Transcript EU8 Quarterly Economic Report Highlights

World Bank EU-8
Quarterly Economic Report
October 2004
Thomas Laursen
Lead Economist
World Bank
October 15, 2004
The Political Economy
Background
Changes in the political landscape continued:
• New government in Poland and the Czech Republic,
new Prime Minister in Hungary;
• Parliamentary elections in Slovenia - shift from the
incumbent center-left government toward the centerright;
• In Lithuania the ruling coalition lost to the Labor Party
in the first round of elections;
Governments busy preparing 2005 budgets—
little further progress on broader reforms,
with exception of Poland, Slovakia and Czech
Republic.
The Political Economy Background
Slovakia
Voter preference for government has improved since start
of year;
Government was able to push through controversial but
much needed health care reform;
Also approval of new system of revenue sharing with local
governments;
Slovakia leading global reformer in 2003 (World Bank
Doing Business 2005) and now in world Top-20 (only
Lithuania in the region shares this achievement);
First multi-year budget 2005-07—fiscal deficit to reach 3%
of GDP in 2006/07 consistent with Euro adoption 200809 (depending on final verdict on pension funds).
Macroeconomic Policies and Developments
Output growth – EU-8
• Output growth remain robust through the
second quarter of 2004 on the back of the
ongoing recovery in Europe and improved
competitiveness.
• But dynamics this year affected by stockbuilding in relation to EU accession, some
signs that activity is becoming somewhat
less buoyant.
Macroeconomic Policies and Developments
Output growth – Slovakia
• Robust output growth continued;
• Real GDP growth steady at 5 ½ % y/y in Q2-2004;
• Growth driven by investment and consumption
while net exports contribute negatively;
• Agriculture and industry most dynamic sectors;
• Unemployment declining slowly, but remains high
(18.5% in Q2-2005 according to LFS);
• Significant uncertainty about poverty data
Macroeconomic Policies and Developments
Inflation – EU 8
• Stabilizes following the jump in the level
related to EU accession. Should ease as
the impact of one-off factors fades, and
tighter monetary conditions feed through.
• Unemployment high in several countries in
the region, wage pressures moderate rapid closing of output gaps, emerging
bottlenecks in some labor markets, and
risks of further increases in oil and other
commodity prices suggests that monetary
authorities need to remain vigilant.
Macroeconomic Policies and Developments
Inflation – Slovakia
• Headline inflation stabilized (6.7% in
September);
• Core inflation moderate at less than 3%
Macroeconomic Policies and Developments
Fiscal performance – EU 8
o Better than expected, on the back of strong output
and revenue growth;
o Hungary stands out negatively;
o Budget plans for next year point to some further
consolidation where most needed (Poland and to a
lesser extent Hungary);
o Little further progress in the Czech and Slovak
Republics, budgets eased in the Baltic countries;
o In view of the cyclical upturn in the region, stronger
fiscal consolidation would have been warranted.
Macroeconomic Policies and Developments
Fiscal performance –
Slovakia
• Budget implementation in 2004 on track—
higher revenues mostly committed to
increased spending;
• Corporate tax revenues as a share of GDP
unchanged from 2003 but lower than in
2002 (when adjusted for extra payments
this year on 2003 profits);
• General government deficit for the year
expected at 3.9 % of GDP (ESA95)
compared to 3.6% of GDP in 2003;
Macroeconomic Policies and Developments
Fiscal performance – Slovakia (2)
• 2005 budget targets a general government
deficit of 3.8% of GDP;
• No improvement envisaged in fiscal position
2005-06 (but losses from pension reform
offset through savings);
• New budget emphasized increased spending
on social programs and highways.
Macroeconomic Policies and Developments
External imbalances – EU 8
• Remain worrisome in Hungary, but
also sizeable in the Baltic countries
and the Czech Republic although
with a higher coverage by FDI;
• Meanwhile, current account
positions remain strong in the other
EU-8 countries as exports are
booming.
Special Topic
Corporate Taxation and FDI in the
EU-8
• Unfair “tax competition” concerns in the
wake of sizeable CIT cuts in the new
member states;
• Tax bases largely harmonized with many
incentive schemes abandoned in the new
member countries, several old members
also moved to cut rates, effective tax rates
remain significantly lower in the EU-8
countries;
• But large differences between very low
rates in the Baltic countries and Slovenia
and moderate rates in the other countries
in the region;
Special Topic
Corporate Taxation and FDI in the
EU-8 (2)
• Lower effective corporate tax rates attract FDI,
but other factors more important—(i.e. labor
and other production costs, overall investment
climate);
• Meanwhile, flow of capital from old to new
member states is a natural part of the income
convergence process, including because of low
labor mobility from new to old member states;
• EU-8 countries—in particular those that have
already reduced statutory CIT rates to
relatively low levels—may well be better off
easing very high taxes on labor than lowering
further CIT rates. This should go along with
rationalizing social spending.
Special Topic
Corporate Taxation and FDI in
Slovakia
• Tax burden in Slovakia smaller than EU
average;
but share of CIT in GDP similar (about 3%
of GDP before latest rate cuts);
• Nominal CIT rate reduced to 19% in 2004
(compared to average of 31% in EU-15);
• Effective tax rate around 20% before latest
reduction in nominal rate. Lower than in
EU-15, but around average in the region;
• Some tax holidays remain for enterprises
with foreign capital.