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Published: 07/09/2021

Public Finance and Macroeconomic Developments, July 2021

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.

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