The developments last week proved again that Slovak politics are extremely complicated, with the margins between opposition and coalition allies being quite vague and the parties generally failing to deliver on their promises. After leaving the government in September and sticking to its vow to remain a constructive opposition ready to support the government of PM Eduard Heger, former junior ruling party SaS initiated no-confidence vote in the government. The vote is likely to be successful as opposition Smer-SD and Voice-SD are to back it, while the ruling coalition of OLaNO, We Are Family and For the People has only 70 MPs in the 150-seat parliament. If the no-confidence vote, probably to be held on Dec 13, is successful, the adoption of the draft budget for 2023 by the parliament on time (the vote is also scheduled for Dec 13, but SaS, Smer-SD and Voice-SD said they would not back it), i.e. by the end of the year, may be threatened, meaning the country would probably need to operate under provisional budget with fixed spending in the first few months of 2023, i.e. during the peak of the energy crisis, at best. Therefore, the approved by the government draft budget for 2023 targeting a general government deficit of 6.44% of GDP in 2023, even if being unrealistic and strongly inflated, would have be the lesser evil as it earmarks huge funds for supporting firms and households during the energy crisis and against the strong increases of energy prices expected in 2023, meaning that failure of the parliament to pass the budget amid the looming political crisis after the government's possible fall would leave households and small firms unguarded, in despair.
Former junior ruling party SaS, now in opposition, which left the government of PM Eduard Heger (OLaNO) in September over a row with OLaNO chairperson and finance minister Igor Matovic, and which promised to be a constructive opposition and to support the government in the parliament - which it did on several occasions and also on the no-confidence motion in interior minister Roman Mikulec (OLaNO) last week, surprisingly initiated a motion for the government ouster. The motion was supported by all SaS lawmakers and also by independent MPs of the non-parliamentary party Voice-SD of ex-PM Peter Pellegrini. We think that the last drop that changed SaS's attitude towards Heger's government diametrically was the fact that the Prosecutor General Maros Zilinka, who was elected during the incumbent government's term, dropped the charges against Smer-SD chairperson Robert Fico and other three people in the Twilight corruption case and cancelled the investigation as such over alleged violations of the basic and underlying principles of criminal proceedings. SaS claimed that the government, after it stepped down from its pledge to fight corruption, no longer had the 'raison d'etre'. Smer-SD is also to support the no-confidence vote in the government in the parliament, which is likely to be held on Dec 13, at the day of the vote on the 2023 state budget. As the ruling coalition has only 70 MPs in the 150-seat parliament and the government has been strongly lambasted by all opposition parties and also President Zuzana Caputova, we see the odds for the cabinet to fall quite high, meaning that the draft budget for next year is quite unlikely to be adopted on time, before the end of the year, which will threaten the aid to people and firms this winter.
If the government falls, a new parliamentary majority may be formed to set up a government - however, we do not see such an option plausible in the current composition of the parliament and it is not clear which parties could eventually form it. Another option is President Caputova to appoint a caretaker government or snap polls to be held. In any case, the passage of the draft budget by the parliament on time will be threatened.
2023 budget - generous spending, inflated target, no reforms
The draft budget for 2023 targets a general government deficit of 6.44% of GDP in 2023, which represents a marked increase from 4.97% of GDP fiscal gap estimated for this year, which is up from 4.94% originally planned due to higher tax revenues reflecting the high inflation, but also high expenditures related to the COVID pandemic, the influx of refugees from Ukraine, among others. It seems that the government has planned quite generous spending and no savings at all, respectively, quite high fiscal gap, in order to be able to say it manages public finances well in case that the fiscal gap eventually appears lower than planned as expected by the budget responsibility council RRZ and the NBS - some 5.5% and 3.5%, respectively.
The fiscal gap net of temporary effects - i.e. the structural deficit, is expected to reach 3.1% of GDP, which is close to the current year's estimate of 2.9%. In the following two years, the fiscal gap is targeted to gradually decline to 3.44% of GDP in 2024 and 2.74% in 2025. Total general government revenues in 2023 are projected to reach EUR 50.579bn, up by 12.6%, while expenditures should reach EUR 58.451bn (up by 16.1%), translating to a deficit of EUR 7.87bn, widening from 45.8%. According to the draft, state-budget revenues will amount to EUR 26.699bn (up by 24.3%) and expenditures to EUR 35.041bn (up by 30%), leaving a deficit of EUR 8.34bn (up by 52.4%).
The budget contains an extraordinary volume of expenses for the historical increase in teachers' salaries (by up to 23.2% during the year), other civil servants (17.7%), the historical increase in pensions (valuation of 11.8%), the family package for families with children (transfers to families exceeding EUR 1.1bn), while also reflecting on a significant increase in the salaries of health workers, among others. As doctors' salaries were raised more than originally planned after doctors threatened with effective industrial action and the operation of the healthcare system was threatened, the wage bill is to be even higher or spending will have to be reduced elsewhere to avoid overshooting the fiscal target.
The government also approved a redrafted amendment to the state budget law for 2022, with both revenues and expenditures to be raised by EUR 1.5bn - recall that in September it did not receive support in the parliament as opposition politicians, including the former junior ruling party SaS, objected to the absence of a detailed breakdown of increased spending. Of the total additional expenditures of EUR 1.5bn, the labour ministry shall receive EUR 207.6mn for the payment of fourteenth pensions and EUR 190mn for compensation to be paid to vulnerable groups of the population. The economy ministry is to get EUR 900mn for assistance to companies based on a state aid scheme, and EUR 200mn euros in the General Treasury Chapter shall cover compensation that will be provided to public administration.
Energy crisis-related compensatory spending planned at EUR 3.4bn
In light of the energy crisis, the 2023 draft budget foresees spending on compensatory measures totalling EUR 3.4bn. Of this amount, the economy ministry will have at its disposal EUR 1.4bn, the labour ministry will obtain EUR 900mn and the General Treasury Administration will get EUR 940mn. Bonuses to civil servants, public servants, and workers with an employment relationship should not be paid until late April 2023 except for claimable remuneration arising from the law or collective agreement, which, if need be, will create additional disposable capacity of some EUR 100mn. Thus, the government has allocated a total of EUR 5bn or 5% of GDP to mitigate the effects of soaring energy prices, out of which EUR 1.5bn is to be used this year (in line with the 2022 budget amendment) and EUR 3.5bn in 2023, with the highest share of money to be directed to the business sector that shall receive EUR 1.5bn, households - EUR 1.2bn, and EUR 700mn shall go to government entities.
In terms of specific measures, the government decided to cap the power component of energy prices paid by small businesses from Jan 1 to Mar 31, 2023 at EUR 199 per MWh for electricity and EUR 99 per MWh for gas, with the state to reimburse 80% of expenditures above this level while the rest to be paid by companies at market prices. The measure should remain in force until end-March 2023, when it will be re-evaluated in view of the market situation and eventually decided whether to be continued or modified. The estimated costs of this measure in Q1 2023 are some EUR 500mn. The same price caps were approved for local governments and they will also be applied by end-March; however, no estimates of the costs of these scheme were presented.
The government also approved financial aid worth EUR 40mn to help the most energy-intensive companies this year, with the aid possibly to be extended also in 2023 - the aid is to cover some 120 businesses that directly employ around 50,000 people. The government also approved amendments to the law on provision of subsidies, under which this year EUR 600mn should be spent - possible aid to businesses in 2023-24 would be secured by the economy ministry as the funds earmarked for it has been increased by EUR 1.4bn for 2023.
Last but not least, the prices of electricity for households will be frozen next year (thanks to the memorandum with SE to provide households with a cumulative amount of electricity of 6.15TWh next year at a price of EUR 61.2077 per MWh of baseload electricity), while gas prices will be increased by 15% - according to the estimates, had the state not intervened and households had been obliged to pay electricity prices set by the regulatory authority, they would have had to pay 380% more than in 2022, and 225% extra for gas. Thus, in total, households alone would have had to pay an additional EUR 6bn more or EUR 3,000 per household on average when compared to 2022.
In order to at least partially finance the energy support measures, the government approved tax on extraordinary profits of energy firms at 90%, which will be applied to energy producers with facilities with an installed capacity exceeding 0.9MW along with energy suppliers - the levy should cover the period from Dec 1, 2022 to Dec 31, 2024. Small energy sources up to 0.9MW and energy produced by pumped water power plants or from biomethane will be exempt from the levy. Under the proposal, the tax will apply to the difference between the selling price of 1MWh of electricity and an amount to be set by the government, which will range from EUR 50 to EUR 250, with some exceptions. No estimate of the expected revenues has been provided though. The government also decided to introduce a temporary 70% solidarity tax on companies doing business in the oil, natural gas, coal, and refining industries (meaning that Refinery Slovnaft, part of MOL, should be one of the biggest contributors), which is expected to bring EUR 524mn to state coffers that should be used to counter expensive energy.
Fiscal watchdog, central bank say planned budget realistic but inflated, slam lack of spending limits
The budget responsibility council RRZ assesses the draft budget for 2023 as realistic, but sees it lower by up to 0.9% of GDP, or 0.5% of GDP lower even without one-off measures. Still, the Council, similarly to the EC, criticises that the draft budget was not drawn up in accordance with the spending limits, although the law already assumes this, and recalls that this is also commitment taken in the recovery and resilience plan. The government has also not declared how it will cope with the debt brake sanctions, RRZ pointed out. The NBS also expects the budget deficit next year to be lower at some 4.3% of GDP, also supported by the inflow of large EU funds, and notes that the credibility of the set targets is also weakened by the fact that the budget does not include spending limits, which are assumed by the newly adopted amendment budget rules and to which the government committed in the Recovery and Resilience Plan.
The budget plan for 2023 contains no fiscal consolidation or savings measures, which is no surprising in view of the heightened uncertainty and the energy crisis, but also does not employ the expenditure ceilings, meaning, that the fiscal targets can easily be overrun if the macroeconomic developments appear less upbeat than currently expected. Overall, we find the budget plan for next year somewhat implausible as it envisages robust tax revenues growth, which is hardly to be achieved given the expected contraction of household consumption. The expected robust increase in grants also does not bode well with the country's poor track record of drawing EU funds. Moreover, a negative risk to the 2023 budget plan execution is that the costs of some of the envisaged support measures are not specified, while the amount of the expected revenues from some of the additional temporary taxes and levies is currently not known. Further negative risk is that the planned EUR 3.5bn as energy crisis-related compensatory spending is not sufficient to finance the already announced support measures, while the amount above the planned budget reserve for energy support measures is unlikely to be matched by the proceeds from the newly introduced taxes and special levies.
Overall, in view of the energy crisis and the rapidly growing energy and food prices, the government approving quite inflated budget, one of the most generous among EU members states, is not surprising. However, the approved support measures are rather too general and not targeting the most vulnerable groups of the population, also not encouraging firms and households to be more energy efficient and to make savings. This means that in fact the fiscal gap target could have been lower - we believe that the government intentionally approved a higher gap in order to be able to say in the end that it managed the public finances better than expected. Moreover, the costs of some of the measures are not known, as are the expected proceeds from some of the additional temporary taxes and levies, meaning that the budget targets are unlikely to be met. Also, the government relies on quite robust tax revenue growth, which seems unrealistic in view of the expected contraction of household consumption next year and also on quite strong proceeds from EU funds, which seems unrealistic in view of the country's poor track-record in EU funds drawing. Last but not least, the fact that the government has not employed the approved expenditure limits in the budget plan, which are part of the country's recovery and resilience plan, may additionally jeopardise the EU funds inflow.