direct financial assistance, while countries with less space for taking action are adopting, to a relatively greater extent, measures in the form of guarantees and loans. From the aspect of the current stage of the pandemic, it is recommended that countries gradually abolish support measures and focus on the provision of demand-side incentives. For the implementation of measures, efficiency and transparency continue to be important; in particular, the latter is crucial for the provision of credibility of measures both among domestic economic entities and in the financial markets. The amount and the price of financial means available, as well as the assessment of the effectiveness of individual measures once the epidemic is over, will greatly depend on this credibility.