Slovak state budget gap widens as economy brakes

Slovakia's central state budget gap swelled to 347.4 million euros ($462 million) in the first four months of the year, data showed on Monday, confirming a deteriorating fiscal position as economic slowdown curbs state revenues. Slovakia, which adopted the euro in January, had a budget surplus of 257.5 million euro in the January-April period of 2008.
Analysts expect the budget deficit to exceed the government's target this year. Total tax revenues were 2.630 billion euros in the first four months, or 26.6 percent of the full-year projection, down from 3.126 billion euros in the same period last year.
"Trends in tax collection are not improving, the overall shortfall in tax revenues is still significant," said Tatra Banka analyst Juraj Valachy. "The main shortfall is in the collection of value added tax, which is caused by weaker economic activity." The central budget is the biggest part of the broad public finances, which is the key yardstick of fiscal performance for European Union members.
The government has abandoned its original target to keep the public finance deficit at 2.1 percent of gross domestic product, and it now sees the fiscal gap at 3 percent of GDP, which is the limit set in the EU's Stability and Growth Pact. The deficit estimate is based on an assumption of 2.4 percent economic growth, which the central bank and analysts said was unrealistic.
The finance ministry itself has said Slovakia might see economic contraction this year. The central bank forecasts the Slovak economy shrinking by 2.4 percent this year as demand for its exports, mainly cars and electronics goods, fades in the key western markets. Valachy expected a public finance deficit at around 4.5 percent of GDP, while UniCredit Bank in Slovakia forecast the fiscal deficit at 4.9 percent of GDP this year.
"The main pressure on deficit widening is coming from lower collection of taxes and payroll taxes, as well as bigger spending demands related to rising unemployment, said Jan Toth, UniCredit Bank chief economist in Bratislava. A further risk to budget projections is in the government expectation of people returning from the private pension system to the state-run pay-as-you-go scheme, Toth said.
The government expected some 150,000 people to cancel their private pension accounts, projecting budget revenue from such an outflow at some 330 million euros. But only some 11,000 people have left the private pension system as at the end of March. The window for leaving the private scheme is open until the end of June.