Zvýšenie sadzby DPH
zvýši mieru daňového zaťaženia na Slovensku. K tomuto kroku malo dôjsť až
po vyčerpaní všetkých možností úspor vo verejných výdavkoch uviedol pre
týždenník The Slovak Spectator dňa 10.9.2010 Radovan Ďurana.
BUSINESSES and
citizens have been anxiously waiting for the government of Iveta Radičová to
completely reveal the key ingredients of its new nutritional regime to pump up
the state treasury and its diet to curb state spending, both to be offered up
in an attempt to bring Slovakia’s public finances into better shape. Though not
every ingredient in the long-heralded consolidation recipe has been revealed,
the overall contours designed to save €1.7 billion through a combination of
expenditure cuts and revenue enhancements are now becoming visible.
After a laborious
multi-hour debate, Slovakia’s four ruling parties agreed to hike the country’s
VAT rate from 19 percent to 20 percent and keep it at that level until the
country’s budget deficit falls under 3 percent of GDP. While a lower VAT rate
for books and some health-care products will be continued, the reduced 6
percent VAT rate for informal, yard sales of agricultural products will be
jumped up to the standard 20 percent rate. Excise taxes on tobacco and beer are
proposed to climb as well, just to name a few of the most significant
ingredients of the government’s recipe to raise more revenue.
The Finance Ministry
has estimated that the planned changes to tax and non-tax revenue streams
should bring an additional €598 million into the state coffers in 2011, which
is 0.9 percent of GDP. However, the ministry has also said that these numbers
might still change as final decisions on payroll contributions for social and
health insurance are made, which the ministry said should be known in the next
few days, the SITA newswire wrote.
Even though the
government has trumpeted a number of changes, the VAT hike is the one proposal
that is sure to channel substantial extra revenues, estimated at €185.5
million, to the state treasury.
Earlier this month
the government said increasing revenue streams should make up no more than €800
million of its consolidation package and that cuts in spending should reach at
least €900 million next year, SITA reported. Radičová said the spending cuts
will be made in various areas, including a much-discussed 10-percent reduction
in wages in public administration, tighter public procurement rules, and the
postponement of regional projects which do not have a top priority, but few
specific details have been released.
Will the hike hurt?
While tax hikes,
even minor ones, often hit a raw nerve with the business community and with the
tax-paying public, the reactions thus far have been muted and several economic
analysts are suggesting that increased VAT rate will not dramatically push up
prices for consumers. The largest opposition party, Smer, isn’t sharing that
opinion and has termed the proposed changes the “worst possible rightist
solution”.
Radovan Ďurana of the INESS economic think tank told The
Slovak Spectator that hiking the VAT rate will increase the tax burden on the
population. Ďurana added that it is not important to differentiate who will
directly pay for the tax hike, whether it is consumers doing so through higher
prices or retailers and producers who do so by lower profit margins, since both
groups are parts of the Slovak economy.
Ďurana insists that the state will be taking €180 million
or more from the citizens and businesses in Slovakia, depending on the growth
of prices. But he also added that the higher tax rate can help reduce the state
budget deficit which may exceed €4.6 billion this year.
Vladimír Vaňo, chief
analyst with Volksbank, told The Slovak Spectator that the government-approved
VAT hike is as quite small and less than the original proposal to increase VAT
to 22 percent.
Radičová stated that
the VAT increase would not push up prices in Slovakia.
“Experience shows
that a 1-percentage-point hike in VAT will not be reflected in prices; it is
only increasing revenues to the state budget,” Radičová said, as quoted by Sme.
The increase in VAT
rate was quickly dubbed as “Fico’s tax” by the ruling coalition parties while
Fico sent the criticism straight back by stating that by the ruling coalition
parties are violating their pre-election promises since they had pledged not to
raise taxes. He also dismissed the argument that a 1-percentage-point VAT
increase will not be reflected in prices.
“Mainly people who
have below-average incomes will feel the price hike on their own skins,” Fico
said, as quoted by SITA.
Originally, Finance
Minister Ivan Mikloš and Labour Minister Jozef Mihál had pushed a proposal to
increase state revenues by modifying the country’s income tax and payroll tax
system. But this plan was put on hold after Radičová declared that compulsory
social and health insurance taxes will not be increased, at least for now.
However, some of
what Mikloš and Mihál called “unsubstantiated exemptions and other
deformations” in the country’s tax system will likely be modified.
The tax exemption
currently enjoyed by Slovaks who participate in special-purpose savings plans,
who purchase life insurance, and those who make additional personal
contributions for pension savings are expected to be scrapped.
An increase in the
rate of VAT had been strongly opposed by the Freedom and Solidarity (SaS)
party.
“We look at it as a
compromise,” SaS leader Richard Sulík said as quoted by Sme. “We have
unambiguously been against hiking VAT.”
He added, however,
that his party is taking into consideration the high public finance deficit and
this is why his party nodded to the increase. Sulík said he does not look at it
as breaking promises given to voters during the election campaign because it is
only a temporary decision.
Dissecting the
impact of higher VAT
Vaňo noted that the
VAT increase is envisioned as only one of several measures towards fiscal
consolidation.
“Given the
flexibility, predictable and immediate fiscal impact of the VAT hike, one can
say that only very mediocre use of this tool has been made,” Vaňo told The
Slovak Spectator. “Recently many countries in the region hiked their VAT more
significantly.”
In comparison to the
recent hike of VAT in Romania from 19 percent up to 24 percent, Vaňo said that
Slovaks are enjoying a quite lenient approach to fiscal consolidation in terms
of revenue measures.
“This on the other
hand suggests that expenditure cuts will need to be commensurately more
stringent – an assumption which one might call a courageous one, given the
early evidence of how difficult four-party negotiations have proven to be so
far,” Vaňo said. “Moreover, even if approved, the fiscal effect of expenditure
restraint will not be that fast, given the need to adopt new legislation for
many of the so-called mandatory expenditures driven by existing laws.”
Nevertheless, these
analysts do not predict any dramatic impact on consumer prices from the VAT
increase.
“Given the minimal
change, but more importantly due to ongoing hesitant consumer demand and
continued fierce competition in the retail market, which faced a double-digit
real sales drop in 2009, one can assume that the direct impact of such a small
VAT hike on consumer prices will be minimal, if any,” Vaňo said.
To soften the
reaction to the measure, the government said that higher VAT level is only
temporary and would be in place only until the public finance deficit is squeezed
under 3 percent of GDP.
Sizeable
consolidation needed
Though Ďurana speaks positively about the temporary
nature of the tax increase, he disagrees with its open-ended setup and believes
that a one-year period should be enough.
“The VAT should be hiked for one year only and then
before the end of the year repeatedly evaluated,” Ďurana said. “It would create
room for repeated annual review of the cabinet’s efforts to reduce ineffective
public spending and there would be continuous pressure for adopting fundamental
reforms.”
According to Ďurana, the government is gaining a cushion
through the open-ended setup which might, during forthcoming years, weaken its
resolve to consolidate public finance through expenditure reductions.
“We do not see a reason to have the lowering of the tax
rate bound to a decision of Eurostat,” said Ďurana, adding that the volume of
the deficit is fully in the hands of the Slovak government and parliament.
Vaňo finds the
temporary nature of the hike an interesting concept and suggests that time will
show how well it works out. However, he recalled that the new cabinet programme
statement included a declaration of aiming towards a balanced budget in the
medium term.
“Giving an upfront
pledge to lower the VAT back to 19 percent as soon as budget deficit creeps
under the 3 percent ceiling would hence suggest an ongoing plan for a
multi-year cost-cutting campaign,” Vaňo said.
Vaňo also pointed
out that according to the Heritage Foundation, the overall tax burden in
Slovakia is considered relatively low.
The Heritage
Foundation reported that Slovakia’s tax burden stood at 29.7 percent of GDP.
The foundation categorises this level as a “relatively low burden” in its
evaluation criteria for economic freedom. In comparison, the Czech Republic had
a tax burden of 36.9 percent of GDP and Hungary recorded a tax burden of 39.9
percent of GDP.
Regarding other
measures proposed by the government, Vaňo said that Slovakia does need a
sizeable consolidation in its public finances and in such a situation, any
measures on both the expenditure and revenue sides are welcome.
“The smaller the
financial impact of any one measure, the larger the number of measures that are
required,” Vaňo said. “This is very much the case for many of the mentioned
items. Certainly, governments in Hungary or in Romania were more active in
using available revenue-rising tools, especially in the area of indirect
taxes.”
Ďurana, however, notes that certain proposed tax changes
will pump up state revenues only to a small degree and that all kinds of taxes
are not equal in their effects.
“Hiking excise taxes is seeking the easiest way,” Ďurana
said. “If the deficit is to be the reason for hiking excise taxes and not the
expenses for treating the impacts of alcoholism and smoking, then only VAT
should be hiked, since it is flat and affects all the consumers with the same
rate.”
Ďurana commented that after two months of rule, the
coalition government has not introduced a package of measures which would lead
to structural changes and long-term savings in expenditures by the state.
“In our opinion, the government first should have
exhausted the possibilities of saving [through expenditure reductions] and only
after that reached for a tax hike,” Ďurana stated.
Beata Baloghová
The
Slovak Spectator, 10.9.2010
