{"id":19280,"date":"2023-07-20T14:43:33","date_gmt":"2023-07-20T12:43:33","guid":{"rendered":"https:\/\/www.rrz.sk\/?p=19280"},"modified":"2023-07-22T23:46:42","modified_gmt":"2023-07-22T21:46:42","slug":"report-on-the-long-term-sustainability-of-public-finances-for-2022-april-2023","status":"publish","type":"post","link":"https:\/\/www.rrz.sk\/en\/report-on-the-long-term-sustainability-of-public-finances-for-2022-april-2023\/","title":{"rendered":"Report on the Long-term Sustainability of Public Finances 2022 (April 2023)"},"content":{"rendered":"

Key conclusions<\/strong><\/p>\n

Within the upcoming decades, Slovakia will be facing higher costs caused by demographic developments, exposing the public finances to an ever-increasing pressure. One of the main tasks of the Council for Budget Responsibility (\u201cCBR\u201d) laid down in the Fiscal Responsibility Act[1]<\/a><\/sup> is to publish the Report on the Long-term Sustainability of Public Finances. The report evaluates whether public policies, in conjunction with the assumed demographic and macroeconomic development, have been set up in a sustainable manner from the perspective of public finances.<\/p>\n

Long-term sustainability of public finances for 2022 at high risk<\/span><\/strong><\/p>\n

The baseline scenario presented in this report is based on inputs at the end of 2022<\/strong>, captures the consequences of the security and energy crisis<\/strong>[2]<\/a><\/sup> on the long-term sustainability of public finances, and covers the impacts of measures adopted in 2022. The CBR concludes that the long-term sustainability of public finances has again not been achieved in 2022 <\/strong>[3]<\/a><\/sup>. The long-term sustainability indicator reached 5.5% of GDP <\/strong>(6.6 bn euros), sending the public finances to the high-risk zone <\/strong>[4]<\/a><\/sup>.<\/strong><\/p>\n

Development of the long-term sustainability indicator (% of GDP)<\/span><\/strong><\/p>\n

\"Development_of_the_long_term_sustainability_indicator\"<\/p>\n

Note: BEK \u2013 direct impact of the security and energy crisis
\nNet of the impact of the mandatory enrolment in the second
\npension system pillar, the indicator would be at 4.7% of GDP in 2022.<\/span><\/em><\/h5>\n
Source: CBR<\/span><\/em><\/h5>\n

Medium-term development in public finances and pensions among the main causes of problems with the long-term sustainability<\/strong><\/span><\/p>\n

The public finances were in a much better than expected shape in 2022, with the level of structural balance[5]<\/a><\/sup> at which they would be sustainable over the next 50 years. However, the result was mainly driven by a high rate of inflation which led to a sharp rise in general government revenues but its effect on expenditures will fully be felt a year later. The 2022 result will have no perceptible impact on the long-term sustainability, nor does it indicate a further trend in the public finance development.<\/p>\n

Long-term sustainability indicator in 2022 (% of GDP)<\/span><\/strong><\/p>\n

\"Long-term_sustainability_indicator_in_2022\"<\/p>\n

Note: * impact of the initial budgetary position, i.e., the structural primary balance and gross debt in 2022;
\nMedium-term outlook \u2013 development in all GG balance items between 2022 and 2026
\n<\/span><\/em><\/h5>\n
Source: CBR<\/span><\/em><\/h5>\n

By contrast, due to the delayed growth in expenditures and measures adopted in 2022<\/strong>, the CBR anticipates a considerably less favourable medium-term development in public finances, contributing 2.6% of GDP to the increase in the sustainability indicator<\/strong>.<\/p>\n

Beyond the medium term, in the period between 2026 and 2027, the development in public finances contributes additional 2.8% of GDP to the worsening of the long-term sustainability<\/strong>, mainly due to higher expenditures sensitive to population ageing. The largest negative impact, at 1.6% of GDP, comes from the growth in the pension system deficit.<\/strong> The sustainability will worsen by additional 1.2% of GDP due to higher health and long-term care expenditures.<\/p>\n

Security and energy crisis augmented by the war in Ukraine had the largest impact on the decline in sustainability<\/span><\/strong><\/p>\n

\u00a0<\/em>Compared o 2021, the sustainability of public finances <\/strong>worsened by 1.1% of GDP in 2022, or 0.4% of GDP if the impact of the reform in the second pension system pillar<\/strong> [6]<\/a><\/sup> is omitted. The security and energy crisis had the largest negative effect of 0.8% of GDP<\/strong>[7]<\/a><\/sup>. <\/strong>The government\u2019s economic policy had a neutral effect on the sustainability; <\/strong>however, there is a significant time mismatch between the immediate expenditures and gradually accruing future savings from the reform of the first pension system pillar. Assumed forced cuts in local government expenditures improve the sustainability by 0.5% of GDP. Macroeconomic developments not affected by the war in Ukraine had a slightly negative impact.<\/strong><\/p>\n

Change in the long-term sustainability of public finances in 2022<\/strong><\/span><\/p>\n

\"Change_in_the_long-term_sustainability_of_public_finance_in_2022\"<\/p>\n

Note: (+) means deterioration and (-) improvement in the long-term sustainabil<\/em><\/span>ity indicator
\n<\/em>*<\/em> The reform of the 2nd<\/sup> pension system pillar (due to the 50-year horizon) worsens the sustainability, even though its negative impact declines considerably over the horizon. The European Commission does not take into account the impact of the 2nd<\/sup> pillar (on the revenue side) when presenting sustainability indicators.
\n<\/em>**Including, for example, possible negative impacts of Russia\u2019s energy policy even prior to the outbreak of the war.<\/em><\/span><\/h5>\n
Source: CBR<\/span><\/em><\/h5>\n

The negative impact of the security and energy crisis (of 0.8 p.p.) <\/strong>shows in the less favourable macroeconomic development immediately after the outbreak of the war in Ukraine, combined with a hike in energy prices for general government entities and an increase in defence expenditures to 2% of GDP. The CBR considers a portion of the increase in energy costs and defence expenditures to have a permanent effect.<\/p>\n

Contributions to the change in the long-term sustainability indicator between 2021 and 2022 (% of GDP)<\/span><\/strong><\/p>\n

\"Contributions_to_the_change_in_the_long_term_sustainability_indicator_between_2021_2022(%_of_GDP)\"<\/p>\n

* estimated direct impact of the war in Ukraine on Slovakia\u2019s macroeconomic development
\n<\/em><\/span>** adjusted for the impact of green energy, defence expenditures (2% of GDP) and a four-year average of investments
\n<\/em><\/span>Note: BEK \u2013 security and energy crisis, including the impact of the war in Ukraine\u00a0 \u00a0 <\/em><\/span><\/h5>\n
Source<\/em>: CBR<\/em><\/span><\/h5>\n

In 2022,<\/strong> a number of measures<\/strong> (outside local government) were approved, overall contributing to the deterioration of the long-term sustainability indicator<\/strong> (by 0.3% of GDP without the effect of changes in the second pension system pillar), while their impacts were compensated for by improved fiscal performance in 2022<\/strong> (contributing 0.4% of GDP)[8]<\/a><\/sup> and the assumed response of local governments to a worse development in their balance<\/strong> (contributing 0.5% of GDP)[9]<\/a><\/sup>:\u00a0<\/strong><\/p>\n