INTERVIEW: Hawkish Kazimir keeps a close eye on Slovak prize

INTERVIEW: Hawkish Kazimir keeps a close eye on Slovak prize
By Robert Anderson in Prague December 8, 2015

“I am a socialist and an economic hawk. Is it possible?” asks Peter Kazimir, Slovakia's finance minister.

Kazimir has put his country on the map over the past four years as a staunch ally of Germany in forcing Greece to accept austerity. He regularly expresses frustration with Greece’s procrastrinations, and scepticism over whether it will be able to make the reforms to stay in the Eurozone.

An avid tweeter with a good command of English, who is much more outspoken that many of his ministerial peers in the Euro Group, he is regularly quoted by international media as the voice of Central Europe in the debate over economic austerity (helped by the fact that Slovakia is the only member of the Visegrad Group in the Eurozone).  

Kazimir draws on the deep resentment of the new member states of Central Europe towards Greece, a country that they feel has shirked making the kind of sacrifices they had to make to transform their economies after the collapse of communism.

His stance is remarkable not so much because the ruling Smer party is nominally Social Democrat, but because the party lost power in 2010 amid accusations from the centre-right opposition that its alleged financial profligacy risked making Slovakia another Greece.

Kazimir, who was deputy finance minister in that government, has been desperate to re-establish Smer’s economic credentials after the party won a landslide victory in 2012. This has meant both taking a hard line on Greece, and running a tight ship at home to bring down the country’s budget deficit.

Under Kazimir, Slovakia climbed out of the EU’s excessive deficit procedure in June 2014 and has kept just below the EU’s 3% of GDP threshold since then: the deficit this year is expected to be 2.74% of GDP, after 2.8% last year.

Parliament passed in November a three-year fiscal plan that envisages a deficit of 1.93% of GDP next year, progressing to a structurally balanced budget in 2017 (adjusted for the economic cycle and on-offs) and a headline balanced budget in 2018. If achieved, this would be the first balanced budget in the country’s short history. “I would like to achieve the target of a balanced budget in structural terms at least,” he tells bne IntelliNews during a visit to Prague at the end of November. “It is doable. “

All this has won the respect of the markets, and yields for Slovak three-year debt have been negative since October

Credibility restored, Kazimir says he is in no mood to loosen the purse strings now, even though Slovakia’s low borrowing costs could enable the government to invest in much needed infrastructure. The government is even pushing ahead with a controversial plan to build a ring road around Bratislava through a private-public partnership (PPP), in an environment when a purely public project would probably be much cheaper. 

He admits “this is a convenient environment for infrastructure investment”, but adds: “We are strongly committed to rules. Any investment must be compatible with the rules.”

This commitment demonstrates Kazimir’s fear that credibility can be easily lost. “We have to be accountable and credible, and not surprise the markets,” he says.

This stance, which evens wins the grudging respect of local analysts, could also be a vote-winner in March’s general election, because it takes away the main weapon of the fractious centre-right parties: economic trust. The radical supply side reforms of one of his predecessors Ivan Miklos (who is now advising Ukraine), which many analysts credit with Slovakia’s vigorous growth since then, are now more than a decade ago.

Combined with Prime Minister Robert Fico’s populist opposition to accepting refugees, the ruling Smer party could even win another absolute majority, according to recent opinion polls

This has made the 47-year-old Kazimir a rising star in Smer. Already deputy premier in the government and vice-president of the party, he is tipped for another top post after the election, possibly as head of the central bank or Slovakia’s next EU commissioner. He would certainly be a lot more popular in Brussels than Fico, whose views on refugees have angered fellow Social Democrats so much that they have threatened to expel Smer from the Party of European Socialists grouping. 

Pragmatic to the core

Yet on closer inspection, Kazimir’s record as finance minister shows that he is more of a pragmatic politician with progressive instincts than a neo-liberal “austerian”.

He dismantled Miklos’ much lauded 19% flat rate for VAT and income and corporate taxes, which had created one of the least progressive tax systems among the nations of the Organisation for Economic Co-operation and Development (OECD). In their place, he introduced a 25% tax band for those on higher incomes, reduced their tax-free allowances and raised their social security contributions. Self-employed entrepreneurs were also forced to pay higher minimum social security contributions and faced tougher rules on writing off expenses.  

He also hiked corporation tax to 22%, making it the highest in the Visegrad Group, and imposed a minimum lump sum contribution and tightened the rules on carrying forward losses, to address the problem that more than half of Slovak companies paid no corporation tax at all. He also followed neighbouring Hungary and Austria in imposing a levy on bank assets.

He has also gone after corporate tax evasion, in particular of VAT, a tax vulnerable to “carousel schemes” by criminal gangs, who fraudulently reclaim VAT they never paid. 

Slovakia was not receiving 39% of the VAT it expected to receive – a gap equal to 3.9% of GDP, the second worst figure in the OECD in 2012 – partly because VAT refunds were running at 60% of VAT revenues. This gap has now been reduced to 29% of the expected take, meaning that Slovakia is receiving the equivalent of a 14% VAT rate instead of its headline 20% rate. At a press conference in June with Angel Gurria, secretary-general of the OECD, Kazimir said this had enabled to Slovakia to recoup extra revenue of €1.6bn over the past three years, or 2.1% of GDP.

Gurria praised Slovakia’s efforts, saying Slovakia is now used as a model for other countries that have the same problems. “2-3% of GDP sounds impossible for any finance minister these days – it's massive,” commented Gurria. “This is a revolution, this is a very dramatic change.”

Building on Slovakia’s experience, Kazimir wants to step up the fight against tax evasion at the EU level by improving the swapping of tax information. “This issue we would like to push ahead,” he says.

But he remains cautious about further progressive tax reforms. In a working paper, OECD experts have recommended Slovakia further rebalances its tax system by reducing the tax wedge on salaried workers, and imposing property and environmental taxes. In low tax Slovakia this would be a radical departure and Kazimir says his focus will remain on reducing tax evasion. “We are obliged first of all to combat tax fraud,” he says. “This is our moral obligation. I do not want to increase tax in other areas with such a high rate of VAT evasion.”

On cutting the budget deficit, Kazimir has also been pragmatic – perhaps too much for some economists. Much of the reduction has come through tax rises, rather than spending cuts or reforms of the public administration. Future cuts are pencilled in to come from lower public investment, as spending linked to EU structural funds dips after the end of the EU budget cycle. Says Zdenko Stefanides, chief economist of VUB bank in Bratislava: “The key savings should come from reform of the state administration. The question is whether any reform has happened at all.”

Ageing problems

The cut in the deficit has also been more gradual than many economists would have liked and will remain so. According to Kazimir, after fiscal expansion of 0.2 percentage points of GDP in 2014, this year’s budget is neutral, while next year the budget will be structurally tightened by around 0.5% of GDP.

Kazimir has been able to avoid big cuts because of the accelerating growth of the Slovak economy – which hit 3.7% in the third quarter – the low interest rate environment, as well as changes to the pension system that have given the state more contributions. This has all boosted revenues and enabled him to even make some welfare increases and tax cuts before the election. 

This recent fiscal loosening and the lack of detail about future tightening has raised the ire of the Council for Budget Responsibility, the country’s fiscal watchdog, which argues that the government should be doing more to prepare for the future fiscal challenges from demographic ageing. “The government missed the opportunity to use numerous positive effects to step up consolidation; on the contrary, as part of its three-year budget updates the government would repeatedly revise the target values of budgeted deficits upwards,” the council commented in November.

Kazimir insists he plans to run structurally balanced budgets in the future, but allows himself a get-out clause. “I can imagine deviating from a balanced budget in the future, but only under cases of additional investment,” he says.

He adds that he would like to discuss at the Ecofin level the issue of how infrastructure investment should be treated in budget calculations, in a nudge towards some who argue it should not be included in judging the 3% of GDP threshold. “I would like to raise the discussion in Brussels,” he says.  

Kazimir will soon be able to command a bigger stage for his ideas on infrastructure investment and sharing tax information – assuming Smer wins the March election and he is re-appointed finance minister – when the country holds the rolling EU presidency in the second half of 2016.

He says that the Slovak plans for the presidency are modest, perhaps reflecting a wish not to follow the disastrous example of the arrogant and chaotic Czech EU presidency of 2009, rated by observers as one of the EU’s worst. “We want to be humble,” he says. “We don’t want to be heroes. We want a smooth presidency, to be reliable.”

Looking further forward, his goal appears to be to secure Slovakia a place beside Germany as the Eurozone solidifies around a more integrated inner core. He tweeted in September: “I'm in the camp advocating that #eurozone has to move decisively towards a deeper integration to have effective & strong fiscal union”.

Asked about Slovakia’s place in such a union, he only allows himself to say: “We are already close to the core on the results, and on the way of thinking – just look at our [bond] yields.”