The withdrawal of restrictive measures and the consequent gradual recovery of economic activity, which is distributed relatively evenly across activities this year, have not yet been fully reflected in the improvement of the situation of public finances. Expenditure related to COVID measures was rather high in the first six months, mainly due to certain measures in the field of labour costs and social transfers, the share of which deviates from the EU average in Slovenia. The future evolution of the epidemic remains the main risk related to achieving the targets set out in the adopted budgetary documents in the context of recent improved economic growth forecasts. During the crisis, the state of public finances in Slovenia worsened to a greater extent than the EU average. Increased government debt is thus more sensitive to possible changes in future financing conditions. All this indicates the need for the sound and targeted adoption and implementation of measures that may have an impact on fiscal position.
The government budget deficit amounted to EUR −1.95 billion in the first half of 2021, which is slightly higher than in the same period last year (EUR −1.92 billion), notwithstanding the strong revenue growth this year. Without taking into account the direct impact of COVID measures, it amounted to EUR −162 million, less than in the first six months of 2020 (EUR −562 million). In particular, due to the direct impact of COVID measures amounting to EUR 1.824 billion, year-on-year expenditure increased by 18.0%. The budget adopted for 2021 provided for just under EUR 800 million for this purpose. In the first half of the year, the largest share made up payments of allowances to employees of around EUR 0.5 billion, while the total volume of all measures to maintain jobs was only slightly higher. Despite growth in recent months, the relatively modest inflow of EU funds, as well as related investment by the state in the first half of 2021, will require a significant increase in the second half of the year to meet the set targets, whereas the failure to meet these may also have an impact on economic activity. The favourable balance sheets of the ZZZS and ZPIZ this year are largely due to the high increase in compensation of employees, in particular in the public sector, and the resulting social security contributions. This is one of the reasons why the transfer of the state budget to the pension fund in the first five months was one third lower than in the same period last year.
The general government balance deficit amounted to EUR −969 million (−8.3% of GDP) in the first quarter of 2021 while the Government announced a deficit of EUR −4.2 billion (−8.6% of GDP) in April 2021 for the whole of 2021. General government gross debt reached EUR 40.2 billion (86.0% of GDP) in the first quarter of 2021, thus bringing it close to the average level of debt in the EU. Around one third of the increase in the level of debt over the last year has been due to the pre-financing of future liabilities, which is reflected in the favourable liquidity position of the state budget. Irrespective of this, higher debt over the medium term poses a potential risk to fiscal stability and, in the case of changed financing conditions and higher interest costs, the risk of crowding out other expenditure in public finances.
Again this year, the Eurosystem’s exceptionally accommodative monetary policy ensured favourable conditions for financing the greater needs of countries to mitigate the consequences of the epidemic. A coordinated fiscal policy with a general escape clause at the EU level and large sources of funding from existing and new instruments allow the direct mitigation of the consequences of the crisis and the preservation of long-term economic potential. The current orientation of monetary and fiscal policy thus offers an opportunity, but it also entails traps as it increases risks if the resources available under the given financing conditions are not properly used.
At its meeting on 2 June 2021, the National Assembly’s Commission for Public Finance Control adopted a decision proposing the Fiscal Council prepare a comprehensive analysis of fiscal effects of the government’s tax package and submit it to the Commission. The Fiscal Council received the Commission’s decision on 3 June 2021.
The analysis drawn up by the Fiscal Council consists of three parts: (i) a presentation of the estimated direct or static impact of the proposed tax reforms on the general government balance; (ii) an overview of the current tax burden in areas of expected tax reforms including an international comparison; (iii) a model assessment of the dynamic impact of the proposed tax reforms. The dynamic analysis is more comprehensive than the static assessment, however, its results should also be considered with caution due to the parameter estimates included in the models. In the model estimates, the Fiscal Council was not able to take into consideration the entire range of factors that could affect the competitiveness of the economy and the potential GDP.
In its explanation of the proposed tax reforms, the Slovenian government presented the assessment of their direct and static impact on the general government balance, expressing its belief that the loss of general government revenue could be compensated by higher economic growth or higher consumption and other measures. However, the government presented no calculations as to the expected extent of economic growth or consumption following the proposed tax changes and no potential additional measures necessary to neutralise their impact on the general government balance.
In accordance with the Fiscal Rule Act, the Fiscal Council produced an assessment of compliance of the implemented general government budgets with the fiscal rules in 2020. At the outbreak of the epidemic in March 2020, the Fiscal Council confirmed that the conditions to invoke exceptional circumstances were met. The fiscal rules continue to apply during this period, while the legislation allows for temporary measures and deviations from achieving the medium-term balance of public finances for measures related to mitigating the consequences of such event, provided that the medium-term public finance sustainability is not compromised.
According to the Fiscal Council, the fiscal rules were mostly complied with in 2020. The national rule referring to the maximum permitted level of general government expenditure was complied with in the past year. The minimum permitted level of structural balance under the EU rules (MTO) in 2020 was attained, considering the allowed deviation. Growth in general government expenditure, excluding one-off effects, was also below the limit permitted under the expenditure rule of the Stability and Growth Pact. Despite the favourable outcome in 2020, the average deviation of both the structural balance and the structural effort over a two-year period, which reached over 0.25 percentage point of GDP according to current calculations, was exceeded due to the expansionary fiscal policy implemented in 2019. The general government debt increased in 2020 contrary to the rules, according to which it should have decreased. The Fiscal Council did not assess the balance over the business cycle due to the temporary deviation from the medium-term balance allowed during the period of exceptional circumstances.
The framework for drawing up budgets was adjusted frequently and substantially, and failed in its core function of setting the medium-term orientation of the fiscal policy. It was amended twice last year, by a total of over EUR 3 billion. General government expenditure (excluding one-off effects) thus remained below the maximum level permitted under the current framework for drawing up budgets, also in terms of the current assessment of the output gap and one-off factors.
The outbreak of the COVID-19 epidemic posed a major challenge for fiscal policy management, to which countries responded with large-scale measures, also thanks to the flexibility of formal fiscal frameworks. The scope of discretionary measures in Slovenia with a direct impact on the general government balance, estimated by the Ministry of Finance at 6% of GDP in 2020, was higher by about a half compared to the EU average. Estimates suggest that their short-term impact on cushioning the fall in economic activity was smaller than the EU average, as the fall in real GDP last year was similar to the EU average, although the share of tourism in value added is lower in Slovenia than the EU average. Most discretionary measures were aimed at preserving jobs through subsidies, as in other countries. However, the main deviation from measures in other countries was recorded in the higher share of employee compensation (allowances for public employees) and social transfers (transfers to certain population groups). In all countries, job preservation measures significantly contributed to a smaller increase in unemployment, although in Slovenia it was slightly higher than the EU average; nevertheless, estimates of the short-term impact of measures on unemployment point to similar effectiveness.
In 2020, no measures were adopted to mitigate the expected adverse fiscal impacts of structural, particularly demographic pressures to which the economy and public finances will be exposed already this decade. On the contrary, some economic policy measures adopted in 2020 have even weakened the sustainability of public finances in the medium and long term.
According to provisional data, the state budget deficit amounted to EUR 1,350 million in the first five months of 2021, and without the direct effect of COVID-related measures the budget would be roughly balanced. A deficit of EUR 2,747 million is envisaged in the state budget for the whole year.
Revenue in the first five months was 26.7% higher than in the same period last year, and, without taking into account the direct effect of COVID measures, it was 14.0% higher. The relatively high revenue growth is largely due to the base effect, when revenue fell sharply last year at the start of the epidemic, and the easing of restrictive measures this year.
Expenditure in the first five months was 21.3% higher than in the same period last year, and, without taking into account the direct effect of COVID measures totalling EUR 1.366 million, it was 0.5% higher. The latter is predominantly due to higher labour costs.
The cost of COVID measures with a direct effect on the state budget balance was EUR 334 million in May. In the first five months of 2021, the total direct scope of COVID measures was EUR 1,382 million, mostly on the expenditure side (EUR 1,366 million). The largest part of COVID expenditure in the first five months was accounted for by bonuses to employees (almost EUR 400 million), with the largest amount of bonuses since the beginning of the epidemic paid in May.
The total direct effect of COVID measures since March 2020 amounts to EUR 3,775 million, and the total cost of such measures, taking into account the potential effect of guarantees, liquidity loans and deferred credit payments on the state budget results, stands at EUR 4,477 million.
According to preliminary data, 53 thousand employees were involved in job retention measures in March 2021. In February, for which the data are already more definitive, the number was about 70 thousand, which is about a tenth of all employees. The basic income for March was received by 32 thousand or about 45% of all self-employed, while the total number of recipients of basic income was 37 thousand.
The Fiscal Council has prepared a report on its operation in the past year, which it is obliged to submit, pursuant to the Fiscal Rule Act, to the National Assembly of the Republic of Slovenia by the end of May each year.
The Fiscal Council estimates that in 2020 all the obligations imposed by legislation were duly fulfilled in their entirety. In 2020, it carried out all the necessary assessments of budget documents. Furthermore, it monitored the response to the epidemic in the period of exceptional circumstances, in which using all the flexibility available under existing rules applicable in the case of an unusual event outside the control of the state is encouraged at the EU level. It strived to contribute to the transparency and to informing the public about the fiscal impact of the measures related to the epidemic. For this reason, it relied even more heavily than before on the qualitative assessment and evaluation of whether or not the measures to overcome the crisis can be effective and oriented towards actually resolving the issues related to the epidemic. In this regard, the temporary nature of such measures is important, meaning that their effect expires when the reasons for them subside. Therefore, in 2020, the Fiscal Council repeatedly called upon stakeholders to avoid intervention measures that structurally worsen the state of public finances in the medium term.
The Fiscal Council began assessing compliance with fiscal rules in budget documents in the years of lively economic activity and fiscal nominal surpluses achieved in a relatively comfortable manner. Considering the epidemic and the significant decline in economic activity, the year 2020, to which this Fiscal Council report refers, is a clear turning point and a transition to a period of prolonged uncertainty due to exceptional circumstances caused by the pandemic. The year 2020 also marks a turning point in the economic policy response practiced in previous crises, both at the monetary policy level and in terms of the orientation of fiscal policy priorities in the EU during the crisis, together with the new aid instruments adopted. Thus far, the current fiscal rules have proven to be flexible enough to respond appropriately even in these changed circumstances, as they also allow for measures aimed at the recovery of economic activity. However, despite the temporary exemption from pursuing the medium-term balance in times of exceptional circumstances, they remain the main support of the fiscal policy in the medium and long term where decisions are made on which fiscal stability and, in turn, the well-being of the population now and in the future depends. Support in achieving both goals in the medium and long term is the guiding principle of the Fiscal Council’s operations.
According to provisional data, the state budget deficit amounted to EUR 1.318 million in the first four months of 2021, and without the direct effect of COVID-related measures the deficit would have amounted to EUR 296 million. A deficit of EUR 2,747 million is envisaged in the state budget for the whole year.
After favourable trends in April, revenue in the first four months was 11.8% higher than in the same period last year, and, without taking into account the direct effect of COVID measures, it was 2.7% higher. The relatively favorable revenue growth is largely due to the base effect, when revenues fell sharply last year at the start of the epidemic, and the easing of restrictive measures in April this year.
Expenditure in the first four months was 26.3% higher than in the same period last year, and, without taking into account the direct effect of COVID measures totalling EUR 1.031 million, it was 1.6% higher, mostly due to higher labour costs.
The April cost of COVID measures with a direct effect on the state budget balance was EUR 179 million. In the first four months of 2021, the total direct scope of COVID measures was EUR 1.052 million, mostly on the expenditure side (EUR 1.031 million).
The total direct effect of COVID measures since March 2020 amounts to EUR 3,477 million, and the total cost of such measures, taking into account the potential effect of guarantees, liquidity loans and deferred credit payments on the state budget results, stands at EUR 4,043 million.
According to preliminary data, 54.0 thousand employees were involved in job retention measures in February 2021. In the previous three months, for which the data are already more definitive, the number was about 90 thousand, which is about a tenth of all employees. Basic income for February was disbursed to 33.0 thousand self-employed people, which is around 45% of all the self-employed, while this number stood at around 65% in the spring of last year.