Economists Warn Over New Govt’s Spending Plans

By , 16 May 2022, 15:44 PM Politics
Economists Warn Over New Govt’s Spending Plans CC-by-0

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STA, 16 May 2022 - From the economic point of view the coalition agreement of the Freedom Movement, Social Democrats (SD) and the Left is much more leftist than centrist, economist Marko Pahor said on Monday. He sees many of the government priorities as expensive and thus unrealistic. Economist Mitja Kovač expressed shock and profound disappointment.

Pahor said the social component was very highlighted in the coalition agreement, while Slovenia was already among the best in the world in terms of social security and equality.

The professor at the Ljubljana Faculty of Economics warned against the planned progressive taxation, noting this was a "rather unique solution".

The planned changes to the public sector pay system cannot be implemented without notable wage bill rise, so this will be a big burden on the public finances, he said.

Annulling the changes to the income tax act is "perhaps not something that would really belong into the coalition agreement", Pahor added.

The pension reform is well conceived but the wording of the coalition agreement allows for broad interpretations, which could lead to conflicts within the coalition, he warned while praising the planned measures for activation of pensioners.

As for additional sources for pensions that should come from managing state assets, Pahor said the coalition partners "obviously overestimate the size of the assets" as even when highly profitable revenue from these assets covered less than 10% of the current deficit, which is now being covered from the state budget.

Pahor finds the commitments on entrepreneurship promotion encouraging, although he does not know how this will be financed.

The parts about economic democracy make sense from the Left's point of view, but "they understandably cause fear among entrepreneurs".

Pahor thinks the gradual increasing of health spending to 12% of GDP is an "extremely high and probably unrealistic number".

Pahor's colleague Kovač was even more critical. He said he was "shocked and deeply disappointed". Rightist populism is being obviously replaced by "extremely leftist populism", he said.

He thinks the coalition agreement is an example of a regulation based on a "completely obsolete system of central planning of entire economic sectors and social systems". "Potential implementation of such a coalition agreement is a true recipe for economic disaster."

According to Kovač, the coalition agreement "mostly deals with massive rearranging of the distribution of funds and extreme increasing of public spending, massive raising of taxes, regulation of entire economic sectors and social subsystems". It aims to expand the already rigid labour legislation and introduce a "kind of state healthcare based on central planning".

He believes that in view of liberal western European standards, the plans of the future government coalition are a great disappointment. In line with the document, the new government will do nothing to improve the business environment, decrease administration, increase productivity and added value, and achieve sustainable and inclusive economic growth, he said.

Kovač thinks the implementation of "such populist coalition agreement" would soon lead to slower economic growth, explosion of public debt, further structural imbalances and unemployment, brain drain and departures of businesses from Slovenia.

Economist Polanec said the announced increase in public spending for healthcare, wages, pensions, and construction of apartments indicated that the costs of public sector could be close to 50% of GDP or even higher, which would be one of the highest shares in the EU.

More funds for healthcare would entail raising contributions and taxes. "If health spending increased from 8.5% to 12%, a significant increase in contribution rate would be required, by more than a half, which could raise contribution rates on gross wages from 12.9% to 19.5% and decrease wages by several percent."

Households would also be affected by higher taxes on real estate, he warned.

But he welcomed the new coalition's commitment to raise funding for health. "Raising the spending to around 10% is urgently needed if waiting times are to be cut."

However, he disagrees with the idea to ban doctors from working in private institutions in their free time. This will decrease the offering of health services, he believes. He also sees no advantages in abolishing supplementary insurance.

The planned minimal pension would reduce income inequality but Polanec stresses pensions should reflect peoples' past work.

Instead of building 20,000 state-owned apartments for rent, Polanec proposes introducing a tax on plots intended for construction that are not used for this purpose, and measures to release more plots in central Slovenia.

He would also like the coalition agreement to deal more with long-term development, especially investment in research and development, which currently stands at 2% of GDP, while most developed countries allocate about 3% for this purpose.

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