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Published: 02/10/2021

Public Finance and Macroeconomic Developments, February 2021

Being undertaken due to the epidemiological crisis, the extensive measures are reflected in the significant increase in general government expenditure, while general government revenue has also seen a substantial decline due to the restrictions imposed on a range of economic activities resulting in a severe economic downturn. The deterioration of public finances is predominantly a result of measures implemented for the mitigation and limitation of the consequences of the epidemic, however, some expenditure categories not directly related to the crisis, such as labour costs and spending on goods and services, have also increased rapidly. During the crisis, the position of public finances worsened to a greater extent than the EU average, which in the context of less favourable economic trends and accompanying risks highlights the importance of the comprehensive and targeted adoption and implementation of measures.

The state budget deficit in 2020 was EUR 3.5 billion (7.6% of projected GDP), and would amount to 2.5% of GDP if the direct effects of COVID measures were not taken into account. Without considering the COVID measures, expenditure increased by 6.5%, which implies an expansion, which is nevertheless smaller than expenditure growth forecast in the revised budget. In its assessment of the revised budget for 2020, the Fiscal Council already noted that the projected expenditure levels were not realistic and do not represent a suitable basis for planning in 2021. Additionally, under the anti-corona packages certain measures were introduced that do not address the consequences of the crisis or fail to do so properly, which also structurally worsens the position of public finances. Given the expected major importance of EU funds and related general government investment for the recovery of economic activity in the upcoming years, it is particularly worrying that the outturn of both categories lagged behind the plans in 2020. In 2020, the ZZZS recorded the highest deficit so far. The high expenditure of ZPIZ was balanced by the general government transfer, which was larger by a quarter compared to 2019, while the surplus in local government budgets was primarily the result of stronger growth in income tax revenue due to higher lump sum expenditure.

In the first three quarters of 2020, the general government deficit was EUR 2.6 billion (−7.7% of GDP). In its October 2020 Draft Budgetary Plan, the government estimated the deficit in 2020 at EUR 4 billion (–8.6% of BDP). The outturn for the entire year remains uncertain: according to the cash flow methodology, the situation at the end of the year deteriorated and will also be affected by the payments for COVID measures in 2021 earmarked in the preceding year. At the end of the third quarter of 2020, the gross general government debt stood at EUR 36.7 billion (78.5% of GDP), EUR 5 billion more than at the end of 2019. Net borrowing has continued from the end of the preceding year into the beginning of this year primarily with the issue of long-term bonds, for which the required yield-to-maturity is close to 0%. In the first three quarters of 2020, the year-on-year deterioration of the general government balance in GDP in Slovenia was the fifth largest and the deficit ratio was the eighth largest in the EU. With a similar drop in revenue, the expenditure growth (12.9%) was considerably higher compared to the EU average (7.7%). The debt-to-GDP ratio is smaller than the EU average ratio; however, compared to the period before the beginning of the current crisis, the increase in the debt-to-GDP ratio in Slovenia ranks in the upper third of EU Member States.

The Eurosystem’s exceptionally accomodative monetary policy ensures favourable financing conditions of the greater needs of countries to mitigate the consequences of the epidemic. The harmonised economic policy with the general escape clause at the EU level provides for a fiscal expansion aimed at the direct mitigation of the crisis consequences and the restoration of long-term economic potential. Furthermore, the proper targeting and effectiveness of measures, which determine the pace of economic growth and the capacity to maintain fiscal sustainability after the end of the crisis, are crucial at the national level. Otherwise, the room for fiscal policy manoeuvre will be reduced during the exit and after the end of the crisis.

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