The Fiscal Council acquired a new modeling tool to improve the assessment of long-term sustainability of public finances

The Fiscal Council concluded a multi-year project with which we obtained a new model tool for assessing the long-term sustainability of public finances, with an emphasis on risks due to demographic changes. The project was financed by the European Commission within the Instrument of Technical Support to Member States (https://commission.europa.eu/funding-tenders/find-funding/eu-funding-programmes/technical-support-instrument/technical-support-instrument-tsi_sl ). The Danish DREAM Institute (https://dreamgroup.dk/), which has many years of experience in this field, was chosen to implement the model tool.

The project was officially completed with a workshop on 13 June 2024, where DREAM representatives presented a model to representatives of Slovenian institutions dealing with public finances (Ministry of Finance, Ministry of Labour, Family, Social Affairs and Equal Opportunities, IMAD, SORS, Bank of Slovenia, IER). Despite the official end of the project, DREAM representatives will continue to provide support to the Fiscal Council in managing the model in the future.

The new tool will improve the Fiscal Council’s ability to assess the long-term sustainability of public finances, particularly in the area of demographic change. The tool also allows simulation of the effects of different policy change scenarios.

Monthly Information, June 2024

According to preliminary data, the state budget, excluding the direct impact of intervention measures, recorded a surplus of EUR 210 million in the first five months of 2024, which was similar to the figure in the same period last year (EUR 237 million).

The growth of “core” revenue (excluding intervention measures) was higher on average in the first five months of 2024 (6.6%) than in the same period last year (0.3%). The growth of “core” expenditure was also higher, at 7.4% (6.4% in the same period last year).

The total volume of various intervention measures in the first five months of 2024 (EUR 240 million) was about half of that in the same period last year (EUR 459 million).

Report on the Fiscal Council’s operations in 2023

According to the Fiscal Rule Act, the Fiscal Council is obliged to submit a report on its activities in the previous year to the National Assembly of the Republic of Slovenia by the end of May each year. Under this law, adopted in June 2015, the Fiscal Council is an autonomous and independent state authority that prepares and makes publicly available assessments on the compliance of fiscal policy with fiscal rules.

With exceptional circumstances still in place until the end of the year, fiscal policy seemingly had more room for manoeuvre in 2023 and remained expansionary despite favourable macroeconomic trends. While the general government deficit was smaller than projected, this is more evidence of the weaknesses in fiscal planning that the Fiscal Council has consistently pointed out, than of austerity. In particular, fiscal planning is flawed in terms of including oversized investment plans, which exceed the absorption capacity of the administration and providers and which, in addition to inefficiencies, can lead to irrational decisions.

The relatively favourable macroeconomic context has not been sufficiently used to strengthen fiscal sustainability. The deficit is projected to be higher in 2024 than the outturn in 2023. Government debt increased in nominal terms last year and declined in relative terms, mainly due to inflation-driven growth in nominal economic activity. Moreover, key challenges to the sustainability of public finances were not addressed in the previous year either.

The last year of the agreed exceptional circumstances and the need to return to a functioning system of economic governance in the EU have run parallel to the process of adopting new fiscal rules. These are primarily aimed at ensuring medium- and long-term sustainability of public debt in a way that allows for individual adjustment paths by Member States. It is important that the EU and its Member States maintain their position as a reliable partner in financial markets through credible rules. The EU’s ability to enforce the new rules is the best basis for investor confidence and thus for unhindered financing across the EU. The new rules will also require legislative adaptation in Slovenia.

The Fiscal Council will continue to consistently pursue its mission to monitor and warn about the sustainability of public finances in the medium and longer term. Here the main tool remains the power of argumentation. In particular, the public presence of the Fiscal Council, facilitated by the media, ensures that the general public can follow independent views on fiscal policy. In this way, the Fiscal Council creates indirect pressure on democratically elected decision-makers, while at the same time we also strive to support these decision-makers to take fiscally sustainable decisions through our assessments.

Monthly Information, May 2024

According to preliminary data, the state budget, excluding the direct impact of intervention measures, recorded a surplus of EUR 162 million in the first four months of 2024, which was lower than in the same period last year (EUR 292 million).

The growth of “core” revenue (excluding intervention measures) was slightly higher on average in the first four months of 2024 (5.3%) than in the same period last year (3.7%). The growth of “core” expenditure (8.8%) more than doubled in the first four months of 2024 relative to the same period last year (4.3%).

The total volume of various intervention measures in the first four months of 2024 (EUR 191 million) was half of that in the same period last year (EUR 384 million). 

Assessment by the Fiscal Council: Assessment of budgetary documents for the 2024–2027 period

The general government deficit, excluding the intervention measures, is expected to remain at a similar level until 2027, after an increase to around 2.0% of GDP this year, despite the projected stable and relatively favourable macroeconomic conditions mirrored in general government revenue. The projected deterioration of the fiscal position this year is mainly due to the projections of investment, which, in the Fiscal Council’s view, is again overestimated. The persistence of the deficit over the next three years is primarily expected to originate from the high level of current spending resulting from discretionary measures taken in previous years. This year, fiscal policy is inappropriately set with a markedly expansionary stance which is also not in line with last year’s recommendation of the EU Council. In the face of a number of risks, assessing the fiscal policy stance in the coming three years on the basis of the documents presented is uncertain. The Fiscal Council considers that the projections do not follow the currently estimated anticipated path within the new EU governance framework. The EU Council will make a final decision on this path in autumn. Moreover, the analysis suggests that debt is unsustainable in the long term. The transitional nature of the budget documents, as cited by the Government, does not justify their shortcomings. The documents represent a missed opportunity to put in place an appropriate medium-term budgetary framework as the new fiscal rules are about to enter into force. As a consequence, the preparation of the first medium-term fiscal and structural plan under the new fiscal rules framework this autumn remains a major challenge.

Monthly Information, April 2024

The state budget was in deficit in the first three months of the year (EUR 379 million), according to preliminary data, excluding the direct effect of intervention measures amounting to EUR 278 million. In both comparisons, the deficit was higher than in the same period last year.

Total revenue was 4.0% higher year-on-year on average in the first three months of the year, while total expenditure was 5.3% higher. The growth in “core” expenditure (8.4%) more than doubled in the first three months of this year compared to the same period last year. This was mainly due to the high growth in labour costs due to the early payment of holiday allowance and to the increase in the transfer to the Pension and Disability Insurance Institute of Slovenia (ZPIZ) in the context of the high regular adjustment of pensions.

The total volume of the various intervention measures in the first three months of the year (EUR 112 million) was less than half of that in the same period last year.

The general government deficit was 2.5% of GDP last year, 1.9 percentage points of GDP lower than the government’s projections in October. The lower-than-projected deficit was mainly due to an expected lower realisation of investment and lower capital transfers. This was mainly due to a lower realisation of flood recovery measures than planned in the autumn budget documents.