Opinion of the CBR on the Finance Ministry’s proposal to end exceptional circumstances

  • 27. 8. 2021

Having assessed all the relevant factors, the CBR considers that the reasons for declaring exceptional circumstances in the past no longer apply and agrees with the Ministry’s proposal for their ending.

After the exceptional circumstances are ended, a binding correction plan should follow because of the significant deviation of the structural balance from a balanced budget rule and temporary non-application of the correction mechanism which was approved by the government on 15 January 2020. From this perspective, the fact that the government proposed a new stricter medium-term objective in the Stability Programme, taking into account the currently high risks associated with the long-term sustainability of public finances while setting a deadline by which the objective should be met (a structural surplus of 0.5% of GDP by 2028), is regarded positively.

However, the CBR considers the proposed consolidation path to be insufficiently ambitious in particular in the medium-term horizon, because the government’s targets until 2024 are worse than the public finance development estimated by the CBR when assuming no change in policies. The reason is that the government expects the development in public finances to be significantly worse in 2021 and intends to start reducing the structural deficit only as late as in 2023.

In CBR’s opinion, a gradual decline in the structural deficit could be started already in 2022. Despite the fact that, in general, international institutions (EC, IMF) recommend a slower start-up curve for the consolidation of public finances, Slovakia’s economy and public finances are in a specific position allowing the consolidation to start from 2022, provided that the third wave of the pandemic is not strong and, therefore, the available macroeconomic forecasts would be fulfilled. According to the most recent forecasts, Slovakia’s economy will start overheating already in 2022, while the EC suggests that the level of overheating to be seen in Slovakia will be the highest among the EU countries. The post-crisis recovery of the economy could significantly benefit from the resources received under the Next Generation EU recovery fund which, in Slovakia’s case, are almost triple the average level for the EU countries. The urgency of consolidation is underlined by high risks associated with the long-term sustainability of public finances, in which case Slovakia is the worst in the EU, according to the EC (the so-called S2 indicator).

Therefore, in the event where a more favourable public finance development is confirmed in 2021 and the recovery of Slovakia’s economy continues, the government should be prepared to reconsider its fiscal targets and achieve a balanced budget at an earlier date.