New govt to cut income tax, raise contributions


The new government first plans to review the 2019 budget and amend it in line with the commitments enshrined in the coalition agreement.

Sustainable public finances are in line with the growth and stability pact and the respect of the fiscal rule is enshrined in the Constitution, Sašo Polanec of the Ljubljana Economics Faculty commented on this for the STA.

Any deviation from these two rules would be risky, he said. Borrowing costs could go up quickly, especially in the coming years when the European Central Bank will raise interest rates and scale back bond purchases, he explained.

His colleague Marko Jaklič said that the budget must envisage surpluses in the periods of relatively high economic growth to allow for borrowing during crises. This is why the fiscal rule must be obeyed, he believes.

The coalition parties also plan to speed up the drawing of EU funds and make Slovenia more efficient in this respect, which is what any rational government should do, according to Polanec.

The coalition plans to amend the worker participation in management act and the financial participation act.

Polanec think this makes sense to a certain extent: "It is important to know that this participation is limited if society is to survive. Otherwise jobs could be preserved irrespective of productivity."

He noted that profit sharing was already provided for through the lower taxation of profit incumbent on workers, which is why legislative changes are not necessarily needed.

Jakič and another economist of the Ljubljana Faculty of Economics, Mitja Kovač, assessed the planned changes as ridiculous, because they will de facto increase the taxation of profit.

Jakič warned that profit as shown in companies' reports could be "creatively adjusted" without breaking the law, so he expects companies in Slovenia to report lower profits.

Kovač said a possible obligatory distribution of profit was "completely insane".

The coalition also plans to introduce a tax on real estate and assets that would hit the wealthiest the hardest. Polanec sees this as one of the most urgently needed measures, paving the way for re-distribution of assets (and not just income) to reduce inequality.

Jakič too sees this as a good plan. He believes real estate which the owners do not use or property they rent out should be particularly highly taxed.

This would encourage selling and positively affect the economy, budget and the entire society, he believes.

The coalition parties would also like to introduce a tax break of up to 5% of the annual income tax base for funds invested in culture, sports and health.

They would also set the minimum company tax at 5%. All transactions to tax havens would be taxed, while annuities and capital gains would be liable for the general personal income tax.

At the same time, income tax should be reduced as much as possible – either by raising tax incentives for all or overhauling the tax brackets, the coalition believes.

Polanec thinks that the first option could make life complicated for the Tax Administration but its advantage is that funds would be allocated in line with the desires of individuals, not the state.

But he disagrees with the planed minimum company tax, warning that this could discourage companies from investing.

Kovač too sees this as harmful, because it would affect the most vital part of the economy – companies that invest in R&D a lot.

Jaklič, however, expects the measure not to have a notable effect if all the other parts of the tax system function properly.

The coalition also plans to gradually raise the contributions for pension and disability insurance of employers from the current 9% by 0.8 percentage points a year until the end of the term.

"This will be quite a shock for employers, as the costs of labour would go up by 3% in four years," Polanec said.

He admitted, though, that the health system could use an increase in funding to address hospital waiting times.

Jaklič sees this as yet another burden for employers. He believes that the problems of the pension and health systems should be tackled in a different way.

The coalition partners also plan to increase the benefits of state assets for the citizens, which is why they will overhaul the strategy for managing these assets.

Aside from profitability, the goals in the managing of state assets should also be positive social and environmental effects, regional development and employment.

Polanec is concerned by this plan. He believes Slovenia should follow the example of Norway and set up a sovereign fund to reduce the risks associated with individual investments.

He believes additional goals in the strategy would only complicate the situation and that environment, regional development and employment should be tackled in separate laws.

Jakič, who supports privatisation, agreed. Kovač on the other hand said the coalition was vague about how the implementation of the goals would be measured.

The coalition also wants to look into the possibility of transferring the Slovenian Sovereign Holding to the Economy Ministry, arguing that most of the companies it manages have already undergone financial restructuring and are now in for a change of business model.

Under the new government, the responsibility of supervisors is to be set in more detail, while a law should be passed on auditing the projects of systemic importance.

Polanec is happy with the current system, though, arguing that it clearly divided the state and the management of state assets.

The proposed changes would increase the direct influence of politics and undermine the independence of supervisors, he believes.

Kovač and Jaklič see no point in the proposed changes either.