New Taxes Instead of Public Sector Cuts

Both VAT rates will increase as of 1 July, from 20% to 22% and from 8.5% to 9.5% respectively, a real estate tax will be enacted in 2014, the automatic corporate income tax cuts stopped and several smaller taxes introduced.

On the expenditure side savings of about EUR 500m are planned, but this includes EUR 380m in cuts that are the result of the effect of last year's fiscal consolidation act.

The government had also planned a temporary payroll tax, but that has been put on the back burner. However, if public sector spending cuts are not agreed with the unions, the tax would take effect next year, according to the prime minister.

"We realize that no tax increases have a positive impact on the economy. We chose hikes that have the smallest negative effect on economic growth," Bratušek said.

The general government deficit is expected to hit 7.8% of GDP this year, which includes EUR 900m on bank capital hikes and already completed conversions of hybrid loans to banks into equity.

In 2014 the deficit is expected to drop to 3.3% of GDP before sliding below the 3% threshold the year after, according to Bratušek.

Debt, meanwhile, will temporarily exceed the 60% ceiling prescribed by the EU, but will climb down as non-performing loans transferred onto the bad bank are cashed in.

Slovenia needs structural measures of about EUR 1bn for fiscal consolidation, according to Finance Minister Uroš Čufer.

The current ratio between revenue- and expenditure-side measures is 50:50, but the ultimate goal is to achieve two-thirds of consolidation with spending cuts.

It is also vital that the measures are permanent, not temporary. They also need to be actionable and have the smallest possible impact on economic growth, he said.

The measures are part of the Stability Programme and National Reform Programme, two documents that the government will send to the European Commission on Friday.

These steps will be coupled with ongoing measures such as the transfer of non-performing loans onto a bad bank, changes to referendum legislation and amendments to the Constitution enshrining a balanced-budget rule.

The government has also announced measures to kick-start growth. Čufer did not elaborate, but he suggested Slovenia's current debt level provided enough room for stimulus.

However, Čufer was quick to point out that Slovenia would need to roll over EUR 3bn-4bn of debt each year over the medium term. Since foreign investors buy up 70% of Slovenia's bonds, the country will continue to be in the spotlight of financial markets.

The debt will ultimately be reduced with further consolidation measures and privatisation. Just today the government decided to privatize 15 companies, including NKBM bank and telco Telekom Slovenije.

The economic and fiscal measures will be followed-up by measures to improve the business environment, raise the effectiveness of the public sector and enhancing the rule of law.