ECONOMIC ISSUESFISCAL DEVELOPMENT AND POLICY

Ljubljana, 20th June 2011

Maja Bednaš IMAD

Revenues – expenditure imbalance

Source: SORS.

General government deficit and debt in Slovenia

Source: SORS.

General government deficit in the EU countries

Source: Eurostat.

General government debt in 2010 and its increase since 2008

Source: Eurostat.

Consolidation in the EU in 2011 (EC Spring forecast 2011)

Source: EC Spring forecast 2011.

Consolidation in Stability programmes 2009 and 2011

Source: Stability Programme 2009, Stability Programme 2011.

Why is consolidation slow? Pre-crisis structural issues

Source: Stability Programme 2011, calculations IMAD.

...and why it slowed down further?

• Lower nominal GDP forecast

• NLB re-capitalization in 2011

Lower nominal GDP forecast

Source: IMAD.

Revenues and expenditure in Stability Programmes 2009 and 2011

Source: Stability Programme 2009, Stability Programme 2011.

Change in general governement revenues and expenditure in Stability Programme 2011 (EUR mn)

Source: Stability Programme 2011.

Risks to consolidation

Substantial fiscal effort will be needed to realise the planned consolidation

• pace of consolidation still significantly depends on revenue dynamics – in case of worse economic situation deficit may exceed 3% of GDP

• Consolidation relies on emergency measures

• (All) measures are not clearly defined

• Proposed economic policy mix increases the risk that more flexible development expenditure (investments, subsidies) will be crowded out in the event that the planned measures are not implemented – it is easier to achieve than cutting spending with systemic changes

• Furthermore - more expensive borrowing would affect the quality of the public finances, as growing expenditure on interest would also crowd out more flexible development expenditure

Revenues and expenditure in Stability Programme 2011

Source: Stability Programme 2011.

Pension reform

Source: IER.

Successful consolidation in 2013 would result in debt around 46 % of GDP

Source: Stability Programme 2009, Stability Programme 2011.

10-year bond yield spreads, relative to German bonds, in p.p.

Source: Eurostat.

Interest expenditure – crowding out

Source: Stability Programme 2011.

The scope for increasing the tax burden is limited

On the revenue side, the scope for increasing the tax burden is limited. To speed up consolidation, it makes sense to raise certain indirect taxes and broaden the tax base: 

• Higher taxes on labour and capital would have an adverse impact on economic activity and competitiveness - tax policy in these fields must focus on improving the tax capacity by preserving the current tax rates and broadening the tax base

• Given rising inflationary pressures, the scope for raising consumption taxes is also limited. Possibilities: to raise excise duties on products with relatively low elasticity of demand (alcohol, tobbaco), property and environmental taxes

Measures to reduce expenditure and maintain long-term sustainability of public finance

• A part of spending cuts can be achieved with savings measures and streamlining, not with linear cuts but with the creation of a system that will allow for greater flexibility in wages and hiring, consistent implementation of measures to improve the efficiency of the public sector, and streamlining of operations

• Improving the efficiency and effectiveness of development expenditure would speed up consolidation and have a positive impact on competitiveness (exclude inefficient programmes, curb expenditure on oversized and inefficient subsidies, enhancing public-private partnerships, carry out the transition to priority financing investments with EU funds, improve efficency of expenditure RD and, education, adjustments in the management of public institutions and public administration)

• Maintaining the long-term sustainability of the public finances: pension, health care and long-term care reforms