Slowing growth puts Slovakia's fiscal targets further out of reach

By bne IntelliNews February 11, 2013

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Even with the strong economic performance in 2012 Slovakia was struggling to raise enough tax revenue to meet its fiscal targets. So the rapid economic slowdown in recent months has forced the finance ministry on February 8 to cut its budgetary income target for the second time in four month, piling further pressure on the government.

The same day that Slovak industrial production in December recorded its first drop in 2012 (down 4.4% year on year), the ministry cut its budget revenue forecast for 2013 by €361m. The revisions of the forecasts for 2014 (down €707m) and 2015 (€1.05bn) were even deeper.

"I'm convinced we will turn this corner. This is of course a complication," Finance Minister Peter Kazimir said, according to Reuters. "The ambition is to meet the goal and bring the deficit below 3%. We have a commitment and we have to do it."

The sharp slowdown in growth is a huge challenge to Slovakia's fiscal targets, which most analysts had already suggested were too ambitious even as the economy barreled along through the first half of 2012. On January 31, the finance ministry reduced its 2013 growth forecast to 1.2% from the 2.1% it had predicted in September. Provoked by reduced demand in the Eurozone - especially for cars from the country's automakers - fourth-quarter economic activity dropped off significantly, to leave the country likely to fall short of recording the 2.6% growth (the highest in the Eurozone) for the full year that most had been predicting.

Even during the good times, Kazimir was regularly found in front of the press last year explaining that tax revenue was lagging and that the budget would need to be rejigged. His last announcement in late November suggested a €276m shortfall in income for 2012, with another €250m this year.

Reflecting Prime Minister Robert Fico's election pledges to his blue-collar electorate, the major consolidation measures unveiled by the government when it came to power in March have remained confined to revenue raising - mainly through hiking taxes on companies and high earners. Analysts have been fretting that leaves the plan heavily exposed to slowing economic growth.

That scenario quickly became apparent, and Kazimir and Fico have been battling for months to find some extra leverage. However, there's little space for significant spending cuts, especially for the populist Fico, given the previous, centre-right government had made deep cuts across the board. Despite ongoing difficulties with employment - analysts are expecting January figures to show it creeping to just below 15% - Bratislava has already ordered a freeze on local administration budgets, but is wary of provoking its core electorate with social and pension freezes.

That leaves Kazimir little space to manoeveur. The finance minister now says the revised 2013 budget revenue shortfall should be offset by €250m re-channeled from the private pension system - like most Visegrad peers Slovakia reduced flows to the second pillar last year - with the remainder to come from targeted (but notably unnamed) spending cuts and higher dividends from state firms.

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