The Fiscal Council assesses that the Proposal of budgets of the Republic of Slovenia for 2020 and 2021 is clouded by significant negative risks. While projections are formally compliant with the fiscal rules, even a realisation of a small fraction of identified risks could result in a deviation from formal compliance.
These risks relate to the inconsistencies between projections and proposed measures. The aforementioned proposal includes the projected financial effects of certain laws with positive fiscal effects, which have not yet been adopted by the National Assembly, and does not take into consideration the effects of the laws which are at the same stage of the legislative procedure and have a potential negative impact on the fiscal balance. Moreover, the proposal includes headings with a positive impact on the fiscal balance, which, according to the Fiscal Council, do not currently have an adequate basis in the applicable legislation. Furthermore, the proposed measures that are still being discussed could add to the burden on public finances. Additional risks are associated with macroeconomic forecasts and arise, in particular, from the international environment, which the IMAD has already drawn attention to when drafting an alternative scenario.
The expenditure level of the state budget in the 2020-2021 period is lower than the maximum permitted in the current Framework for drafting general government budgets, while the level of general government sector expenditure exceeds it. The latter is due to the national accounts data revised after the date by which the framework could still be amended. The Fiscal Council assesses that the projected level of general government sector expenditure is in line with the recalculated expenditure ceilings based on current estimates of the output gap and revenue projections of the general government sector. The assessed structural balance is expected to be in surplus in the projection period, which is in line with the requirements of the Fiscal Rule Act in terms of the state of public finances in a given year and in line with the Stability and Growth Pact. Taking into account the varying estimates of the economic cycle duration, the structural balance is converging towards the medium-term balance. However, the Fiscal Council assesses that, in order to achieve this objective, the creation of structural surpluses will also be necessary after 2021.
The Fiscal Council notes that the proposal of the state budget for 2020 and 2021 represents a continuation of fiscal policy without a comprehensive set of policies to adequately ensure the long-term sustainability of public finances, especially in relation to the expenditure on the ageing population. Recently, measures have been put in place or are in the pipeline that could lead to a structural deterioration of public finances in the future. In the past, the lack of room for manoeuvre of fiscal policy often led to the shrinking of public investment. In the period of an economic growth slowdown, such a restrictive fiscal policy would be inappropriate and would also worsen the long-term economic outlook.
The Fiscal Council proposes that the Government should prepare an amended budget proposal for 2020 and 2021, which will take full account of the financial impact of the proposed legislation or support the proposal with measures that are consistent with the projected revenue and expenditure levels. In a period of an economic growth slowdown and given the significant macroeconomic risks, due account must be taken of the precautionary principle, which is also required under the Fiscal Rule Act.
The calculations submitted to the Fiscal Council by the Ministry of Labour, Family, Social Affairs and Equal Opportunities are similar to the estimates made by the Fiscal Council and indicate that the proposed legislation would have a significant impact on the long-term increase in the general government expenditure.
On 28 August 2019, Fiscal Council members met the State Secretary of the Ministry of Labour, Family, Social Affairs and Equal Opportunities Mr Tilen Božič and his team at the Ministry’s initiative. The discussion focused on the Fiscal Council’s position regarding the presentation of long-term costs of the proposed changes to the pension-related legislation and on the challenges to long-term fiscal sustainability in light of rising expenditure on pensions.
Fiscal Council members today met the Minister of Health Mr Aleš Šabeder and his team at the Ministry’s initiative. The discussion focused on challenges of long-term fiscal sustainability in light of rising public health-related expenditure.
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.