www.fs-rs.si / News / News / Assessment by the Fiscal Council: Compliance of the draft Ordinance amending the Ordinance on the framework for the preparation of the general government budgets for the 2020–2022 period with the fiscal rules
Published: 10/08/2021

Assessment by the Fiscal Council: Compliance of the draft Ordinance amending the Ordinance on the framework for the preparation of the general government budgets for the 2020–2022 period with the fiscal rules

The proposal of the amended Framework allows for additional fiscal stimulus, given that economic conditions are better than expected at the time when the current Framework was drawn up. A significant increase in expenditure in 2021 would set the stage for an inappropriate structural deterioration of public finances in the future.

According to the Fiscal Council, in a situation where exceptional circumstances have been approved, the proposed amendment to the Framework represents a continuation of inadequate planning, which is only partly justified by the uncertainties caused by the epidemic. The Fiscal Council assesses that the proposed Framework for the preparation of general government budgets for 2021 is based on the unrealistic projections of government revenue and expenditure until the end of this year. The proposed changes to the Framework are not accompanied by publicly presented budget documents which, according to the Fiscal Council, would increase the transparency of the 2021 Framework amendment process.

Compared to the Framework adopted in April this year, the proposed increase in general government expenditure by EUR 500 million and the state budget expenditure by EUR 670 million is the third increase in the expenditure ceiling for 2021. The ceiling has already increased by a total of EUR 3,640 million for the general government sector as a whole, including the first amendment in September 2020, and by EUR 4,535 million for the state budget. With the amendment to the 2021 Framework, expenditure not directly related to the epidemic has increased by approximately EUR 1.5 billion at the general government level and by approximately EUR 1.7 billion at the state budget level.

In its assessments of budget documents during the period of exceptional circumstances, the Fiscal Council’s focus is on assessing the realism of the projections, excluding the direct effect of COVID-related measures in the analysis. Quantitative assessments of compliance with fiscal rules in the period of exceptional circumstances are only indicative, recognising the considerable uncertainty as to the reliability of the calculations of the key parameters entering the calculation. The excessive increase in general government expenditure in 2021 is indicated both by calculations based on the domestic statutory fiscal rule and by alternative indicators of fiscal policy stance. In this context, the Fiscal Council notes that while a limited fiscal stimulus is still warranted in the current cyclical environment, the fiscal policy should be more geared towards strengthening the resilience of the economy and increasing long-term economic potential rather than towards increasing current expenditure.

In addition to more systemic and transparent solutions for current expenditure, where spending has partly spiralled out of control during the epidemic, a better planned and efficient use of investment expenditure should also be the basis for ensuring sustainable economic growth and sustainable public finances. During the period of exceptional circumstances, the revised budget for 2020 started to plan investment spending even more optimistically than in the past. While this has in the past been typical of the planning of European funds, it has also recently become characteristic of domestically funded projects. We believe that the contribution of domestic funds to public investment financing should be more closely aligned with cyclical conditions and the absorption capacities of both the economy and the administration. As early as last year, when the 2020 revised budget was being drafted, the level of state budget expenditure was set at an unrealistically high level. Given that the projection for 2021 and 2022 was also made on this basis, this high level of expenditure is carried over into the following years. As a result, the estimates of the budget documents for the coming years are again not based on appropriate bases. This opens up room for excessive public spending and, in many cases, also for the structural deterioration of public finances. Avoiding the latter is particularly necessary in view of the fact that financing conditions are unlikely to remain as favourable as those currently provided by monetary policy and also in view of the fact that, at the same time, the fiscal outcomes will increasingly reflect the negative effects of an ageing population and the costs tackling climate change.

In our view, the frameworks for the preparation of general government budgets continue to be applied inadequately and do not serve the primary purpose. According to the Fiscal Rule Act (FRA), the framework should provide the basis for medium-term budget planning and the basis for counter-cyclical fiscal policy. Even in the years preceding the epidemic, the values in the frameworks changed frequently and mostly only for one year, which does not correspond to the purpose of a multi-annual framework. The present proposal for the 2021 amendment is the third amendment over a period of one year, which is partly understandable in view of the uncertain conditions brought about by the epidemic. However, since the beginning of the epidemic, the changes to the frameworks under the approved exceptional circumstances have been substantial. The lack of understanding of the framework instrument as a counter-cyclical fiscal policy tool is also indicated by the arguments put forward at the presentation of the latest budget documents that the forecasts of higher economic growth and, consequently, higher government revenues justify further increases in the expenditure ceilings.

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