Caution advised as condition to depart from fiscal balance is to be met

Ljubljana – The Fiscal Council has noted that at least one of the two conditions enabling the government to depart from the obligation of medium-term fiscal balance under exceptional circumstances will be met next year. It has thus advised caution and again called on the government to clearly define mitigation measures and quantify their fiscal effect.

Article 11 of the fiscal rule act says that departure from the medium-term balance is permitted, provided that it does not endanger fiscal sustainability in the medium term, in periods of severe economic downturn or in the case of an unusual event outside the control of the government.

The government advisory body said on Friday that at least one of the conditions would be met given the significant drop in economic activity in 2020, which according to the latest available data was 5.5% compared to the year before.

The thing is also that the pre-crisis level of GDP expressed in constant 2019 prices, according to the calculations based on the spring forecast by the IMAD macroeconomic think tank, will be exceeded in 2022, while the amount of GDP projected before the crisis will not.

“This finding is confirmed by the expectation that the number of unemployed persons will stay higher than in the pre-crisis year 2019 also in 2023, despite the extensive measures to preserve jobs and the expected gradual recovery of the labour market.”

The Fiscal Council noted that it had already called for caution related to mitigating measures, also taken in the period of exceptional circumstances, last year as it had established that the relevant conditions had been met.

It said at the time that measures used to address extraordinary circumstances must, in accordance with the valid European fiscal rules, be temporary and be directly related to extraordinary circumstances.

“The Fiscal Council again expresses the expectation that the government will clearly define the measures intended for mitigating the epidemic and quantify their effect on public finances,” the council said today.

It also noted that once the exceptional circumstances have ended, a medium-term financial balance of the general government sector should be restored, as stipulated by the Slovenian and EU law.

The Fiscal Council added that different trends in individual sectors should also be taken into account, and noted that determining whether the conditions allowing a departure from the medium-term fiscal balance obligation were met was not a “static assessment”.

It may change relative to circumstances and projections, which brings additional uncertainty in budget planning.

This “requires additional caution and reflection about how to set the course of fiscal policy and to what extent so that measures that would excessively disturb the stance established by budget documents are not required in the future.”

Future budget documents should thus imply the course for securing medium-term sustainability of public finances, the Fiscal Council said, adding that a medium-term course of public finances should be determined in an updated Stability Programme.