Transcript | 3. lecture: Slovakia and triple “S” (Ľudovít Ódor) - University for modern Slovakia

The aim of today’s lecture will be to discuss how the consolidation of public finance in Slovakia is performed nowadays and what steps were taken in past. Slovakia has so far resolved to perform consolidation strategies twice. For the first time this happened in 2002 and for the second time in 2010. Let us have a closer look at what we can say about these two periods when consolidation strategies were used.

It is notable that in both cases the strategy follows the same scenario. Let me call this “3S Strategy”. Since consolidation is to be understood in its complexity and is constituted by three components: stabilization, structure reforms and sustainability. To picture this, imagine toothpaste with three stripes or a pill with three working substances. First pillar is stabilization – bringing relief – whereas it often covers global measures that are on the one hand less thought over, however, it serves as “first aid”.  Structure reforms represent already a treatment of the problem and do not only cover symptoms. It is also important that at the same time they have a positive effect upon economic growth; and as we have learnt, the easiest way to achieving low deficit is healthy and big growth of economy. The third component of the consolidation strategy is sustainability, hence prevention from further sickness. We will deal with sustainability in more details within the upcoming lectures and it covers interferences within systems, which represent a public finance framework or are sensitive to factors like ageing population.

Let us begin with the “S” strategy put in action within the period of 2002 - 2006. This period of time may be labeled a textbook example of consolidation. Despite the fact that the government decreased the deficit of public finance significantly from 8% GDP to a deficit below 3% GDP, the economic growth had not slowed down. Just the opposite – the economic growth almost doubled. The above Slovak example has shown that it is possible to make significant cuts and concurrently increase citizens’ standard of living.

At that time, the stage covering stabilization was mainly carried out through cuts in transfers, within social allowances foremost. Major savings were attained also within state consumption as well as via stricter budgetary restrictions in state enterprises and health care. The trustworthiness of the strategy together with introduction of State Treasury lead to massive savings in expenditures with regard to interests.  

The structure reforms stage is probably quite well-known, since it is nowadays acknowledged even abroad. In this regard only the following key areas are to be mentioned: tax reform, distinct improvement of business environment, as well as of labor market.

A lot has been achieved within the area of sustainability. Following the public finance management reform in cooperation with the World Bank, analytical capacities of the Ministry of Finance have been improved, multiannual and program budgeting have been introduced, State Treasury and Debt and Liquidity Management Agency have been established as well as political influence on prognosticating macroeconomics and taxes has been eliminated. Changes in pension system and health care have also improved long-term sustainability of public finance.

Generally, over 100% of the measures were performed on part of the expenditures, whereas the tax reform did not lead to increase but to the decrease of income from taxes. The more this income decreased, the more further consolidation was needed. External environment has also been helpful for the “3S strategy” to become successful. The economies of our business partners had been growing, the financial sector was healthy and the monetary politics could have seemed to have been much more relaxed. Apart from that we joined the European Union in 2004.

Let’s have a closer look at current consolidation measures now. We will deal with them again through the “S” strategy point of view. However, it is not possible to expect success similar to the one in 2002 to 2006. On the one hand, the financial sector and monetary policy are at a completely different point to start from, which means that changes by fits and starts are much more difficult to be achieved.

This time, the government has concentrated mainly on the state consumption within the stabilization stage. Expenditures for goods and services will nominally sink down by 20%, whereas expenditures for salaries in public sector should fall in some cases by 15%. Except from that many subsidies and investment projects are being reassessed. More than a half the consolidation will be performed on the expenditure side. On the income side the measures focus mainly on removing exceptions from tax levy system and on increasing indirect taxes. Some fees have increased as well and the recovery of state enterprises should bring more dividends to the budget. The government plans to fight against tax evasion as well.

The main goal within the area of structure reforms is to increase economic growth and to moderate negative effects of consolidation upon economic growth. Changes in the Labor Code, tax levy system, simplifying the set-up of a business and measures taken within the judiciary should improve the business environment. Although reform of higher education and bigger support of knowledge economy will not bring effects within short period of time, but from the long-term point of view they are crucial for the prosperity of Slovakia.

The government tries to achieve the sustainability of consolidation through several changes. E-auctions and higher transparency concerning state agreements should diminish ineffective economizing. Pension reform should improve sustainability of the first pillar and increase yields in the second pillar. For health care sector, transformation of hospitals into joint stock companies seems to be essential together with new drug policy and standardization of payments for the execution of related services. In order to enhance sustainability the government plans to change the budgetary framework in Slovakia, which will be the topic of next lectures.

The question whether consolidation plan will be successful in present times, is a question of time; however, the cornerstones of the strategy put hope in a good result.