ECONOMIC ISSUES

ECONOMIC ISSUESFISCAL DEVELOPMENT AND POLICY

Ljubljana, 19th June 2012

Maja Bednaš IMAD

General government deficit in the majority of the EU countries lower in 2011

Source: Eurostat.

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

Source: Bloomberg

No consolidation in Slovenia until 2012

Vir: SORS, Eurostat, Stability Programme 2012, Spring forecast 2012 EC

Expenditure growth in 2011

Source: SORS

Structural deficit has already been high in the pre-crisis period

Source: SORS, calc. IMAD.

General government debt increase in Slovenia the sixth largest since 2008

Source: Eurostat.

Consolidation in 2012 - substantial fiscal effort supported by agreed measures defined by the law (credibility)

Source: Ministry of Finance.

Consolidation in Stability programmes 2011 and 2012

Source: Stability Programme 2011, Stability Programme 2012.

Consolidation measures in SP 2012

Source: Stability Programme 2012

Three sets of measures

• Rationalising public sector operations

• Limiting investments, subsidies and programmes

• Adjusting labour market and social security policies

Interest expenditure – crowding out

Source: Stability Programme 2012.

Age related expenditure

Source: Ageing Report 2012, EC 2012

Challenges to consolidation

• Positive side

• adopted and agreed measures • nominal decline in expenditure in 2012 and 2013

• Risks

• consolidation partly relies on temporary (intervention) measures

• (all) measures are not clearly defined, especially for the period beyond 2013

• growing expenditure on interest is crowding out more flexible development expenditure

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

• 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

• increase of VAT tax rate is estimated to have relatively smaller dverse effects on economic growth, BUT it is crucial to avoid a spillover of higher tax rates into the growth of wages and transfers through adjustment to inflation

Further sistemic changes are needed for sustainable consolidation

Substantial fiscal effort will be needed to realise the planned consolidation, including further systemic changes

• 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

• improving the efficiency and effectiveness of development expenditure as indicated in SP 2012 - positive impact on competitiveness

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