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Slovenia Business Week no. 07: Slovenia Fails to Cut Deficit in 2006

Slovenia failed to curb the general government deficit in 2006 despite favourable economic trends

Slovenia failed to curb the general government deficit in 2006 despite favourable economic trends. The government did cut spending, but this was not enough to reduce the deficit, which was up 0.2 percentage points year-on-year to 1.6% of GDP, the Institute for Macroeconomic Analysis and Development (IMAD) has found.

Based on available data, the actual as well as the structural deficit increased, Bostjan Vasle, the head of IMAD's macroeconomic analysis department, told the press on Wednesday, 7 February.

Finance Ministry calculations suggest that the main factor behind the increase in the structural deficit (which is estimated at 1.7% of GDP) was the payroll tax cut, Vasle said, quoting figures in IMAD's latest Economic Mirror.

The IMAD believes, however, that government spending will continue to contract, which will reduce the structural and actual deficit by 2009. The general government deficit is expected to stand at 1% of GDP that year.

The macroeconomic environment also had a favourable impact on industrial production, which was up 7.8% year-on-year in the first 11 months of 2006, more than IMAD forecast in its Autumn Report.

Unemployment trends were positive as well, for the number of the unemployed was down by 2,000 in the last quarter of the year, Vasle explained.

Wage growth was moderate last year: gross wages were up 4.9% in nominal terms and 2.4% in real terms, which is still below the productivity gains.

"This had a beneficial impact on economic activity indicators, but more importantly, it did not put extra pressure on prices," Vasle said.

The think-tank is of the opinion that slower wage growth had been a major stabilising factor and contributed to the fulfilment of criteria for the adoption of the euro.

However, it feels that pay policy should be adapted to the altered macroeconomic environment.

"We advocate the position that it makes sense to reduce the gap between productivity and salary growth over the coming years, or even harmonise wages with productivity," he said.

Inflation, which averaged 2.5% at the end of 2006, is expected to remain moderate into this year. Vasle does not expect a general increase in January due to the adoption of the euro even though prices in individual groups have increased.

Source: Slovenian Press Agency STA

Author: STA, Slovenian National Press Agency