With the recent reports of continued strong GDP growth in the second quarter of this year, the Institute of Macroeconomic Analysis and Development of the Republic of Slovenia warns that the outlook for the second half of the year has deteriorated due to high uncertainty related to the war in Ukraine, problems with energy supply and the inflation.
Slovenia’s gross domestic product rose by 8.2 percent on an annual basis in the second quarter of this year. This was also driven by domestic and foreign demand. Domestic consumption growth in this time period was driven mainly by household consumption, while foreign consumption growth was boosted by trade services, according to the Statistical Office of the Republic of Slovenia.
The Bank of Slovenia says these are the expected figures but stresses that the outlook is more uncertain if the Russian military aggression continues.
Confidence in the economy is falling
The Institute of Macroeconomic Analysis and Development of the Republic of Slovenia warns, however, that the data available for the beginning of the third quarter show that the downward trend in confidence in the economy continued in July, especially in consumer confidence and manufacturing. Confidence fell below the long-term average, which, according to the Institute, points to a moderation in activity.
Consumer confidence even fell to its lowest level since the start of the COVID-19 epidemic, which the Institute of Macroeconomic Analysis and Development attributes to the deterioration of household purchasing power due to rising prices. However, bottlenecks in the supply of raw materials, rising prices of raw materials and energy products, and the negative effects of the Russian-Ukrainian war continue to affect the low confidence in manufacturing.
Thus, the outlook for the second half of the year is deteriorating. “In the coming months, economic developments in Slovenia and the European area will be crucially influenced by the high uncertainty related to the course of the war in Ukraine and the response of economies and policies to possible energy supply problems and easing. This is associated with risks of prolonged high inflation, especially in combination with high energy and food prices and tighter monetary policy,” wrote Alenka Kajzer, Deputy Director of the Institute of Macroeconomic Analysis and Development.
Will the government give up its socialist experiments?
The question is, how will the government of Robert Golob react to the economic cooling forecast? So far, the signs are not encouraging. At a time when the first signs of a coming recession are emerging, the government has already announced higher corporate taxes.
The coalition intends to repeal the provisions of this year’s amendment to the Income Tax Act as early as the 1st of January 2023. Only the general income tax credit will remain. Everything else will be repealed, which means that wages will effectively be lower, but if an entrepreneur wants to be competitive in a certain area of employment when being compared to foreign employers, he or she will have to pay higher labour taxes. They have also announced an increase in taxes on rents, which will further reduce economic activity. The new coalition is predicting progressive taxation of all citizens’ wealth. Economists describe such intentions as a rather dangerous and unique solution in the world.
Namely, very few countries in the world actually have progressive taxation, and Slovenia will now become one of them. The coalition agreement does not specify what the new tax rate will be. Several possibilities are being mentioned in public, ranging from 0.1 percent to 1.5 percent, which some sources say the Left party (Levica) expects. However, Robert Golob, speaking on the 24ur news show on the commercial television station POP TV, mentioned that the new tax would be 1 percent of all wealth. For every 100 thousand euros of property, 1000 euros of tax would be paid per year – and keep in mind that the majority of Slovenians have houses that are worth at least that much, according to the estimates of the Surveying and Mapping Authority of the Republic of Slovenia, which means that every citizen will have to pay one average salary per year back to the state. The new government still has time to dig itself out of the pernicious clutches of the extremist Left party, especially now that stagflation is fast approaching; the only question is whether Robert Golob has enough free will to decide for that by himself.
Andrej Žitnik
