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ECONOMIC ISSUES

ECONOMIC ISSUES. Maja Bednaš IMAD. Ljubljana, 19th June 2012. FISCAL DEVELOPMENT AND POLICY. General government deficit in the majority of the EU countries lower in 2011. Source: Eurostat. 10-year bond yield spreads, relative to German bonds, in p.p. Source: Bloomberg.

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ECONOMIC ISSUES

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  1. ECONOMIC ISSUES Maja Bednaš IMAD Ljubljana, 19th June 2012 FISCAL DEVELOPMENT AND POLICY

  2. General government deficit in the majority of the EU countries lower in 2011 Source: Eurostat.

  3. 10-year bond yield spreads, relative to German bonds, in p.p. Source: Bloomberg

  4. No consolidation in Slovenia until 2012 Vir: SORS, Eurostat, Stability Programme 2012, Spring forecast 2012 EC

  5. Expenditure growth in 2011 Source: SORS

  6. Structural deficit has already been high in the pre-crisis period Source: SORS, calc. IMAD.

  7. General government debt increase in Slovenia the sixth largest since 2008 Source: Eurostat.

  8. Consolidation in 2012 - substantial fiscal effort supported by agreed measures defined by the law (credibility) Source: Ministry of Finance.

  9. Consolidation in Stability programmes 2011 and 2012 Source: Stability Programme 2011, Stability Programme 2012.

  10. Consolidation measures in SP 2012 • Three sets of measures • Rationalising public sector operations • Limiting investments, subsidies and programmes • Adjusting labour market and social security policies Source: Stability Programme 2012

  11. Interest expenditure – crowding out Source: Stability Programme 2012.

  12. Age related expenditure Source: Ageing Report 2012, EC 2012

  13. Challenges to consolidation • Positiveside • adoptedandagreedmeasures • nominal decline in expenditure in 2012 and 2013 • Risks • consolidationpartlyrelies on temporary (intervention) measures • (all) measures are not clearly defined, especiallyforthe period beyond 2013 • growing expenditure on interest is crowding out more flexible development expenditure

  14. The scope for increasing the tax burden is limited • To speed up consolidation, it makes sense to raise certain indirect taxes and broaden the tax base: • higher taxes on labour and capital would have an adverse impact on economic activity and competitiveness - tax policy in these fields must focus on improving the tax capacity by preserving the current tax rates and broadening the tax base • the scope for raising consumption taxes is also limited. Possibilities: to raise excise duties on products with relatively low elasticity of demand (alcohol, tobbaco), property and environmental taxes • increaseofVAT taxrateis estimatedto have relatively smaller dverse effects on economic growth, BUT it is crucial to avoid a spillover of higher tax rates into the growth of wages and transfers through adjustment to inflation

  15. Further sistemic changes are needed for sustainable consolidation • Substantial fiscal effort will be needed to realise the planned consolidation, including further systemic changes • creation of a system that will allow for greater flexibility in wages and hiring • consistent implementation of measures to improve the efficiency of the public sector • improving the efficiency and effectiveness of development expenditure as indicated in SP 2012 - positive impact on competitiveness • maintaining the long-term sustainability of the public finances: pension, health care and long-term care reforms

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