According to provisional data, the state budget deficit amounted to EUR -342 million in the first eight months of 2022, while, without taking into account the direct effect of COVID-related measures, there would have been a surplus of EUR 189 million.
Revenues increased by 16.7% year-on-year in the first eight months of 2022 and 20.2% without taking into account the direct influence of COVID-related measures.
Expenditure in the first eight months of this year was -9.4% lower on a year-on-year basis, or 10.5% higher on a year-on-year basis excluding the direct effect of COVID-related measures totalling EUR 637 million.
The total level of state budget expenditures for COVID-related measures from March 2020 to the end of August this year amounts to EUR 5,430 million.
The financial impact of the measures taken so far to mitigate the consequences of price increases on the state budget this year is estimated at around EUR 325 million, and the impact of all measures is estimated at around EUR 650 million. Next year, the measures with an impact on the state budget taken so far could amount to around EUR 150 million, totalling around EUR 250 million. Measures to mitigate the effects of the price increases are similar to those in other countries, but they are not targeted to a large extent. In the face of expected increasingly constrained fiscal space, this may prove to be ineffective and contrary to the recommendations of international institutions.
The state budget’s outturn in the first eight months suggests that, despite the measures taken to mitigate the effects of inflation, the deficit should be smaller this year than foreseen in the amendments to the current budget adopted in autumn last year. This is mainly due to higher-than-expected tax revenue growth, mainly as a result of the recovery in domestic consumption, as well as high inflation and another failure to achieve over-optimistic investment plans.
While revenue growth is expected to slow down in the last four months of the year, the current budget allows for a turnaround in the development of consumption, which could be 12.0% higher year-on-year to meet budget projections, and a deficit of EUR 2,130 million in the months through the end of the year. However, the government intends to increase the state budget’s expenditure ceiling by a further EUR 600 million when drafting the revised state budget. We consider that this could have been avoided with an appropriate reallocation of commitment appropriations, in particular when identifying unrealistic investment plans. Using revenues from high inflation to increase spending instead of reducing debt is inappropriate given the high risks to Slovenia’s medium- and long-term fiscal sustainability compared to other EU countries. If the announced increase in permissible spending materialises, the practice of the past two years of non-transparent and unreliable budget planning in times of exceptional circumstances will continue.
The present analysis of deviations in forecasts, which the Fiscal Council is required to prepare every two years in accordance with legislation, is truncated. The legislation adopted in 2020 determines that 2020 and 2021 are not to be taken into account in the analysis of forecast deviations, which limits the relevance of this ex-post evaluation of forecast deviations for the 2018-2021 period. Accordingly, merely for the sake of continuity, we have produced only a shorter evaluation with a limited set of variables. The short period that can be included in the analysis, unlike the previous analysis from 2020, is also the reason for not making proposals to the Institute of Macroeconomic Analysis and Development and the Ministry of Finance, which draw up macroeconomic and public finance forecasts, respectively. These legal provisions will also impair the next forecast deviation analysis for the period 2020-2023, which the Fiscal Council is required to produce in 2024.
Shocks affecting the deviation of actual outturns from previous forecasts are common and do not necessarily affect the bias of the forecast, which is one of the essential elements of forecast quality. Despite the possible exclusion of individual years marked by unexpected circumstances from subsequent analyses of forecast deviations, it is an undeniable fact that shocks can have important long-term public finance implications. As the effects of shocks can significantly limit the future room for manoeuvre of fiscal policy, the periods in which they occur must also be included in ex-post analyses of forecast deviations.
Our assessment is that in times of heightened uncertainty, it is even more necessary than in normal times to ensure transparency in policy planning and implementation. Otherwise, at a time of shocks, which are often cushioned by increased public spending, there may also be room for non-transparent and irrational or unjustified spending of public funds, which can lead to a deterioration in the long-term sustainability of public finances. It is the imposition of exceptional circumstances in 2020 and 2021 that, in the view of the Fiscal Council, was accompanied by less transparent and less credible fiscal planning in the part that does not cover the direct impact of measures to mitigate the effects of the epidemic.
Public finance position continues to improve gradually on the back of strong revenue growth, coupled with a rapid recovery in economic activity and the withdrawal of support to mitigate the effects of the epidemic, while the rest of public spending is growing markedly. For the time being, heightened macroeconomic risks are mainly reflected in the worsening economic outlook and an increase in pessimism. At present, economic activity remains broadly favourable, although labour market imbalances are deepening and the current account surplus is shrinking rapidly. At the same time, inflation is rising and becoming more broad-based. A key short-term economic policy challenge is to mitigate the consequences of inflation, where the measures taken so far are broad and, to a certain extent, inadequate from a long-term perspective, as they reduce dedicated resources for the green transition. The challenges of achieving long-term sustainability, in particular the health and pension funds, have been highlighted again more clearly thanks to recent measures. Despite the reduction, the government debt-to-GDP ratio remains higher than before the epidemic, with some manoeuvring room to cope with the already existing tightening of financing conditions, notably in the form of a very favourable balance in the treasury account. The autumn budgetary documents should provide for a slightly restrictive fiscal policy in the coming years, which would open room for action were significant current risks to be realized, and indicate the course of action to address the relatively high medium- and long-term risks to the sustainability of Slovenia’s public finances.
Last year, fiscal trends were again seriously affected by the epidemic. The scope of measures taken to mitigate its impact was again substantial, however, the general government deficit decreased, mainly due to a marked rebound in economic activity and the resulting cyclically driven high revenue growth. Nevertheless, fiscal policy was pro-cyclically expansionary according to the latest available assessments of the cyclical position of the economy, which are in the current situation more uncertain than usual. The procyclicality was partly due to an increased investment activity and partly to a rise in public spending not related to the epidemic. While the growth in investment activity was as expected lower than budgeted, its increase was financed equally by European and domestic funds. The remaining part of public expenditures, which, in addition to investment, excludes interest expenditure and one-off expenditure, together with expenditure on COVID measures, increased last year by the most since 2008 and significantly exceeded estimates of potential economic growth. Despite the deficit reduction, a significant part of the unexpectedly high revenue growth thus also translated into higher current spending, which was in many respects of a structural or permanent character. Furthermore, a number of new discretionary measures were adopted at the end of last year, further constraining manoeuvring room for future fiscal policy.
Economic activity picked up significantly last year after a contraction in 2020, surpassing the pre-crisis level and growing at the highest rates in the EU. The high growth was mainly driven by the adaptation of business entities and households to the epidemic situation. The economic recovery also benefited from government measures, both directly through the strengthening of investment activity and indirectly through measures that contributed to an increase in disposable income and thus to private consumption growth. Economic growth exceeded all the available forecasts owing to, primarily, favourable trends at the end of the year when, contrary to assumptions and despite the worsening of the epidemiological situation, restrictive measures were milder than in the preceding outbreaks.
The general government deficit decreased to -5.2% of GDP last year and, while excluding the impact of expenditure on COVID measures, it amounted to -0.7% of GDP. The decrease was mainly due to strong revenue growth, notably from tax and social contributions, combined with growth in domestic consumption and improvements in the labour market. On the other hand, non-epidemic expenditure growth picked up further last year. This was only partly related to higher government investment activity, and partly stemmed from a strong pick-up in growth of other public spending. The deterioration of the public finance balance during the epidemic was among the largest in the EU Member States, both overall and when the impact of expenditure on COVID measures is excluded.
Last year, general government gross debt decreased to 74.4% of GDP, thus exceeding the pre-crisis level by around 10 pps of GDP. The decline in the share was largely driven by economic growth, which more than offset the further deterioration in the primary balance. Last year, borrowing continued in a favourable financial market environment, mainly as a result of the ECB’s accommodative policy. The central bank’s share of government debt securities owners further increased to almost 40% last year due to the government bond-buying programme introduced in the epidemic.
The epidemic also led to the application of exceptional circumstances last year in accordance with the legislation. This means that, in particular, due to the growing uncertainty in the calculation of key input variables, the Fiscal Council’s ex-ante and ex-post quantitative assessments of compliance with the fiscal rules are only indicative and, similar to the European Commission, place more emphasis on qualitative assessments. Despite the application of exceptional circumstances, the Fiscal Council must determine, based on national legislation, whether the actual volume of general government expenditures was in line with the last applicable maximum set by the amendment of the Framework under Article 13 of the Fiscal Rule Act. The threshold of the Framework for the maximum permitted level of general government expenditures was increased three times between November 2020 and September 2021, i.e. by EUR 900 million. The level of expenditure outturn was lower than the last maximum defined by the ordinance, but the ex-post assessment based on the latest known estimates of the output gap shows that the realisation was slightly higher than the current estimates of the maximum permitted level of expenditure.
The Fiscal Council was invited to attend the first extraordinary meeting of the Commission for Public Finance Control, to be held on 16 June 2022, to discuss the agenda item: The fiscal situation in Slovenia and warnings of the Fiscal Council, namely the Fiscal Council’s assessment of the fiscal implications of the Coalition Agreement. The meeting was attended by Mr Davorin Kračun, the President of the Fiscal Council.
According to provisional data, the state budget deficit amounted to EUR -22 million in the first five months of 2022, while without taking into account the direct effect of COVID-related measures, there would have been a surplus of EUR 309 million.
Revenue in the first five months of 2022 on a year-on-year basis was 17.3% higher, or 20.1% higher excluding the direct effect of COVID-related measures.
Expenditure in the first five months of this year was -9.2% lower on a year-on-year basis, or 14.4% higher excluding the direct effect of COVID measures totalling EUR 402 million.
The total level of state budget expenditures for COVID-related measures from March 2020 to the end of May this year amounts to EUR 5,194 million.
The decrease in the deficit compared to the same period last year is mainly due to lower expenditure on COVID-related measures and revenue growth as a result of a recovery in economic activity. If there is no significant deterioration in the economic situation by the end of the year, we estimate that revenue will be higher than projected in the state budget. As a consequence, the deficit should also be lower if the expenditure target is met. On the other hand, the key short-term downside risks are an increase in labour costs if trade union demands are met, and the recovery of financial losses to oil product sellers or possible additional measures to limit the impact of high prices on households and the economy.