Ljubljana, November 21 2007 - The European Central Bank executive board member Lorenzo Bini Smaghi made a reference yesterday in Vienna to Slovenian macroeconomic conditions which, in the opinion of the Ministry of Finance, do not fully reflect current developments:

1. Mr Smaghi mentioned that “Slovenian fiscal policy, risked causing a “boom-and-bust cycle” and that “Fiscal policy in Slovenia is too lax, out of line with what would be required for macroeconomic stabilization”

Data pertaining fiscal developments, particularly in 2007, when Slovenia faced adverse supply side shocks of oil and food prices indicates, that fiscal policy can hardly be qualified to be lax. By the contrary, it is restrictive and has acted countercyclically. In particular this is the real picture as shown by relevant fiscal indicators for 2007 (Table 1 and Figure 1):

1. the share of expenditures in GDP has declined by 1.7% one of the largest reductions in recent history;
2. Government consumption real growth rate has been reduced by 1.8 percentage points;
3. the general government deficit has been halved from 1.2% to 0.6% and;
4. the structural deficit has declined substantially by 0.6% in accordance with relevant agreed multilateral fiscal surveillance procedure. Thus, fiscal policy is not risking causing a boom-and-boost cycle but the contrary. 

Table 1.

Source: Statistical Office of the Republic of Slovenia and Ministry of Finance

Figure 1

Source: Statistical Office of the Republic of Slovenia and Ministry of Finance

These developments clearly show that in line with the Berlin ECOFIN conclusions of April this year, Slovenia has achieved its medium-term objective (–1% GDP) two years earlier than planned.

2. Mr. Smaghi also mentioned that “The economy is growing fast and inflationary pressures are mounting, with the latest numbers exceeding 5 percent''. We can agree with such an statement with certain caveats as follows:

• Economic growth driven by investment and exports has picked up in 2007 and growth is expected to decrease in the next two years as forecasted by all relevant institutions. In the next years government expenditures-to-GDP-ratio will continue declining and government consumption growth will remain low.

• The drivers of inflation in Slovenia have been two supply side shocks: i) increase in international price of oil and; ii) increased in international food prices which given specific circumstances in the Slovenian economy in 2007 were reflected in:

• A) high price increase of newly introduced seasonal food prices in euro in April 2007 and;
• B) increase of processed food in the second half of 2007 coinciding with the lift of no-price increase commitments

• The effects of supply side shocks of temporary nature are reflected in the annual inflation rate but are expected to fade away in the first half of next year. Such inflation development scenario is reflected in the relevant forecasts of the Slovenian economy.

• The government attributes high importance to inflationary expectations in inflation developments, particularly on wage formation. Recent developments of real wages indicate that they are lagging behind productivity growth which is consistent with macroeconomic stability (Table 2). Provided that the temporary supply is not reflected on wage developments, stable macroeconomic conditions should continue in the future. In addition, the growth in exports of 17.1% by the end of third quarter does not point to adverse effects on competitiveness.

Table 2.

Source: Institute of Macroeconomic Analysis and Statistical Office of the Republic of Slovenia

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