Govt adopts Stability Programme, fiscal policy stays expansive

Ljubljana – The government adopted on Wednesday the Stability Programme that explains and puts into context the public finance policy in this and coming years and puts it within the framework of the Stability and Growth Pact. Slovenia’s fiscal policy remains expansive as temporary departures from the pact’s rules are allowed at the EU level due to Covid-19.

Two main goals in the Stability and Growth Pact are a maximum general government deficit of 3% of GDP and limiting general government debt at 60% of GDP.

According to the Slovenian government, the situation requires resolute measures and effective adjustment of measures for tackling the consequences of the epidemic, and public finance incentives for recovery and resilience in the coming years.

The key role will be played by funds from the EU recovery fund, the unused cohesion funds for the 2014-2020 period and first funds as part of the 2021-2027 multi-year budget, the government said.

The Stability Programme puts in the macro-economic context the decree that had already been adopted as part of the drafting of the general government sector budgets for 2020-2022 and for 2022-2024, which cap expenditure until 2024.

This year, the upper limit for public expenditure will be raised from EUR 24.9 billion, set last November, to EUR 25.3 billion, while general government deficit is expected to increase from 8.4% of GDP in 2020 to 8.6% of GDP.

In the coming years, a gradual reduction of general government deficit is planned, as it is expected to stand at 5.7% of GDP at the expenditure cap of EUR 25.05 billion in 2022, and at 3.8% of GDP at the expenditure cap of EUR 25.045 billion in 2023.

In 2024, general government deficit is planned at 2.8% of GDP at the expenditure cap of EUR 25.43 billion.

For this year, the upper limit for budget expenditure increases by EUR 800 million to EUR 14.32 billion, and budget deficit is planned at 8.6% of GDP.

For 2022, the relevant decrees envisage EUR 700 million higher budget expenditure, capped at EUR 13.3 billion, and instead of 3.1% of GDP, budget deficit is planned to reach 4.9% of GDP.

In 2023, the figures are 3.6% of GDP and EUR 13.06 billion, respectively, and in 2024, the figures are 2.5% of GDP and EUR 12.75 billion, respectively.

After the measures to mitigate the consequences of the epidemic on companies and individuals last year amounted to EUR 3 billion or 6.5% of GDP, this year the value is expected to stand at EUR 1.5 billion of 3% of GDP, and in 2022 it is expected to drop to EUR 55 million as the epidemic is expected to end by then.

The increased expenditure and high deficit rates have reflected on a higher general government debt, as after it had been decreasing for four years to reach EUR 31.74 billion or 65.6% of GDP in 2019, it jumped to EUR 37.4 billion or 80.8% of GDP in 2020.

This year, general government debt is expected to stand at 80.4% of GDP due to the expected economic growth. In 2022, it is expected to settle at EUR 40.9 billion or 79.6% of GDP, and to grow in nominal terms by 2024 to EUR 44.3 billion, while dropping in terms of the share of GDP to 78%.

While the government maintains that the expansive public finance policy is a must in order to address the consequences of the epidemic and that Slovenia needs investments as support for post-Covid recovery, the oppositions warns that the country is again slipping into fiscal problems.

The opposition is even mentioning the word “catastrophe” and pointing to the fact that, with the proposal to cap social security contributions and planned tax reforms, the government will see public finance revenue drop by hundreds of millions of euros at the annual basis.

The government argues that these measures will increase private consumption and boost investments by companies, although the Fiscal Council warns that these projections are not realistic from certain aspects and that some of the planned measures worsen the structural balance of public finances and reduce the wiggle room for fiscal policy in the coming years.

In the Stability Programme, the government plans that the structural deficit will increase from 6.8% of GDP from last year to 8% of GDP this year, and then to start to decrease gradually and reach 3.3% of GDP in 2024.

The government has announced that a more reliable medium-term fiscal strategy could be drafted after the extraordinary circumstances are over, when a programme for gradual elimination of departures from the medium-term balance of public finances will probably need to be adopted.