• Velimir Bole
  • Jože Mencinger
  • Franjo Štiblar
  • Robert Volčjak

Is a drop in tax revenues the first result of new economic policy?

Gospodarska gibanja 447

Total domestic demand increased in March; but its longer run dynamics remained negative. Negative trends prevail in government expenditures, investments in fixed assets and exports, and also in private consumption despite sudden and unusual jump in March. Expectations indicate that in coming months one can expect sluggish private consumption, worsening of exports, and continuing decrease of investments. The worsening of foreign trade ceased slightly in April; better than before were the results also in comparison with EU27. The position of Slovenia has not altered. Terms of trade in April were unfavorable. In May, business climate improved slightly due to increased confidence in construction and services. All economic sectors have been affected by weak demand, inability to get credits, and strong competition. In EU27, business climate worsened badly in May: reduction of new orders in manufacturing, construction, and retail trade might be blamed for enhanced pessimism.

Industrial production increased slightly in April. Though it was 10 percent lower than in March, it exceeded production in April 2011; impulse trend indicated growth, as well. In EU27 and EA17 industrial production shrank compared both to March 2012 and April 2011. The value of construction works continued to decrease, both measured by monthly or yearly dynamics. The decrease in the number of tourist overnights halted; overnights of domestic guests increased. Road transportation stagnated, air transportation was rapidly decreasing, the state of maritime transportation was better. The situation in the labor market improved; number of employees increased but lagged behind the number in April 2011. Registered unemployment was decreasing rapidly, though many who left Unemployment Office did not get job. Rate of unemployment in EU27 remains high; in euro zone it is even higher; number of unemployed persons in EU27 is approaching 25 millions; more than 17 millions are in the euro zone. In a year, unemployment rate increased in fifteen and decreased in eleven member states; most in three Baltic countries.

Prices increased in May; longer run dynamics however decreased and impulse trend dropped. Prices of goods grew; above average for clothing and footwear, non- alcoholic beverages and food while transportation, housing, communication, apartments and automotive fuel became cheaper. The increase of prices in Slovenia was accompanied by a decrease in the euro area. Yearly growth was however similar and core inflation in Slovenia lagged behind core inflation in the Euro area. Expectations point to the continuation of existing trends in the costs of living; the dynamics of prices of services will most likely decrease while the dynamics of prices of goods will remain stable. Growth of producers prices strengthened, price expectations did not, large changes are not likely. World raw material prices in Euros decreased (except for gold and food prices) between mid May and mid June. In April, average wages in most activities decreased both compared to March 2012 or April 2011. Labor costs in Slovenia grew slower than in the Euro area where they increased. In manufacturing labor costs in Slovenia lagged most. Following 2009/II, when wage reform pushed wages upward, the destroying impact of the reform has been gradually brought to a halt; labor costs in Slovenian public sector has grown slower than in Germany and Austria.

The data on public revenues remain incomplete. Total public revenues in May decreased for 10 percent and there was a severe decrease compared to May 2011. Tax revenues of direct and indirect taxes contracted. Very strong yearly drop of direct tax revenues is surprising, as they are not affected by fluctuations in the timing of tax payments. It seems that the key factor for the shrinkage could be looked for in the tax reform, which cut profit tax rates. The drop was enhanced by decreased revenues of income taxes where the impact of tax reform is not yet possible to estimate. Indeed, total tax revenues of income taxes in April and May was practically equal to the revenues in the same period a year ago. However, rather stable contributions for social security decreased in May, as well, which means that the decline of tax revenues might be explained by the decline of wages. The revenues of indirect taxes decreased in May substantially, as well, but this might be a consequence of timing, namely high tax revenues in April. Nothing happened at VAT on imports where there are no problems with fluctuations in the timing of payments.

Credits to non financial companies and households decreased in April but less than in March. Yearly rate of change reached 4.4 percent. Intervention of EBA affects credits in the Euro zone; they are similar to the effects of BS intervention two years ago. Namely, credits to non financial companies in Slovenia have been decreasing since the middle of 2010, similar requests of EBA in the third quarter of 2011 launched similar turn in the credit dynamics for non financial companies. As the owners are unable to recapitalize their banks, the banks themselves fulfill the requests of the authorities by reducing credits, particularly for good companies as only these can afford to repay credits in a short run if requested by regulators. Practically balanced current account prevented decrease of deposits which would be otherwise caused by credit crunch. Deposits began to increase very slowly; deposits of households being more systematic than deposits by companies. ECB interest rates remained unaltered, Euribor is being pushed down by the ECB three years credits. Lending interest rates decrease slowly, deposit interest rates remain stable. The dynamics in the Euro area is similar.

Surplus in the current account in April is balancing four months current account; in April it was composed of small surplus in trade balance, traditional surplus in balance of services, and deficits on income and current transfer accounts. After four months, current account balance is slightly positive, which is due to smaller trade deficit, slightly larger surplus on services account, higher deficit on income account and deficit on the account of current transfers. Financial account points to a small increase of foreign indebtedness; the forms of its growth change. Capital flows in the country through FDI and other investments and it flows out through portfolio investments. Net foreign debt exceeds 12 billion €. The share of the public sector in gross foreign debt is increasing.

Full article is available in Slovenian language.

Only a part of the articles in the publication Gospodarska gibanja (Economic Trends) is written in the English language. Please visit the Slovenian web page.


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