A Lesson in Accounting

It feels a bit like a crash course in economics, one that all of Slovakia seems to be attending. The curriculum consists of only one subject: how can the government reduce an unhealthy level of indebtedness? How much should it cut itself and how much should it squeeze out of its citizens? For the past four years Robert Fico’s left-wing government did not bother the Slovaks with news about the state’’s indebtedness and now they have suddenly woken up to the news that the country is in a big financial mess.

However, the problem is that, unlike in the neighbouring Czech Republic, where the winners of the general election vowed to cut the deficit, Iveta Radičová’’s Slovak government was elected for reasons not connected to the economy. Their victory resulted from a protest vote against Fico’’s government, its corruption and aggressiveness. Politicians who are part of the new ruling coalition never said that austerity measures might be necessary after the election and their room for manoeuvre is now restricted by this pre-election strategy. On the other hand, as a result of this strategy politicians are now obliged to explain their intentions in great detail in what sometimes resembles a nationwide course in economics. And as an unintended side-effect the trainees sometimes discover that there are many issues on which their teachers are far from clear.

The current figures are clear: the public finance deficit, which according to Fico’’s government was supposed to amount to 5.5%, will reach 7.8% by the end of this year and there is nothing the current government can do about it. It has pledged to reduce next year’’s deficit to 4.9%, which means they have to find 1.7 billion euros somewhere – roughly the same goal as that proclaimed by the new Czech government of Petr Nečas.

Originally the Slovak government intended to shoulder two-thirds of this burden, collecting the rest from the citizens (this is the model recommended by the OECD). Later, however, it reduced its own share, arriving at a final ratio of 900 million euro of government cuts as against 800 million to be collected from the population. The ideas for slimming down government are still rather unclear; for example there is talk of cuts of 10% in the ministries, but schools have already been promised they would be exempted from the cuts.

The government has a much clearer idea of how to get the 800 million euros out of its citizens.  The process of reaching a coalition agreement was chaotic and the tactical manoeuvring revealed not just the internal workings of Slovak politics but also the simple accountancy nature of the whole problem: actually it all boils down to answering the question of whether the government will tax people’s earnings or their spending.

Finance Minister Ivan Mikloš and Social Affairs Minister Jozef Mihál took the first steps over the summer holidays, announcing various tax increases (e.g. abolition of a number of exemptions and tax increases for the self-employed). Although Prime Minister Iveta Radičová was at the seaside at the time, she must have noted the disapproving reaction from the media, professional associations and analysts. Slovakia is no longer the same as it was seven years ago, when sweeping reforms introduced by [Radičová’’s party colleague] Dzurinda’s government went almost unnoticed. These days people, including journalists, have a much better understanding of the relation between their wallet and the government and they are much more critical.

That is why after the summer vacation Radičová instructed her ministers to come up with a better plan, and what emerged from prolonged coalition talks looks like something proposed by a completely different government. Instead of introducing changes in taxation the government plans are aimed at the consumer.

The new plan puts an end to the flat income tax and VAT rate of 19% [introduced by Ivan Mikloš under Dzurinda’’s previous, centre-right government], a round figure, which former Prime Minister Fico had already chipped away at by lowering VAT on medications and books to 10%. This exemption has been retained but in January VAT on all other products will go up to 20%. The government has called this additional 1 percent Fico’’s tax, claiming it was its predecessor’’s prodigal policies that have forced it to introduce the increase and promising to revert to the original 19% as soon as the budget deficit is reduced to 3%. Nevertheless, this rather symbolic increase, which is expected to raise no more than 200 million euros, won’’t be enough to reduce the deficit.

The VAT increases also affect beer and cigarettes. That would be fine except that they don’’t cover wine – supposedly to protect the interests of Slovak winemakers. Naturally, Slovak breweries have immediately voiced their concern, claiming the price of beer would go up by more than a euro and that would spell the death of small companies. The government hopes to raise further income from car owners. It said it would raise the VAT on diesel and petrol and abolish the bio-fuel exemption for tractors, leading to protests from the Minister of Agriculture. The cost of motorway toll stickers is also said to be going up, as is the cost of electricity (albeit only slightly), not just because of VAT but also due to the higher costs of nuclear fuel storage.

The list of examples goes on (it includes, among other things, the abolition of certain tax benefits and the introduction of levies on additional income) but basically they all concern what Czech Prime Minister Petr Nečas calls blunt accountancy measures.  Serious reforms, such as simplifying the tax system, will have to be set aside for later. However, there is hope on the horizon: the Ministry of Finance expects a 4 percent increase in GDP by the end of this year, one of the highest increases in the EU, and a further 3.3 percent next year; it is expected to slow down only due to the inevitable cuts and VAT increases.

Although the economy is the main subject of the government’’s nationwide course in accountancy, there are other challenges to a country’’s a healthy development than just public finance indebtedness. Slovakia is losing its competitive edge due to corruption and the systemic failure of the justice system. If Radičová’’s government resolves, or at least begins to tackle, these ills, dealing with the economy should be quite straightforward.

Translation: Julia Sherwood

This article originaly apperaed in the Czech weekly Respekt