According to the Fiscal Rule Act, the Fiscal Council is obliged to submit a report on its activities in the previous year to the National Assembly of the Republic of Slovenia by the end of May each year. Under this law, adopted in June 2015, the Fiscal Council is an autonomous and independent state authority that prepares and makes publicly available assessments on the compliance of fiscal policy with fiscal rules.
Given the high level of uncertainty in the international environment, the exceptional circumstances, which were put in place in March 2020 following the outbreak of the epidemic, applied throughout 2022. The exceptional circumstances allowed for a temporary deviation from the medium-term fiscal objectives also in 2022, provided that this did not endanger medium-term fiscal sustainability. In 2022, however, there was a strong rebound in economic activity after the end of the epidemic. Slovenia recorded strong economic growth and an increase in employment as well as a rise in inflation. While inflation was largely imported, the adjustment process, which autonomously generates domestic inflation, started already in the second half of the year, while domestic fiscal policy did not work in line with monetary policy, which is designed for the euro area average.
Despite the proposal made by the European Commission in April this year, uncertainties regarding the finalisation of the European fiscal rules are currently still present. Whatever the individual countries’ interests in their formulation, it is important that on the financial markets the EU as a whole is perceived as a reliable partner which enjoys the full confidence of investors. Credible fiscal rules that are binding on and acceptable to Member States without any reservations are a prerequisite for government bonds to be sold on financial markets under favourable conditions, thus allowing the smooth financing of development plans.
Even in these uncertain circumstances, the Fiscal Council will consistently pursue its mission to monitor and warn about the sustainability of public finances in the medium and long term. Here the main tool remains the power of argumentation. Therefore the transparency made possible by the wide publication of the Fiscal Council’s assessments ensures the continuous follow-up of fiscal policy. In this way, a democratic pressure is created on decision-makers, while at the same time the assessments help decision-makers to take fiscally sustainable decisions on budget documents.
This year’s draft revised budget foresees a high general government deficit (-4.5% of GDP), equally affected by the intervention measures to cushion the impact of the cost-of-living crisis and the epidemic and the “core” deficit (excluding the impact of intervention measures). The latter is also the only reason for the significant increase in the deficit compared to last year (by 2.2 percentage points of GDP), largely due to the assumed decline in the revenue-to-GDP ratio and the further strengthening of the already high level of investment activity. Growth in “core” current spending is also expected to be significantly higher this year than its long-term average and the current estimate of medium-term economic potential growth, mainly reflecting high inflation and, to some extent, discretionary measures. Its ratio to GDP will not increase significantly, so that core current spending will not contribute significantly to the increase in the deficit-to-GDP ratio.
According to the government’s assurances, the draft revised budget is in line with the 2023 Stability Programme and therefore the assessment of compliance with the fiscal rules made by the Fiscal Council in April this year remains unchanged. According to this indicative assessment, most of the indicators used for 2023 point to a deviation in fiscal policy from compliance with the fiscal rules. In particular, due to the high inflation and the projected further strengthening of investment activity, the projections for the general government balance in the 2023 Stability Programme suggest an expansionary fiscal policy stance this year, while exceptional circumstances still persist. In this context, it should be noted that the set high level of government expenditure in 2023 and the declining cyclical revenue-to-GDP ratio also contribute significantly to the limited manoeuvring room for additional fiscal policy measures in the coming years, which would worsen the structural position of public finances and thus affect the medium-term sustainability of public debt.
The lower deficit proposed in the draft revised budget compared to the current budget adopted last autumn is mainly due to lower expenditure related to the cost-of-living crisis, partly reflecting the new measures, and partly due to more appropriate projections of certain items, the shortcomings of which were already highlighted by the Fiscal Council in the autumn. Nevertheless, budget planning remains deficient due to the inadequate classification of measures as intervention measures, insufficient assessment of the impact of discretionary measures, systematic under- or overestimation of individual revenue and expenditure categories, and uncoordinated processes for the preparation of budget documents.
The fiscal policy stance projected in the medium-term budget documents is on average neutral over the 2023–2026 period, but in the absence of reforms, the projections imply rather limited room for manoeuvre for fiscal policy in the years ahead. Most of the indicators used by the Fiscal Council in preparing its assessment show compliance with the rules in 2025 and 2026. The deviations in 2024 are mainly due to the projected high investment activity and a further decline in the revenue-to-GDP ratio and are within the range of variability of the assessments of the cyclical position of the economy. Against this background, we assess the projections in the draft Stability Programme 2023 as broadly realistic and, in line with the IMAD macroeconomic forecast, consistent with the precautionary principle. This approach is appropriate given the continuing high uncertainty and number of risks. Apart from macroeconomic risks, the main risk is posed by the announced reforms. Their financial effects are not included in the proposed budgetary documents while, in view of the assessed risks to the long-term sustainability of public finances, reforms of the social security systems are particularly urgent.
The President of the Fiscal Council dr Kračun attended the 10th extraordinary meeting of the Commission for Public Finance Control. In his remarks, he emphasised introducing sufficiently defined reforms into medium-term budgetary plans and the credibility of budgetary planning, including in the proposed revised framework of economic governance in the EU as well as the necessity of ensuring medium-term sustainability of public finances.
In the first three months of this year, the state budget had a deficit (EUR 324 million). Excluding the direct impact of expenditure on anti-COVID measures (EUR 58 million) and anti-inflationary measures (EUR 237 million), the deficit was EUR 30 million.
Based on the latest available information, we estimate that the state budget expenditure on anti inflationary measures will amount to around EUR 800 million in 2023 as a whole, around EUR 500 million less than foreseen when the 2023 budget amendments were prepared in autumn last year. At the start of drafting the revised budget, the Government announced that this is the principal reason why total expenditure this year would be around EUR 600 million lower than planned.
In line with the legislative deadlines, we expect the Government to adopt the draft Stability Programme containing four-year projections for the general government sector as a whole (for the period 2023–2026) by 10 April, while the draft revised state budget (for 2023), which represents the bulk of the general government sector, is not expected to be considered until 20 April. Key budget documents should be aligned in terms both of timeline of drafting and content. This is particularly important in the context of the announced changes to the EU’s economic governance system, where credible medium-term planning is set to become the cornerstone for assessing fiscal sustainability.
The Fiscal Council has published two studies that present the challenges associated with two key elements of the European Commission’s proposal regarding the change in the EU’s economic governance: the medium-term fiscal plan and a study of debt sustainability and the related sensitivity of projections to changed assumptions.
The proposed binding medium-term fiscal plan represents an appropriate basis for achieving a more predictable, stable and sustainable fiscal policy. Its implementation, however, will be a significant challenge for Slovenia, as there has been a considerable gap between the formal arrangements and the actual practice of medium-term planning, where the projections reflected backloading of consolidation. Given the need for operational and technical improvement of the planning processes, the support of economic policy makers will be key to the introduction of an effective medium-term fiscal framework.
In addition to sustainable public debt, the setting of fiscal policy orientations based on medium-term budget projections should also play an important role in the proposed EU economic governance framework. These projections relate to a period that is longer than that usually presented in budget documents. Due to the longer-term orientation, medium-term macroeconomic and fiscal projections and the resulting assumptions should be given greater importance. Simulations show that the sensitivity of projections to changed assumptions increases with the lengthening of the forecasting horizon; therefore, special caution is required when choosing assumptions.