www.fs-rs.si / News / News / Public Finance and Macroeconomic Developments, January 2020
Published: 01/08/2020

Public Finance and Macroeconomic Developments, January 2020

In the first three quarters of 2019, the general government balance recorded a surplus of 0.7% of GDP and was thus within the forecast of the October Draft Budgetary Plan, which projected a surplus of 0.8% of GDP for the whole of 2019. Achieving the nominal surplus was mainly the result of further improvement in the labour market situation, in particular the increase in wage growth, and of relatively high economic growth, as well as of a continued decline in interest expenditure, which was reflected in a lower year-on-year primary surplus. If these fiscal targets are achieved, the surplus in the structural primary balance will decline also in 2019 indicating a continuation of expansionary pro-cyclical fiscal policy. However, in a still favourable macroeconomic situation, this policy is inappropriate and reduces the room for action in case the materialisation of negative risks would lead to a significant slowdown in economic growth with respect to the projections relevant budget documents are based on. At the same time, last year’s revenue growth was largely cyclical, while the increase in expenditure was predominantly structural in nature.

At the end of the third quarter of 2019, the nominal debt of the general government sector stood at a similar level as in the same quarter of the previous year (approx. EUR 32.4 billion), while in this period its share in GDP declined by 3.3 percentage points, i.e. to 68.1% of GDP. A slower decline in the debt ratio compared to the previous year is a result of lower economic growth and consequently of a less favourable relationship between implicit interest rate and economic growth. The required yield on Slovenian long-term government bonds decreased further in mid-last year and stood at around 0% at the end of the year.

Economic growth slowed down, which was in accordance with the forecasts, and was lower (2.7%) on average for the three quarters than in 2018 (4.1%). The main reason for the slowdown lies in uncertainty in the international environment and the associated lower growth in foreign demand, which is mainly reflected in delaying investments in equipment and machinery and a negative contribution of inventories that most significantly contributed to a lower GDP growth compared to 2018. Private consumption remained the main driver of economic growth, but the consumer sentiment deteriorated in the second half of the previous year constituting a risk for supporting relatively high economic growth. At the same time, cost and price pressures intensified. Increase in wage growth in the context of continued low productivity growth represents a risk for maintaining export competitiveness. Growth in domestic demand led to higher core inflation, which stood at around 2% at the end of the year and was thus the highest in the past decade.

The Fiscal Council estimates that the period of high economic growth over the past two years was not sufficiently taken advantage of in order to comprehensively address the long-term challenges regarding public finance sustainability. Increase in macroeconomic risks calls for more caution in drawing up further measures, and above all, their implementation should take into account their long-term fiscal impact, which was not the case when certain legislative solutions were adopted at the end of the previous year.

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