According to provisional data, the state budget deficit amounted to EUR –2.339 billion in the first ten months of 2021, while without the direct effect of COVID-related measures the deficit would have amounted to EUR –423 million. According to the Ministry of Finance’s estimate of the out-turn in September, the state budget deficit is expected to amount to EUR -3.958 billion this year, which is around EUR 1.200 billion more than projected in the budget adopted last autumn.
Revenue in the first ten months was 19.6% higher than in the same period last year or 8.1% higher without taking into account the direct effect of COVID-related measures.
Expenditure in the first ten months was 13.9% higher than in the same period last year or 7.5% higher without taking into account the direct effect of COVID-related measures totalling EUR 2.420 billion. The latter is predominantly due to higher labour costs and investment.
The total level of state budget expenditures for COVID-related measures since March 2020 amounts to EUR 4.424 billion. The largest individual measure was allowances to employees of EUR 928 million, of which around EUR 720 million were paid in the first ten months of this year. The Ministry of Finance’s September estimate of the out-turn for 2021 shows that, within the framework of expenditures for COVID measures, labour costs in the last two months of this year are expected to amount to around EUR 230 million.
The Ministry of Finance’s September estimate of the annual out-turn for 2021 shows that the year-on-year expenditure growth without considering the effect of COVID-related measures and investments is expected to increase from 5.0% in the first ten months to 31.8% in the last two months. As the actual out-turn is likely to be lower than these estimates, the projections for the coming years in the budget documents in the process of adoption are again not based on appropriate bases. This increases the risks for a structural deterioration of public finances. These risks also derive from some legislative proposals that are already being considered in the National Assembly.
The proposed budget documents set out an additionally stimulative fiscal policy for the coming years, over and above that included in the documents currently in force, although there are already signs of overheating in the economy, with supply-side constraints emerging. This increases the risk that the temporary exceptional increase in public spending, which was largely justified because of the epidemic, could turn into a structural and thus permanent deterioration of public finances. Fiscal policy should, to a greater extent than indicated in the budget documents, strike a balance between the need to create room for manoeuvre to cope with future crises, effective strengthening of long-term economic potential and resilience, and short-term economy boosting.
The epidemic and the measures put in place to mitigate its effects are a key reason for the significant deterioration in public finances both last and this year. The measures imposed were similar to those in other countries and largely in line with the guidelines that they should be temporary and aimed at addressing the immediate effects of the epidemic. The large-scale package, amounting to around 5% of GDP per year, has made an important contribution to cushioning the fall in economic activity last year and to supporting the recovery this year. Nevertheless, the measures have revealed certain shortcomings, which also point to systemic weaknesses in the allocation of the otherwise large public funds available in a situation that allows budget users too much spending discretion.
The general government deficit, excluding expenditure on COVID-19 measures, is expected to increase significantly both this year and next as a result of expenditure growth. The projected increase in public investment contributes to this to a lesser extent than the increase in current expenditure, which should be limited in the face of a sharp increase in public debt due to the crisis. The deficit in 2023 is projected to be more than 3% of GDP if the budget documents materialise.
The growth in current expenditure, excluding measures to mitigate the effect of the epidemic and investments, is expected to be well above the long-term average this year and next. The proposed expenditure levels in 2022, following the expected lower actual outturn this year, will show higher growth than would be justified by the legislation currently in force. Such fiscal planning opens the way for measures to be taken in the final phase of the policy cycle, which could lead to inefficient spending or a structural deterioration of the public finances. The planned deficit reduction in 2023 will be mainly due to the projected reduction in current expenditure growth, despite the insufficient presentation of the measures to ensure this. Growth in this expenditure in 2023 is projected to be well below the long-term average. While the high investment spending is to be retained, the projection of very low increase in compensation of employees and the unchanged level of expenditure on social benefits stand out in particular.. Indicative estimates suggest that, if all plans are implemented, general government expenditure will remain above the level allowed by the fiscal rules in 2022. In 2023, the projected levels are partly appropriate, but with insufficiently specified policies for that year.
If well targeted and implemented effectively, public investments can make an important contribution to kick-starting the economy in the short term and to building resilience and increasing economic potential in the long term. According to the submitted budget plans, the level of general government investment is set to rise to around 6.5% of GDP over the next two years, which is well above its highest level ever. The decrease in the outturn estimate for this year confirms the Fiscal Council’s previous assessment that the plans in this area exceed the absorption capacity of the economy and the administration. If plans are to be implemented in full, the risk of inefficient project implementation and also of creating macroeconomic imbalances increases. The Fiscal Council assesses that it would make sense to give priority to projects financed by EU grants, where control over the efficiency of spending is also stricter. The domestically-funded investments should, however, be more closely aligned with cyclical conditions and the absorption capacities of the economy.
The excessive general government debt is only expected to decline in line with the rules in 2023 and 2024, remaining well above the 60% of GDP threshold. The favourable macroeconomic outlook and the high liquidity of the state budget, combined with more moderate expenditure growth than currently projected, would allow for a faster reduction of debt without jeopardising the economic recovery. The level of debt achieved and the increased possibility of a reversal of the highly accommodative monetary policy, which is a key contributor to the current low financing costs, suggest that in future there will be no additional room for fiscal policy created based on lowering interest expenditure.
Macroeconomic risks are predominantly concentrated on the downside, which, in addition to the epidemic, is mainly related to institutional and logistical constraints in international trade, which are currently also reflected in high prices of commodities. Risks to the realisation of the fiscal scenario are more balanced mainly due to the probably overestimated investment projections as well as current spending.
In September 2021, the Fiscal Council assessed that, based on currently available information and forecasts, the conditions for the existence of exceptional circumstances will continue to be met in 2022. The Fiscal Council expects that, once none of the conditions for invoking exceptional circumstances is met any longer, the Government will immediately adhere to the implementation of the correction mechanism in accordance with the legislation.
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.
According to provisional data, the state budget deficit amounted to EUR –2.453 billion in the first nine months of 2021, while without the direct effect of COVID-related measures the deficit would have amounted to EUR –388 million. A deficit of EUR –2.747 billion is envisaged in the state budget for the whole year.
Revenue in the first nine months was 19.6% higher than in the same period last year or 9.8%higher without taking into account the direct effect of COVID-related measures. The relatively high revenue growth is largely due to the base effect, when revenue fell sharply last year at the onset of the epidemic, and the easing of restrictive measures this year.
Expenditure in the first nine months was 15.3% higher than in the same period last year or 8.7%higher without taking into account the direct effect of COVID-related measures totalling EUR 2.324 billion. The latter is predominantly due to higher labour costs and investment.
In the first nine months of 2021, the total direct cost of COVID-related measures amounted to EUR 2.311 billion, which is about three times the number envisioned for the whole 2021 by the budget amendment in October last year. The largest part of COVID expenditure in the first nine months of this year (almost EUR 700 million) and since the beginning of the epidemic in March last year (almost EUR 900 million) was accounted for by allowances to employees.
The total direct effect of COVID-related measures since March 2020 amounts to EUR 4.704 billion, 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 5.314 billion.
According to preliminary data, 28,000 employees were involved in job retention measures in June 2021. At the end of June, the measure of subsidising temporary lay-offs came to an end, while in July and August there was a significant drop in the number of claims for compensation due to reduced working time and quarantine.
On 23 September 2021, the Fiscal Council received for assessment the proposal for the Ordinance amending the Ordinance on the framework for the preparation of the general government budgets for the 2020–2022 period, with envisaged changes in the maximum permitted level of general government expenditure and expenditure of the general government budget in 2021. In accordance with the statutory deadline of 15 days, the assessment will be published on 8 October 2021.
The Fiscal Council assesses that, based on currently available information and forecasts, the conditions for the existence of exceptional circumstances will continue to be met in 2022. The existence of exceptional circumstances in 2022 only allows for flexibility in the conduct of fiscal policy to directly deal with the challenges brought by the epidemic, while its additional expansionary orientation is not justified according to the Fiscal Council’s assessment based on the latest IMAD forecasts. In particular, exceptional circumstances should not be used for the adoption of measures reflecting the final stage of the political cycle. The continuation of exceptional circumstances in 2022 was recommended at EU level by the European Commission in June 2021, which also called for the differentiation of EU Member States’ fiscal policies, taking into account differences in the stage of recovery of economic activity and the different risks to the medium- and long-term fiscal sustainability of each country. In this context, the Fiscal Council assesses that in Slovenia excessive fiscal policy support of economic growth based on significant deficits could create macroeconomic imbalances in the coming years, increase the possibilities for the inefficient use of public funds, reduce opportunities to create room for manoeuvre in bad times and make the transition to the correction mechanism process more difficult. Even only the optimal use of available EU grants, which does not worsen fiscal balance, would provide a major boost to economic growth. While the domestic economic situation is improving this year also as a result of support measures, and the outlook is favourable, the sustainability of the recovery is subject to a number of risks, many related to the further course of the epidemic. The recovery is also seen in the labour market, where some indicators already suggest constraints on the supply side. The Fiscal Council expects that, once none of the both conditions for invoking exceptional circumstances is met, the Government will adhere to the implementation of the correction mechanism in accordance with the legislation, ensure that structural measures are in place to prepare for future shocks, and adequately address the challenges to the long-term sustainability of public finances.
In accordance with the first paragraph of Article 9 of Fiscal Rule Act which provides that the President of Fiscal Councill shall notify the Government six months prior to the expiry of the office of members of the Fiscal Council, the President of Fiscal Council has today communicated the Government of Slovenia about the expiry of the office of members of the Fiscal Council. The term of office of the current members of the Fiscal Council expires on 21 March 2022. Today’s communication constitutes the starting point for initiating a selection procedure of members of the Fiscal Council as laid down in 2-7 paragraph of Article 9 of Fiscal Rule Act.