Page 63 - bne magazine February 2024_20240206

bne February 2024
Opinion 63
governments, with his populist leftist Smer party enjoying a total of 12 years in power since 2006.
At the end of October, after winning the September 30 general election, Fico began his fourth term. It already looks clear that Fico’s new government will not prioritise economic reform, and will once again just tread water.
“The whole strategy is to maintain the status quo,” says Michal Vasecka, head of the Bratislava Policy Institute. “As other countries are stepping up, we are sleeping.”
Bare larder
This time, however, is different, economists warn, if only because it is the first time the populist strongman has come into office when the larder is bare. He will not be able to splurge because the government budget deficit is expected to be 6.5% of GDP this year, the highest figure in the EU.
The deterioration in the budget deficit is also the worst in the EU after Hungary. It is largely the result of handouts by the 2020-2024 centre-right governments to fight the downturn caused by the 2020-23 pandemic and to mitigate the energy price rises sparked by the 2022 Russian invasion of Ukraine.
Before the election, Slovakia’s Council for Budget Responsibility and the outgoing technocratic caretaker government had called for the next cabinet to reduce the deficit by more than 1pp a year over its term, warning that otherwise the government could end up paying €2.5bn a year to service its debt.
Economists also warned that Slovakia would be forced to impose budget cuts under the EU’s Stability and Growth Pact next year, and the government could also be forced to run a balanced budget in 2026 under the country’s debt brake law.
Fitch also sounded a warning by downgrading Slovakia to 'A-' last week. "The downgrade reflects the deterioration of the state of public finances and the unclear progress of consolidation," the credit rating agency said.
The new government has brushed aside these concerns. It has just announced a series of populist measures including a rise in pensions this year (costing €600mn), subsidies for mortgage holders next year, and a continued freeze in gas prices (costing €1.25bn).
The new Smer finance minister, Ladislav Kamenický , only plans to cut the deficit next year by 0.5pp (or €600mn) compared to this year’s figure to around 5.9% of GDP.
Moreover, the belt-tightening, amounting to nearly €2bn next year, is almost entirely focussed on tax rises and financing dodges, rather than spending cuts.
The government has avoided cuts to the welfare state or increases in VAT, which would hurt its mostly poorer voters.
The key elements are instead a supertax on bank profits (raising €336mn), and a shift of some second pillar pension contributions back into the state-controlled first pillar (raising €365mn).
At the start of their term, when many governments would carry out their toughest budget tightening measures, the new government is instead just offering populist gestures.
Looking ahead, it says it will cut the deficit to around 5% of GDP in 2025 and 4% in 2026 but the only measures currently being discussed are a more progressive income tax and higher property and environmental taxes.
These are undoubtedly necessary but fall far short of the transformation required.
“The deterioration in the budget deficit is also the worst in the
EU after Hungary. It is largely the result of handouts by the 2020- 2024 centre-right governments to fight the downturn caused by the 2020-23 pandemic and to mitigate the energy price rises”
Luckily, Slovakia does not face any immediate crisis in public finances, given that public debt is low by EU standards. Fitch projects the government debt/GDP ratio to rise from 57.8% at the end of 2022 to 65.5% by the end of 2025.
Recent government bond sales have actually been at tighter spreads, with a yield of under 4% at the auction last month.
Nevertheless, Slovakia has the worst long-term demographic trends in the bloc, which will push up pension and health costs and reduce tax and social contributions.
At the same time the government needs to spend more on defence, build infrastructure, invest significantly in the country’s woeful education and health systems, and switch the economy onto a green and higher value-added track.
New model required
Transforming the economy is the greatest challenge.
The Dzurinda government’s reforms built a low-wage, low-tax
model that attracted FDI, particularly into the automotive sector. This drove economic growth that helped Slovakia catch up with its neighbours and ease its chronic unemployment problem.
Under Fico, Slovakia then became the only one of the Visegrad
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