Slovakia's 2004 Budget: Needed step and a clear opportunity.

(From The Slovak Spectator)

Byline: Costas Christou Resident Representative of the International Monetary Fund in Slovakia

SLOVAKIA will join the EU in less than six months. This membership will boost growth in Slovakia and eventually - given supportive policies - the country could catch up to the living standards of its EU partners. At the same time, Slovakia's reputation abroad is now very positive. Many observers have come to regard Slovakia as the most reform-oriented economy in central Europe. It is in this context - securing the full benefits of EU accession and increasing investor interest - that the passage of a strong budget for 2004 is crucial. Why does Slovakia need lower fiscal deficits? An obvious reason is Slovakia's aspiration to full European integration, including euro membership, which will require reducing the general government deficit below the Maastricht limit of 3 percent of GDP. Perhaps more importantly, the underlying goal of fiscal policy should be to support real convergence toward EU living standards, by fostering strong economic growth that can be sustained year after year. A permanently lower public finance deficit would help stabilize the public debt below 50 percent of GDP and, together with declining interest rates, help reduce the debt-service burden. Fiscal consolidation would also help overcome the legacy of missed fiscal targets in past years and build credibility and confidence in the policy-setting environment. These factors are critical to attracting foreign direct investment and, together with the deepening of structural reforms, will lay the basis for strong growth. Slovakia has made a good start towards locking in lower fiscal deficits. The 2003 fiscal deficit target of 5 percent of GDP should be within reach if government ...