Draft Budget of the Public Administration for the years 2006 to 2008

The draft budget of the public administration for the years 2006 to 2008 proceeds from the Public Administration Budget for the years 2005 to 2007, which was approved by the Government on 13th October 2004, and from the Convergence Program of Slovakia for the years 2004 to 2010 from November 2004. Changes in the draft budget are minimal compared to these documents, which confirms the consistency of the Government Economic Policy, which is not common even in the majority of OECD member states.

The public finance deficit in the year 2006 is budgeted at a level of 2.9% of GDP. Such an objective has been already defined in the Government Policy Statement from November 2002. The deficit fall from this year's level of 3.4% of GDP also signifies that the draft budget fulfils the conditions of the reformed Stability and Growth Pact, according to which it is necessary to decrease the structural deficit by at least 0.5% annually until public finance reaches an almost stable position.

The material is founded on macroeconomic conditions that prove the healthy state of the Slovak economy. The Government expects dynamic economic growth, on average at the level of 5.7 % annually, inflation of less than 2.2% and employment growth by 0.8 to 0.9% annually. The forecasts of the Ministry of Finance are at the same time realistic compared to assumptions of international as well as domestic public and private institutions. The current fast economic growth is balanced, founded on healthy foundations, and sustainable.

The dynamic growth of the Slovak economy will present itself also in the improvement of the living standard of the population. A real wage increase will exceed the level of 4% also in the year 2006, pensions should rise on average by 4.4% and household consumption will rise by 4.9%.

Through implementation of the draft budget, public finance shall noticeably approximate the level that will be sustainable in the long term. The start of pension reform, together with the proposed reduction of the deficit, contribute in a fundamental way to the preparation of public finance for the ageing population, which in the near decades will not avoid even Slovakia.

While at present one citizen of retirement age falls to six citizens of working age, in the year 2050 it will be just two. A necessary condition for Slovakia’s preparation for this development is the reduction of the public finance deficit, stopping the growth of the National Debt and its gradual reduction.

The gross National Debt share in GDP, which reached 43.3% of GDP by the end of the year 2002, shall fall to a level of 38.3% by the end of the year 2006. Although part of this development was caused by creation of the Treasury, it may be positively stated that with regard to the fast economic growth and the contrary falling deficit, public finance is beginning to reduce the financial encumbrance of future generations.

Implementation of the draft budget is a very important condition for the fact that Slovakia fulfilled the key Maastricht criteria in a sustainable way – reducing the public finance deficit to a level of three percent of GDP. Without the cost of the capitalization pillar formation this objective would be unfulfilled, in accordance with the Government Policy Statement already in the year 2006, inclusion of the pension reform cost will shift the fall to a three percent level for the year 2007. It follows from the economic development and objectives of economic policy, that in the year 2007 it will be possible to fulfil, in part, all other Maastricht criteria also, and therefore Slovakia will be prepared for the introduction of Euro in the year 2009.

In the presented draft budget a deficit to the amount of 3% of GDP is proposed for the year 2007. On the basis of the reformed Stability and Growth Pact, which contains a special mode for review of the pension reform costs, it will be possible to fulfil Maastricht criteria also at a slightly higher deficit than a 3-percent level, while maintaining its falling trend. The budget for 2007 therefore provides also a few billion reserve in case of unexpected development of public finance.

Reducing the public finance deficit is not only important in the light of the fulfilment of criteria for the introduction of Euro and the public finance preparedness for the ageing population, but also in the light of the actual state of the Slovak economy. The public finance deficit should not exceed the planned level of 2.9 of GDP in the year 2006, rather on the contrary its gradual reduction would be appropriate. Domestic demand growth is actually very strong, especially thanks to a marked wage increase and employment, which shall cause a positive production gap in the coming year. For this reason it is necessary to fulfil the objectives of the presented budget with a view to further securing necessary macroeconomic stability. It will also be important that in the year 2006 the drawing of a considerable amount of resources that were not drawn in 2005 did not come about and also that possible excess income was not used in the year 2006 for increasing expenditure, but for reducing the public finance deficit.

In the same manner it will be necessary to proceed in the budgetary policy in the year 2007 also, when the Slovak economy will grow very quickly. In the event of failing to fulfil the objective of reducing the deficit that is set in the draft budget of the public administration for the years 2006 to 2008, overheating of the economy would threaten: higher inflationary pressures and a subsequent depreciation of savings, worse external imbalance, and growth in the economy vulnerability. And on the contrary, in the event of fulfilling the above stated objectives of the budgetary policy, in the coming years, the Slovak economy will proceed in rapid and at the same time healthy and sustainable growth. This positive forecast could then only be threatened by strong and unexpected external shocks.

Since the year 2002 public finance has gone through significant changes. The first was implementation of a number of structural reforms during the years 2003 and 2004 that markedly reflected themselves in the form of the budget. The second influence was Slovakia’s entry into the EU, which presented itself partially in the budget for the year 2004, but the full impact is in this year, which is the first full year of our EU membership. Since the beginning of 2005 fiscal decentralization has also been implemented, and the last significant impact is pension reform, which will significantly influence budgets, especially in the years 2005 and 2006, during which people shall decide on entry into the capitalization pillar.

Between the years 2002 and 2006 the public finance deficit shall fall from the level of 5.7% of GDP to 2.9%, therefore by a 2.7 percentage point, and that is in spite of the expenditure that entry into the EU brought. Although the financial advantages of integration are indubitable (In 2006 Slovakia can obtain from the EU almost 28 billion crowns more than it will have to return to the European budget), nevertheless in the light of public finance, entry into the EU means an additional encumbrance. Contributions to the EU budget alone amount to more than SKK 16 billion, co-funding European funds brings further expenditure. Although it is not easy to assess the impact of integration on public finance, the results of different methodologies show the additional encumbrance minimally at a level of 1% of GDP.

Between the years 2002 and 2006 the tax and contribution burden shall fall from 32.5% of GDP to 29.2%, therefore by 3.3% of GDP. In financial expression it means approximately SKK 50 billion. A decrease of a further 1.4% shall be represented by contributions to the capitalization pillar, which will not be, according to Eurostat, considered for public finance income until the year 2007. Slovakia’s tax and delivery burden is among the three lowest in the European Union (after the deduction of contributions to the second pillar, it will be definitely the lowest), while the average of its 25 member states presents 38.8%.

The draft budget of the public administration for the years 2005 to 2007 also fulfils another fundamental point of the Government Policy Statement, which is decreasing the redistribution rate by means of public finance. Public finance share in GDP shall fall between the years 2002 and 2006 from the level of 44% to 39.5%, and that is also in spite of the fact that during this period public finance increased by approximately 1% of GDP by virtue of contributions to the EU budget. Without this influence the public expenditure share in GDP would fall by 5.5% within four years.

This year a crucial question during production of the budget shall also be the expenditure structure.

The distribution of finances to individual spheres should reflect the political priorities of the Government that were unambiguously defined in the Strategy for the Competitiveness of Slovakia until 2010, which was approved by the Government in February 2005.

The presented draft budget analysis in comparison with the budget for the year 2002 shows that the development in many spheres confirms the fulfilment of the Government’s priorities. The high increase was reached by expenditure for the construction of motorways (82%), university education (55%), science (59%), and also justice (78%) or promoting enterprise (240%).

The fact is, however, that the expenditure for agriculture, defence, or the environment also grew quickly, whose impact on the competitiveness has been considerably lower. It is a further adjustment of the expenditure structure to the government’s priorities that is the greatest call for the future.

Individual chapters play an increasingly greater role in the quality of public finance, the authority of which, but at the same time also responsibility, gradually increases in the budgetary process. It is, first of all, the chapters’ responsibility that the expenditure package that is available in the multi-year budget, was distributed in the first phase and also used in the most effective way in the second phase, so that the best services were provided for the taxpayers’ money.

During the preparation of the presented draft budget, programme budgeting was used significantly, which should become a major tool, in the subsequent years also, in making the public expenditure more effective and also its transparency. An unambiguous link between the provided resources and achieved results must always be present in the event of using public resources, so that the public finance expenditure was directed at spheres where it will bring the greatest asset. Programme budgeting significantly contributed to the transparency of the stated budget and to awareness about the facts about to which spheres these resources are directed. In the event of setting measurable target indicators, the significantly smaller progress managed to be reached. The majority of chapters still fail to, or do not wish to, unambiguously and publicly define objectives that would be possible to evaluate concretely and also compare internationally.

Public finance must become more increasingly focused on the results achieved. Not only the volume of used resources can be substantial, but especially the effects and results that these resources are able to bring. For instance, it is not only important how many resources will be earmarked by the budget for flood control, but also the fact that if these resources are used, they served for the protection of the territory to the maximal degree. Likewise, it is important, if is possible, to build more motorways from the funds earmarked for the construction of motorways, or to build it on the territory where they will bring more benefit to taxpayers. Similarly, not only it is substantial how many public resources are earmarked for university education, but also whether they are used effectively – for instance, what is the quality of universities.

The draft budget of the public administration for the years 2006 to 2008 is defined as a three-year budget similar to a year ago Although the expenditure allocation for the years 2007 and 2008 is not binding, it is expected that changes will take place only in unambiguously justified cases.

The greatest uncertainty during producing the budget for the years 2006 to 2008, which concerns particularly the years 2007 and 2008, was disapproval of the basic framework of the European budget – Financial perspective for the years 2007 to 2013. With regard to the fact that at present it is not known how many resources Slovakia will be able to obtain in these years, nor at which spheres these resources shall be directed, it was not possible to include them in the presented budget. The expected volume of finance from the future programme period is classified in the draft in the chapter VPS, while their particular allotment shall be possible only after approval of the Financial perspective by all member states of the EU. Subsequently, it will be necessary that the Slovak Government passed the National Strategic Reference Framework that shall allot resources from Structural Funds and Cohesion Fund to individual spheres, wherewith it shall preordain state budgets up to 2007 in a substantial way.

The second significant unknown factor in the development of public finance is still presented by an estimate of the citizens’ interest in participation in the second pillar of the pension system. The answer to the question of how many citizens will decide on entering the new system will not be known until 30th June 2006, when the deadline for decision-making expires. At present it is obvious that the citizens’ participation will be higher than what was expected in the budget for the years 2005 to 2007, and in the year 2006 the pension system reform impact on the deficit is expected to the amount of 1.4 % of GDP. Since an actual outcome may differ from this estimate, whereas the Government can not influence it in a substantial way, the fiscal policy objective for the year 2006 is a deficit without expenditure connected with the second pillar. The fiscal policy will have to respond to a possible variance from the estimated values, so that the deficit including the pension reform expenditure in the year 2007 did not exceed 3% of GDP.

In contrast to previous years, the budget for the years 2006 to 2008 was prepared in a substantially more stable legislative environment. Impacts of the majority of reforms on public finance have been already relatively accurately quantified and therefore certainty during production of the budget in the view of domestic legislative was significantly higher compared to previously. The presented budget assumes only minimal legislative adjustments.

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