## 1svkea2023001

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### Preface — Mission and engagements
- IMF Fiscal Affairs Department mission visited Bratislava from May 23 to June 6, 2023.
- Team led by Mr. Fazeer Rahim (FAD) and comprised Messrs. Richard Allen, Geert Beekhuis and Tim Pyne (all FAD short-term experts).
- At MFSR, met: Mr. Michal Horváth (Minister of Finance), Mr. Branislav Reľovský (State Secretary I), Mr Juraj Valachy (Director of the Institute for Fiscal Policy, IFP), Mr. Alexander Cirák (Director General of the Budget Policy Section, BPS), Mr. Martin Haluš (Director of the Value for Money Unit, VFM), and staff of IFP, BPS, VFM, and State Reporting Section.
- External meetings included: Mr. Ján Tóth (Chairman of the Council for Budget Responsibility, CBR), Mr. Martin Šuster (Member, CBR), staff of the CBR; Mr. Viskupič (Head, Finance and Budget Committee of the National Council); Mr. Ján Šebo (Economist for Recovery and Resilience Plan, Government Office); Mr. Michal Lehuta (member, Macroeconomic and Tax Forecasting Committees); Ms. Jana Juriová (Head, Department of Strategy and Analysis, Supreme Audit Office of the Slovak Republic), and staff of Ministries of Defense; Labor, Social Affairs and Family; Healthcare; and Transport.
- Mission thanks officials for reception and constructive discussions; special thanks to Mr. Juraj Šuchta (Head, Fiscal Policy Department, IFP) for guidance and logistical support.

### Purpose of the report and rationale for the Public Expenditure Limit (PEL)
- PEL adopted in 2022 as part of Slovakia’s rule-based fiscal framework; culmination of reforms since the 2011 Constitutional Act on Fiscal Responsibility.
- CBR will propose numerical annual limits on general government primary spending (minus some exclusions) for 2024 through 2027 after the general elections in September 2023; the new government must adhere to these limits over its full term.
- PEL characteristics and role:
  - Four-year limits set in nominal terms.
  - Calculated according to a structural balance target linked to a long-term fiscal sustainability indicator.
  - Important complement to the debt brake given projected rise in age-related spending.
  - Provides stronger operational guidance than the debt brake in some circumstances (e.g., first two years of a new government when some debt brake mechanisms do not apply).
- Exclusions from PEL: around 25 percent of general government spending is excluded (main exclusions include local governments, EU Funds including Recovery and Resilience Facility, state budget funds for EU co-financing, Slovakia’s dues to the European Union, interest expenditure, one-off expenses, and cycle-sensitive spending such as unemployment benefits).
- Recalculation triggers: PEL recalculated within a government’s four-year period only when updated revenue forecast deviates by 3 percent of GDP or more from the initial forecast, or when exiting the GDP decline escape clause.
- Law provides two escape clauses: (i) decline in annual GDP and/or (ii) the EU Stability and Growth Pact (SGP) is not being enforced.

### Key operational and strategic recommendations (selected)
- Strategic issues (selected):
  - Prepare an annual Fiscal Strategy Report (FSR), starting in April 2024, for presentation to the Council of Ministers as a complement to the Stability Program (SP). (Action: Minister of Finance. Time horizon: 2024.)
  - Require the Council of Ministers’ discussion of the FSR to conclude with agreement on consolidation efforts (across-the-board policies; sector specific policies; new measures from spending reviews). (Action: Council of Ministers, led by MFSR. Time horizon: 2024.)
  - Establish an independent procedure to review the CBR’s methodology for calculating the PEL and audit the PEL calculations, with a first audit in early 2024 and every four years thereafter. (Action: MFSR, CBR, SAO. Time horizon: 2024.)
  - Carry out a review of consistency between the EU’s new Net Expenditure Rule and the PEL methodology; assess experience with the national ceiling. (Action: IFP and CBR. Time horizon: 2024-2025.)
  - Strengthen arrangements by the Regulatory Impact Assessment Committee for enforcing budget discipline in the National Council. (Action: MFSR to propose to National Council. Time horizon: 2023.)
- Budget preparation:
  - Undertake analysis of forecast errors and develop a policy for the contingency margin. (Action: IFP. Time horizon: September 2023.)
  - Rationalize presentation of Treasury Reserves as a single reserve with well defined access criteria and regular reporting to the National Council. (Action: BPS. Time horizon: For the 2025 Budget.)
  - Prepare initial baseline estimates for all budget chapters. (Action: BPS. Time horizon: March 2024.)
  - Provide guidance and training to line ministries to prepare baselines for the 2026 budget. (Action: BPS (with support from IFP and VFM). Time horizon: May 2025.)
  - Agree on updated expenditure baselines between line ministries and the MFSR. (Action: BPS. Time horizon: March 2026.)
- Budget execution:
  - Determine for each of the ‘other entities’ how to strengthen government control on their budgets and envisage strengthening the responsibility of line ministers in the budget law. (Action: BPS and VFM. Time horizon: September 2023.)
  - Decide upon and announce a stricter policy on virements. (Action: BPS. Time horizon: September 2023.)
- Organizational issues:
  - Establish a high-level committee of Director-Generals and their Directors to coordinate MFSR work on key fiscal policy and budgetary issues and prepare policy advice for the Minister and State Secretaries. (Action: BPS. Time horizon: 2023-2024.)
  - Undertake an independent review of the Budget Policy Section’s organization, functions, business processes, staff resources and training needs and prepare a phased action plan for implementing the new structure. (Action: Minister of Finance. Time horizon: 2024-2026.)

### Weaknesses, risks, and operational challenges
- Organizational fragmentation within the MFSR and insufficient cooperation between fiscal policy, value-for-money, and budget units undermine PEL implementation.
- Budget preparation and execution symptoms that could undermine PEL:
  - Excessive use of virements, which have risen to nearly 4,000 per year.
  - Large share of spending allocated to Treasury reserves and complex access arrangements and reporting.
  - Outsize role of parliament in ad-hoc policy changes without sufficient scrutiny of fiscal implications.
- Comprehensive nature of the PEL includes spending of many autonomous entities — around a third of the general government — making control and monitoring harder than for line ministries.
- Need for stricter in-year spending adjustments controls (virements), including options such as virement “windows” or minimum thresholds for MFSR approval.
- Recommendation to pool Treasury reserves to streamline access and reporting while keeping the overall amount at a prudent level.

### PEL governance, FSR proposal, and validation
- Governance and comparative context:
  - Slovakia assigns responsibility for estimating, updating, and assessing fulfilment of the PEL to its fiscal council (CBR).
  - The National Council can approve or reject the PEL proposed by the CBR.
  - The government, through the MFSR, must accept PEL limits and break down the PEL into individual ceilings for public organizations after setting a contingency margin for each year.
  - Every June, the CBR revises remaining years of the PEL and adds an indicative limit for an additional year; CBR adjusts current year’s PEL for deviations from the previous year’s limit.
  - Four other EU countries have similar frameworks but differing approval processes (Denmark, Finland, Netherlands, Sweden referenced).
- Fiscal Strategy Report (FSR):
  - Proposal: introduce an annual FSR submitted to the Council of Ministers alongside the Stability Programme.
  - FSR content could include: PEL ceilings for 2025 and subsequent years; PEL contingency margin for 2025 and subsequent years; total consolidation effort required in 2025 and shares between expenditure and revenue; any other fiscal targets; initial ceilings for line ministries for 2025.
  - Preparation of the FSR would benefit from enhanced coordination within MFSR (BPS, IFP, VFM).
- Validation of the PEL methodology:
  - CBR’s PEL methodology: documented in a 63-page document; requires models, complex excel sheets, detailed analysis, and a range of assumptions; contains judgement and discretion (e.g., one-off treatment).
  - Rationale for independent validation: complexity and limited capacity create vulnerability to errors and reputational risk; MFSR finds it difficult to replicate CBR estimates.
  - Two proposed validators:
    - Supreme Audit Office (SAO): extension of Act No. 39/1993 may be required; SAO’s Department of Strategy and Analysis could be authorized; SAO may need to recruit two or three economists on a temporary basis.
    - EU Network of Independent Fiscal Institutions (IFIs): use experts from the network.
  - Timing/frequency options: first audit in early 2024; audits could be annual or every four years (e.g., after start of a new government).
- Explicit recommendations (selected):
  - Recommendation 1. Prepare an annual FSR, starting in April 2024. (Action: Minister, MFSR Departments; time horizon: 2023-2024).
  - Recommendation 2. Require FSR discussion to conclude with agreement on consolidation efforts (across-the-board, sector specific, spending review measures). (Action: Council of Ministers, led by MFSR; time horizon: 2023-2024).
  - Recommendation 3. Establish an independent audit/review of CBR methodology and PEL calculations with first audit in early 2024 and every four years thereafter; auditor: SAO or EU Network of IFIs. (Action: MFSR, SAO; time horizon: 2024).

### European Commission proposal (Net Expenditure ceiling) and interactions with PEL
- Commission proposal (Date of proposal: April 26, 2023):
  - Net expenditure path excluding one-off measures, interest payments, EU-funded expenditure and cyclical unemployment expenditure, covering four years.
  - If reforms implemented, consolidation horizon can be extended from four to seven years.
  - Plan assessed by the Commission and approved by the Council; progress monitored; possible more stringent consolidation if underperformance.
  - Proposal would replace the current preventive arm but retain 3 percent deficit and 60 percent debt rules.
- Slovakia’s Stability Program submission (April 2023):
  - Consolidation effort of almost 2.8 percent of GDP over 2024-2026.
  - Objectives: reduce the government deficit from 6.2 percent to 2 percent of GDP over 2024-2026; keep debt under 60 percent of GDP over the reporting period.
- Uncertainties and interim advice:
  - Not yet clear whether proposed EU ceiling will demand greater consolidation than national PEL.
  - Interim advice: until new EU fiscal rules are approved and implemented, advisable not to change national PEL methodology but keep a margin within the limit, as appropriate.
  - Recommendation 4. Once the proposed EU Net Expenditure Rule has been approved, carry out a review of its consistency with the PEL methodology and make changes to the national rule as appropriate. (Action: MFSR, IFP, CBR; time horizon: 2024).

### Contingency margin: sizing, cumulation, and process
- Escape clause for PEL recalculation only triggers if tax revenues deviate by more than 3 percent of GDP or if GDP growth is negative; smaller shocks absorbed within unchanged ceilings.
- Inflation and wage risk:
  - Higher-than-expected inflation and wage growth put pressure on limits; lower-than-expected inflation frees fiscal space.
  - Parts of the budget linked to inflation (e.g., pensions) are particularly constrained.
- Trade-offs in contingency margin sizing:
  - Larger reserve reduces available fiscal space when ceilings binding but provides protection against inflation/wage surprises.
  - Historical forecast errors (2004-2021 preliminary; 2004-2022 inclusion changes picture due to energy crisis): average forecast inflation errors positive; almost half of observations in 2004-2022 show years when inflation was higher than expected; wage-growth errors similar pattern.
- Sweden example (exact figures preserved):
  - Expenditure ceiling (SEK billion): 1665 (2023), 1745 (2024), 1825 (2025), 1860 (2026).
  - Budgeting margin (SEK billion): 71 (2023), 82 (2024), 136 (2025), 169 (2026).
  - % of expenditure ceiling: 4,3% (2023), 4,7% (2024), 7,5% (2025), 9,1% (2026).
  - Required minimum budgeting-margin profile (percent of expenditure ceiling): year t: 1,0%; year t + 1: 1,5%; year t + 2: 2,0%; year t + 3: 3,0%.
  - Compounded required minimum (percent): year t: 1,0%; year t + 1: 2,5%; year t + 2: 4,3%; year t + 3: 7,1%.
  - Actual margin (average 2014-2023) (percent): year t: 3,0%; year t + 1: 3,6%; year t + 2: 5,0%; year t + 3: 7,3%.
- Hypothetical cumulation example (exact figures preserved):
  - Public expenditure limit billion Euro: 44.3 (2024), 46.5 (2025), 48.8 (2026), 51.3 (2027).
  - Contingency margin (CM) %: 1.00% (2024), 1.12% (2025), 1.20% (2026), 1.30% (2027).
  - Total contingency margin billion Euro: 0.443 (2024), 0.986 (2025), 1.620 (2026), 2.370 (2027).
  - Total contingency margin % of PEL: 1.0% (2024), 2.12% (2025), 3.3% (2026), 4.6% (2027).
  - PEL net of margin billion Euro: 43.9 (2024), 45.5 (2025), 47.2 (2026), 48.9 (2027).
  - Example implication: freeing contingency reserve for 2025 from 2.1 percent to 1% could free approximately 580 million for 2025 budget or debt reduction.
- Process for setting/updating contingency margins:
  - At start of budget process (March/April in year T) set or revise contingency margins for T+1 and outer years.
  - On macro forecast updates (e.g., September/October) revise margins: compensate relevant chapters if forecasts exceed earlier estimates or revise margins down and decide use of freed resources.
  - Annual assessment to evaluate freed forward-year contingency margins; default use of freed reserves should be to reduce public debt when debt exceeds debt-brake thresholds.
- Recommendation 6. Analyze forecast errors, and develop a policy for the contingency margin. (Action: IFP in conjunction with the Budget Policy Section; time horizon: September 2023.)

### General Treasury Account reserves — size, structure, and reform options
- 2023 allocation in the General Treasury Account: 6.9 billion of funds composed of:
  - reserve of Euro 2.4 billion,
  - relations with the EU Euro1.5 billion,
  - debt expenditure Euro 1.3 billion,
  - other expenditure Euro 1.6 billion.
- The 2.4 billion euros of reserves in 2023 equals 7.6 percent of the state budget and 4.2 percent of the general government budget.
- Treasury Account structure in 2023: eight separate reserves; MFSR can reallocate across reserves before or during the budget year.
- Table 5 (Reserves in the Treasury Account — Euro million, exact figures preserved):
  - Reserve of EU Funds/levies: 558 (2022 Budget), 537 (2022 Realized), 405 (2023 Budget), 239 (2024), 216 (2025).
  - Reserve for new legislation: 131 (2022 Budget), 131 (2022 Realized), 858 (2023), 985 (2024), 1053 (2025).
  - Reserve for emergencies: 11 (2022 Budget), 7 (2022 Realized), 21 (2023), 21 (2024), 21 (2025).
  - Reserve of the judiciary: 10 (2022 Budget), 0 (2022 Realized), 10 (2023), 10 (2024), 10 (2025).
  - Reserve for public salaries: 276 (2022 Budget), 265 (2022 Realized), 188 (2023), 168 (2024), 213 (2025).
  - Reserve for healthcare: 220 (2022 Budget), 220 (2022 Realized), 0 (2023), 0 (2024), 0 (2025).
  - Reserve for Covid: 717 (2022 Budget), 525 (2022 Realized), 0 (2023), 0 (2024), 0 (2025).
  - Reserve for Ukraine: 0 (2022 Budget), 0 (2022 Realized), 100 (2023), 0 (2024), 0 (2025).
  - Reserve for energy policy: 0 (2022 Budget), 0 (2022 Realized), 860 (2023), 0 (2024), 0 (2025).
  - Reserve of the government: 5 (2022 Budget), 1 (2022 Realized), 5 (2023), 5 (2024), 5 (2025).
  - Reserve of the prime minister \ a: 2 (2022 Budget), 2 (2022 Realized) — included in Government Office from 2023 onwards.
  - Total reserves: 1930 (2022 Budget), 1688 (2022 Realized), 2447 (2023), 1428 (2024), 1518 (2025).
- Governance concerns and reform lines:
  - Multiple reserves reduce transparency; MFSR can reallocate without ex-ante access criteria.
  - Proposed reforms:
    - Pool the eight reserves into one;
    - Define access criteria (urgency, non-foreseeability, unavoidability, inability to absorb within existing appropriations);
    - Evaluate past use and decide on reductions;
    - Include reasonable estimate of reserves for outer years;
    - Continue regular ex-post reporting against access criteria.
  - Recommendation 7. Rationalize presentation of the Treasury Reserves in the budget as a single reserve with well-defined access criteria and regular reporting to the National Council. (Action: Budget Policy Section; April 2024 with 2025 budget.)

### Baselines, budget preparation, and phased rollout
- Baseline methodology:
  - IFP developed a baseline projections methodology with VFM and BPS to construct baseline estimates by expenditure type, provide guidance on price adjustments and volume projections.
  - VFM used the methodology for selected chapters (notably health sector).
  - Zero-based budgeting for major capital works provides appropriate no-policy change baseline for approved projects.
- Phased rollout timetable (exact formulations preserved):
  - Phase 1 (Budget Policy Section): Use methodology taking the 2024 Budget as starting point; baselines to be completed by end of March 2024 based on parameters available in January 2024.
  - Phase 2 (Engage budget chapters): Share methodology and ask chapters to prepare baselines in early 2025; provide manual and training; Baseline preparation assists in assessing fiscal space and chapter expenditure limits.
  - Phase 3 (Agreement and updating): Chapters to update baselines in early 2026 in consultation with MFSR; baselines provide basis for setting budget chapter expenditure limits in May 2026.
- Frequency of updates:
  - Short term: annual updates before budget process.
  - Longer term: consider twice-yearly updates (one early prior to strategic phase; second in budget finalization).
- Recommendations (exact):
  - Recommendation 8. Prepare initial baseline estimates for all budget chapters. (Action: Budget Policy Section; time horizon: March 2024.)
  - Recommendation 9. Provide guidance and training to line ministries to prepare baselines their expenditure baseline by budget chapters for the 2026 budget. (Action: Budget Policy Section,IFP,VFM; time horizon: May 2025.)
  - Recommendation 10. Agree on updated expenditure baselines between line ministries and the MFSR. (Action: Budget Policy Section; time horizon: March 2026.)

### Control of ‘other entities’ and key statistics
- Key facts:
  - Budget of ‘other entities’ approximately Euro 24.7 billion in 2023, corresponding to around half of general government expenditure.
  - State budget contributes Euro 2.2 billion in transfers to these entities.
  - After correcting for state budget transfers, budgets of ‘other entities’ make up 38 percent of the public expenditure ceiling.
  - Entities grouped into 36 categories.
  - Figure 4 budget shares (2023):
    - Social insurance: 36%
    - Healthcare insurance: 16%
    - Medical facilities: 8%
    - Municipalities / local government: 28%
    - Railways: 4%
    - Public universities: 3%
    - Highways: 2%
    - Other: 3%
  - Example entity budgets: 6 million euro (Press Agency) to 11 billion euro (Social Insurance Agency).
- Findings and instruments to strengthen control:
  - MFSR has limited control; many large entities’ spending is demand-driven.
  - Possible instruments (combination tailored per entity):
    - Bring entities’ cash balances into the Treasury Single Account.
    - Integrate revenues and expenditure into the state budget where appropriate.
    - Integrate revenues/expenditure outside state budget under line ministries’ sectoral ceilings.
    - Formal agreements at ministerial/board level on permitted expenditure levels with Minister of Finance approval for variations.
    - Consider penalties for unapproved expenditure (e.g., reduction in transfers, sanctioning Board).
- Governance levers: line ministries appoint board members and set strategic direction; Article 10 of the 2022 Amendment requires Ministry of Health to ensure compliance with public health insurance limits and general budget for medical facilities.
- Recommendation 11. Determine for each of the ‘other entities’ how to strengthen government control on their budgets, which to integrate within the state budget, and explore strengthening the responsibility of the line ministers in the budget law. (Action: BPS and VFM; time horizon: September 2023.)

### Virements (in-year reallocations) — scale, problems, and policy options
- Scale and trend:
  - Approved virements grew by about 10 percent annually, from approximately 2,750 in 2018 to more than 3,900 in 2022.
- Problems identified:
  - Little incentive to propose correct budget breakdowns ex ante.
  - National Council oversight undermined because virements notified ex post (twice a year).
  - Managing virements creates considerable workload for BPS and budget sections, diverting resources from strategic work.
  - Virements approved case-by-case reduce strategic allocation of resources.
- Policy options to contain virements in 2024:
  - i) strict criteria for accepting/rejecting transfer requests;
  - ii) a threshold for minimum size of virements requiring submission to MFSR;
  - iii) grouping virements into 4-5 windows a year, each lasting one week;
  - iv) excluding some types of virement during certain windows (e.g., additional funding virements only during Council of Ministers budget decision-making).
  - Implementation should be gradual; MFSR must build capacity in budget sections and ‘other entities’.
- Recommendation 12. Decide upon and announce a stricter policy on virements. (Action: Budget Policy Section; time horizon: August 2023.)

### Organizational reforms: coordination, forecasting, and Budget Policy Section
- A. Internal coordination:
  - No structured high-level process currently; proposal to establish a high-level Committee of Director-Generals and their Directors including BPS, IFP and VFM.
  - Committee responsibilities: prepare Stability Program, FSR, macro/tax forecasts, PEL ceilings and reserve; coordinate advice for Minister and State Secretaries.
  - Recommendation 13. Establish a high-level committee of Director-Generals and their Directors to coordinate work on key fiscal policy and budgetary issues and prepare policy advice for the Minister and State Secretaries. (Action: IFP / BPS / VFM; time horizon 2023-2024.)
- B. Forecasting procedures:
  - Two independent committees chaired by IFP prepare macro and tax forecasts; committees have limited time leading to forecasts rarely changing from IFP initial proposals.
  - Example timeline pressures:
    - May 22: start macro forecasting;
    - June 5 or 6: national accounts release;
    - June 12: IFP sends macro forecasts to Macroeconomic Committee;
    - June 14-16: Macroeconomic Committee meets;
    - June 20: IFP sends tax forecasts to Tax Committee;
    - June 22-24: Tax Committee meets;
    - June 30: legal deadline for publishing forecasts.
  - Suggested improvements: allow more time for collaborative processes; options include earlier SOSR data release or moving back forecast delivery date to National Council.
- C. Budget Policy Section organization:
  - Current staff: 78 (structure unchanged since 2003).
  - Pressures from crisis measures, election-year spending, increased virements and PEL introduction.
  - International practice suggests integrated structures, pooling staff by line ministry, combined preparation/execution responsibilities.
  - Recommended actions:
    - Undertake independent review of BPS functions, business processes, staff resources and training needs.
    - Prepare phased action plan for implementing new structure.
  - Recommendation 14:
    - (i) Undertake an independent review of the Budget Policy Section’s functions, business processes, staff resources and training needs;
    - (ii) prepare a phased action plan for implementing the new structure. (Action: Minister with the Budget Policy Section; time horizon 2024-2025.)

*Source: IMF Technical Report — Preface and Executive Summary; sections on Slovakia’s PEL governance, FSR proposal, validation of PEL methodology, EU Net Expenditure proposal, contingency margins, Treasury reserves, baselines, ‘other entities’, virements, and organizational reforms (mission visit May 23–June 6, 2023).*

### Preface ____________________________________________________________________________ 6

### Preface

### Mission and engagements
- IMF Fiscal Affairs Department mission visited Bratislava from May 23 to June 6, 2023.
- Team led by Mr. Fazeer Rahim (FAD) and comprised Messrs. Richard Allen, Geert Beekhuis and Tim Pyne (all FAD short-term experts).
- At MFSR, met: Mr. Michal Horváth (Minister of Finance), Mr. Branislav Reľovský (State Secretary I), Mr Juraj Valachy (Director of the Institute for Fiscal Policy, IFP), Mr. Alexander Cirák (Director General of the Budget Policy Section, BPS), Mr. Martin Haluš (Director of the Value for Money Unit, VFM), and staff of IFP, BPS, VFM, and State Reporting Section.
- External meetings included: Mr. Ján Tóth (Chairman of the Council for Budget Responsibility, CBR), Mr. Martin Šuster (Member, CBR), staff of the CBR; Mr. Viskupič (Head, Finance and Budget Committee of the National Council); Mr. Ján Šebo (Economist for Recovery and Resilience Plan, Government Office); Mr. Michal Lehuta (member, Macroeconomic and Tax Forecasting Committees); Ms. Jana Juriová (Head, Department of Strategy and Analysis, Supreme Audit Office of the Slovak Republic), and staff of Ministries of Defense; Labor, Social Affairs and Family; Healthcare; and Transport.
- Mission thanks officials for reception and constructive discussions; special thanks to Mr. Juraj Šuchta (Head, Fiscal Policy Department, IFP) for guidance and logistical support.

### Purpose of the report and rationale for the Public Expenditure Limit (PEL)
- PEL adopted in 2022 as part of Slovakia’s rule-based fiscal framework; culmination of reforms since the 2011 Constitutional Act on Fiscal Responsibility which created an automatic debt brake rule, established the Council for Fiscal Responsibility (CBR), and set high standards for fiscal transparency.
- CBR will propose numerical annual limits on general government primary spending (minus some exclusions) for 2024 through 2027 after the general elections in September 2023; the new government must adhere to these limits over its full term.
- PEL characteristics and role:
  - Four-year limits set in nominal terms.
  - Calculated according to a structural balance target linked to a long-term fiscal sustainability indicator.
  - Important complement to the debt brake given projected rise in age-related spending in Slovakia.
  - Provides stronger operational guidance than the debt brake in certain circumstances (e.g., when some correction mechanisms under the debt brake do not apply, such as during the first two years of a new government).
- Exclusions from PEL: around 25 percent of general government spending is excluded (main exclusions include local governments, EU Funds including Recovery and Resilience Facility, state budget funds for EU co-financing, Slovakia’s dues to the European Union, interest expenditure, one-off expenses, and cycle-sensitive spending such as unemployment benefits).
- Recalculation triggers: within a government’s four-year period, PEL is recalculated only when updated revenue forecast deviates by 3 percent of GDP or more from the forecast initially used, or when exiting the GDP decline escape clause.
- Law provides two escape clauses: (i) decline in annual GDP and/or (ii) the EU Stability and Growth Pact (SGP) is not being enforced.

### Key operational and strategic recommendations (selected entries from Table 1)
- Strategic Issues
  - Prepare an annual Fiscal Strategy Report (FSR), starting in April 2024, for presentation to the Council of Ministers as a complement to the Stability Program (SP). Action: Minister of Finance. Time horizon: 2024.
  - Require the Council of Ministers’ discussion of the FSR to conclude with agreement on consolidation efforts (across-the-board policies; sector specific policies; new measures from spending reviews). Action: Council of Ministers, led by MFSR. Time horizon: 2024.
  - Establish an independent procedure to review the CBR’s methodology for calculating the PEL and audit the PEL calculations, with a first audit in early 2024 and every four years thereafter. Action: MFSR, CBR, SAO. Time horizon: 2024.
  - Carry out a review of consistency between the EU’s new Net Expenditure Rule and the PEL methodology; assess experience with the national ceiling. Action: IFP and CBR. Time horizon: 2024-2025.
  - Strengthen arrangements by the Regulatory Impact Assessment Committee for enforcing budget discipline in the National Council. Action: MFSR to propose to National Council. Time horizon: 2023.
- Budget Preparation
  - Undertake analysis of forecast errors and develop a policy for the contingency margin. Action: IFP. Time horizon: September 2023.
  - Rationalize presentation of Treasury Reserves as a single reserve with well defined access criteria and regular reporting to the National Council. Action: BPS. Time horizon: For the 2025 Budget.
  - Prepare initial baseline estimates for all budget chapters. Action: BPS. Time horizon: March 2024.
  - Provide guidance and training to line ministries to prepare baselines for the 2026 budget. Action: BPS (with support from IFP and VFM). Time horizon: May 2025.
  - Agree on updated expenditure baselines between line ministries and the MFSR. Action: BPS. Time horizon: March 2026.
- Budget Execution
  - Determine for each of the ‘other entities’ how to strengthen government control on their budgets and envisage strengthening the responsibility of line ministers in the budget law. Action: BPS and VFM. Time horizon: September 2023.
  - Decide upon and announce a stricter policy on virements. Action: BPS. Time horizon: September 2023.
- Organizational Issues
  - Establish a high-level committee of Director-Generals and their Directors to coordinate MFSR work on key fiscal policy and budgetary issues and prepare policy advice for the Minister and State Secretaries. Action: BPS. Time horizon: 2023-2024.
  - Undertake an independent review of the Budget Policy Section’s organization, functions, business processes, staff resources and training needs and prepare a phased action plan for implementing the new structure. Action: Minister of Finance. Time horizon: 2024-2026.

### Weaknesses, risks, and specific operational challenges identified
- Organizational fragmentation within the MFSR and insufficient cooperation between fiscal policy, value-for-money, and budget units undermine PEL implementation.
- Budget preparation and execution symptoms that could undermine PEL:
  - Excessive use of virements, which have risen to nearly 4,000 per year.
  - Large share of spending allocated to Treasury reserves and complex access arrangements and reporting.
  - Outsize role of parliament in ad-hoc policy changes without sufficient scrutiny of fiscal implications.
- Comprehensive nature of the PEL includes spending of many autonomous entities — around a third of the general government — making control and monitoring harder than for line ministries (budget chapters).
- Need for stricter in-year spending adjustments controls (virements), including options such as virement “windows” or minimum thresholds for MFSR approval.
- Recommendation to pool Treasury reserves to streamline access and reporting while keeping the overall amount at a prudent level.

### Methodology validation and transparency
- Strong a priori argument for external validation/audit of the PEL methodology and calculations, ideally through the Supreme Audit Office (SAO).
- Rationale: complexity of methodology and discretionary adjustments create vulnerability to errors and reputational risk for the CBR and the fiscal rule.
- Suggested audit frequency: annually or after the election of a new government (Table 1 proposes first audit in early 2024 and every four years thereafter).

### Organizational and institutional reforms recommended
- Strengthen internal coordination across MFSR sections and units.
- Review and modernize Budget Policy Section organization (structure unchanged since 2003), aligning responsibilities with legal requirements and EU best practices.
- Consider transferring responsibilities for capital investment and spending reviews from VFM to BPS in the future.
- Extend timeline for preparing official macroeconomic and fiscal forecasts to enable more substantive collaboration among members of the Macroeconomic and Tax Forecasting Committees and strengthen forecast credibility.

### Slovakia’s debt brake (Box 1) — key features and sanctions (as presented)
- Constitutional Amendment 2011 caps public debt at 60 percent of GDP starting March 1, 2012, until December 31, 2017; from 2018 the cap is reduced by one percentage point each year to reach 50 percent in 2027.
- Correction mechanism thresholds (reduced by one percentage point each year starting 2018; brackets show 2023 applicability for debt in 2022):
  - Level 1 sanction: 50 – 53 percent (45-48 percent in 2023): Minister of Finance must explain reasons for increase and propose measures to bring debt below threshold.
  - Level 2 sanction: 53-55 percent (48-50 percent in 2023): government must propose package to bring debt down and freeze wages of government members.
  - Level 3 sanction: 55-57 percent (50-52 percent in 2023): Ministry of Finance will block 3 percent of the approved state budget expenditure, and general government entities cannot spend more than they spent the previous year.
  - Level 4 sanction: 57-60 percent (52-55 percent in 2023): government should submit a balanced budget for general government and local governments should submit balanced budgets.
  - Level 5 sanction: 60 percent (55 percent in 2023): government must ask the National Council for a vote of confidence.
- Constitutional Amendment allows numerically defined escape clauses for a major recession, banking system bailout, natural disaster, and state of war.
- Sanctions 3, 4 and 5 are waived for 24 months for a new government that receives a vote of confidence on its manifesto.
- Recent context: formation of a new government in May 2021 allowed escape clause until May 2023; debt reached 58.9 percent of GDP at that time and level 1, 2 and 3 sanctions were applied. Eurostat notification in April 2023 reported debt at 57.8 percent of GDP. Caretaker government expected to prepare a balanced budget for 2024.

*Source: IMF technical report — Preface and Executive Summary (mission visit May 23–June 6, 2023).*

### 2.      Slovakia has made the unique choice to give the responsibility of estimating, updating,

### 2.      Slovakia has made the unique choice to give the responsibility of estimating, updating, and assessing the fulfilment of the PEL to its fiscal council

### PEL governance and comparative context
- Slovakia assigns the responsibility for estimating, updating, and assessing fulfilment of the PEL to its fiscal council (CBR).  
- The National Council can approve or reject the PEL proposed by the CBR.  
- The government must accept the PEL limits and, through the MFSR, break down the PEL into individual ceilings for public organizations falling under the PEL definition, after setting a contingency margin for each year.  
- Every June, the CBR revises the remaining years of the PEL and adds an indicative limit for an additional year; revisions reflect new revenue measures and measures affecting long-run sustainability.  
- The CBR adjusts the current year’s PEL for any deviations (positive or negative) from the previous year’s limit.  
- Four other EU countries have a similar multi-year expenditure ceiling framework, but in those countries the limits are initially estimated by the Ministry of Finance, proposed by the Government, and ultimately approved by Parliament. The source highlights Denmark, Finland, Netherlands, and Sweden as case studies of differing design features and approval processes.  
- Slovakia’s model is designed principally to ensure long-run fiscal sustainability.

### Strategic planning weaknesses and required changes
- Current budget process lacks a strategic phase for early-stage policy debates; decisions on fiscal consolidation are made late and focus on finalizing next year’s budget.  
- Increasing adoption of policies outside the budget process (a practice normalized during the COVID-19 pandemic) makes curbing off-budget policy adoption difficult.  
- Implementing the PEL requires:  
  - a sea-change toward a sharper medium-term focus;  
  - better use of technical tools for budget preparation and implementation;  
  - stronger coordination among entities;  
  - changes to inefficient practices (e.g., excessive number of virements);  
  - strengthening the Ministry of Finance’s internal coordination and organizational structure, notably its budgeting function.  
- The PEL provides an opportunity to integrate recent MFSR reforms (spending reviews, project evaluation and zero-based budgeting for capital, and baseline budgeting) into the budget process.

### Introducing a Strategic Phase — Fiscal Strategy Report (FSR)
- Proposal: introduce an annual Fiscal Strategy Report (FSR), submitted to the Council of Ministers alongside the Stability Programme (SP).  
- Current practice: In April each year Slovakia presents its SP to the European Commission; the SP outlines the no policy change fiscal scenario and the fiscal consolidation effort needed under that scenario, but is approved and sent without a government debate on policies to address fiscal challenges.  
- Suggested FSR role and content (FSR prepared in April 2024 could include):  
  - The PEL ceilings for 2025 and subsequent years and the ceilings for the state budget and ‘other entities’ implied by those limits.  
  - The PEL contingency margin for 2025 and subsequent years.  
  - The total consolidation effort required in 2025 and the shares of consolidation for the expenditure and revenue sides of the budget.  
  - Any other fiscal targets such as the minimum spending target for the defense sector.  
  - The initial ceilings for line ministries for 2025, as determined by the MFSR.  
- Council of Ministers could also discuss: potential fiscal risks and mitigation policies; possible consolidation measures for each line ministry; possible revenue measures; possible structural reform measures for 2025-2027.  
- Design options: follow Netherlands’ model where an initial FSR is discussed in early April, amended, and a final version is approved by end-April; expand the FSR over time to include an increasing medium-term perspective.  
- Coordination recommendation: preparing the FSR would benefit from enhanced coordination within MFSR, especially between the Budget Policy Section, the IFP and the VFM Unit.

### Validation of the PEL methodology and calculations
- The CBR’s PEL methodology is highly complex: documented in a 63-page document, requires models and complex excel sheets, detailed analysis, and a range of assumptions (e.g., which estimates of the output gap to use).  
- The methodology requires judgement and discretion (e.g., treating items as one-off).  
- Complexity and limited capacity create vulnerability to errors and reputational risk for the CBR; MFSR finds it difficult to replicate CBR estimates.  
- Strong argument for an independent validation procedure that is separate from the CBR (and MFSR) to:  
  - review and simplify the methodology to reduce room for judgment and discretion; and  
  - audit the PEL calculations themselves.  
- Two possible validators proposed:  
  - Supreme Audit Office (SAO): Act No. 39/1993 already mandates the SAO to audit the draft state budget and annual financial statements and present an assessment to the National Council; extending the SAO to audit the PEL could require an amendment to its law and additional temporary staff (the SAO’s Department of Strategy and Analysis could be authorized to review the CBR’s methodology and audit the PEL calculations; the SAO would probably need to recruit two or three economists on a temporary basis).  
  - EU Network of Independent Fiscal Institutions (IFIs): use experts from the network to review methodology and audit calculations.  
- Timing and frequency options for audits: first audit could be prepared in early 2024; audits could occur every year or every four years (e.g., after first estimates at the start of a new government). Implementing audits may require timeline adjustments for preparing the PEL and possibly changes to the 2004 Budgetary Rules on Public Administration.  
- Parallel process: the MFSR’s IFP needs to double check all calculations in parallel so MFSR can state it fully understands and supports the CBR’s calculations.

### Explicit recommendations from the source
- Recommendation 1. Prepare an annual FSR, starting in April 2024, for presentation to the Council of Ministers as a complement to the SP. Use the document as a vehicle for taking decisions on key fiscal issues required to prepare the budget for 2025. (Action: Minister, MFSR Departments; time horizon: 2023-2024).  
- Recommendation 2. Require that the discussion of the FSR by the Council of Ministers conclude with an agreement on the various consolidation efforts needed (on taxes and spending) under the following headings: (i) across the board policies (e.g., decisions on public employment); (ii) sector specific policies; and (iii) new measures arising from spending reviews. (Action: Council of Ministers, led by MFSR; time horizon: 2023-2024).  
- Recommendation 3. Establish a procedure independent of the CBR and MFSR to (i) review the CBR’s methodology for calculating the PEL and adopt a simpler methodology with less room for judgment and discretion; (ii) audit the PEL calculations themselves with a first audit taking place in early 2024 and every four years thereafter. Audits should be carried out either by the SAO or the EU Network of IFIs. The SAO option would complement the Office’s existing functions but might require an amendment to Act No. 39/1993. (Action: MFSR, SAO; time horizon: 2024).

*Source: IMF Technical Report (sections on Slovakia’s PEL governance, strategic issues, FSR proposal, and validation of PEL methodology).*

### 18.      The European Commission recently proposed the introduction of a net expenditure ceiling

### 18.      The European Commission recently proposed the introduction of a net expenditure ceiling

### Comparison of the European Commission proposal and Slovakia’s Public Expenditure Limit (PEL)
- The Commission proposed a net expenditure ceiling within the Stability and Growth Pact that links multi-year expenditure ceilings (net of some exclusions) with an indicator of fiscal sustainability; this approach appears comparable to the CBR’s methodology for calculating the PEL but differs in coverage of expenditure and in the indicator of fiscal sustainability.
- The Commission’s proposal considers spreading the need for consolidation from four to seven years when structural reforms are implemented.
- It is currently unclear whether the proposed ceiling will translate into greater demands for fiscal consolidation than Slovakia’s national PEL, and to what extent the approaches can be made consistent.
- Recommendation (from source): Review the two methodologies once the European proposal has been agreed (expected later in 2023 or in 2024) and propose changes to the national ceiling as appropriate; the review could also assess the experience with the national ceiling so far. (Action: MFSR, IFP, CBR; time horizon: 2024).

### Key elements of the Commission’s proposed revision to the preventive arm of the Stability and Growth Pact (Box 5)
- Date of proposal: April 26, 2023.
- Core design features:
  - Governments submit a medium-term fiscal-structural plan covering fiscal policy, reforms and investments, and report annually on implementation.
  - Core element is a net expenditure path, excluding one-off measures, interest payments, EU-funded expenditure and cyclical unemployment expenditure, covering a period of four years.
  - The path would need to ensure that public debt declines credibly, or remains at prudent levels, and that the deficit remains at or should be reduced below 3 percent of GDP.
  - If the right reforms are implemented, the expenditure path, and the need for spending or revenue consolidation measures, can be extended from four to seven years, reducing annual consolidation needs.
  - The plan will be assessed by the Commission and approved by the Council, with progress monitored by the Commission and potential for more stringent consolidation if Member States underperform.
- Relationship with existing rules:
  - The proposal would replace the current preventive arm but leave the 3 percent deficit and 60 percent debt rules in place.
  - The existing corrective arm requires debt-ratios to decline by 1/20th of the debt above 60 percent of GDP; this approach would be revised to incorporate the new debt-reduction approach.
  - It would become more likely that countries with a substantial debt challenge would be sanctioned.

### Slovakia’s fiscal position and Stability Program submission
- Slovakia submitted its Stability Program in April 2023 with a consolidation effort of almost 2.8 percent of GDP over the period 2024-2026.
- Objectives in the Stability Program:
  - Reduce the government deficit from 6.2 percent to 2 percent of GDP over 2024-2026.
  - Keep debt under 60 percent of GDP over the reporting period.
- Consolidation measures would need to be determined by Slovakia’s new government, which will take office after the elections on September 30.
- Long-term fiscal sustainability risks:
  - Assessed using the EU-wide S2 indicator; Slovakia has one of the highest scores in the EU.
  - It is likely that pressures on fiscal space will continue over the medium term and that the PEL will significantly constrain government expenditure going forward.

### Potential interactions between EU recommendations and national PEL (uncertainties and interim advice)
- If the European Commission recommends Slovakia be more ambitious in consolidation for 2024 and 2025 than required by the national PEL, the government may be required to find additional consolidation measures.
- As of the source text, it is not yet clear whether the old or new European rules will apply, whether consolidation required in 2024 and 2025 will be greater or smaller than the national PEL, or how and to what extent the government will decide to follow the revised EU rules.
- Interim advice: Until the new EU fiscal rules are approved and implemented, it might be advisable not to change the methodology of the national PEL, but to keep a certain margin within the limit, as appropriate.
- Recommendation 4. Once the proposed EU Net Expenditure Rule has been approved, carry out a review of its consistency with the PEL methodology and make changes to the national rule as appropriate. The review could also assess the experience with the national ceiling so far. (Action: MFSR, IFP, CBR; time horizon: 2024).

### Fiscal powers of the National Council and implications for budget discipline
- Constitutional position: The National Council has unlimited powers to amend the budget, though historically amendments have been relatively small and constrained by political alignment.
- Recent change in practice:
  - The proportion of new laws proposed by the legislature (vs. executive proposals) increased from around 10 percent historically to 40 percent in the past two years.
  - Some recent laws (e.g., revision to the pensions law and free meals for primary school students) have substantial fiscal costs.
- Budget law and procedural safeguards:
  - The Budget law includes provisions intended to constrain parliamentarians from making legislative changes without their financial and budgetary implications being estimated and reviewed by the MFSR, but these requirements are not strictly observed, do not provide reasonable time for review, and do not apply to amendments to existing laws.
- MFSR initiatives to strengthen regulatory impact assessment (RIA) and parliamentary review:
  - Proposals include: (i) reinforcing the RIA Committee by moving it from the Ministry of Economy to the Government Office and increasing analytical capacity; (ii) streamlining and strengthening RIA methodology; (iii) requiring proposals for new legislation to specify expected costs and benefits and review alternatives; and (iv) extending the period for voting on amendments by first submitting them to a legislature committee for review.
  - The proposals are intended for public consultation and submission to the National Council later in 2024.
- Additional measure suggested: the caretaker government could recommend that coalition parties include in their manifesto a commitment to maintain fiscal discipline and fiscal sustainability (an obligation already in Art. 55a of the Constitution), commit to delivering the PEL ceilings, and to only introduce new legislation which has undergone RIAs and can be financed through the budget, EU funding, or borrowing.
- Recommendation 5. Strengthen existing arrangements, exercised through the RIA Committee, for enforcing budget discipline in the National Council, as defined in existing law. (Action: MFSR, VFM Unit; time horizon: 2023).

### Budget preparation: moving from the PEL to binding sector and ministry ceilings
- The four-year PEL requires a strategic process early in the year where the top-down PEL meets baseline estimates; this confrontation allows strategic choices on consolidation, reforms and priorities and should ideally extend into a medium-term budget.
- In the first year of PEL use (process in 2023):
  - End of April 2023: initial ministerial ceilings for 2024 were sent to line ministries and ‘other entities’, which, compared to 2023 ceilings, included partial compensation for inflation.
  - These ceilings were reportedly set at a higher level than spending announced in the Stability Program, requiring additional measures later.
  - End of May 2023: ministries entered claims and budget negotiations began in June.
  - After summer break, outcomes of negotiations will be compared with the PEL and implications discussed by government; process challenged by absence of majority government, substantial spending amendments from the National Council and elections on September 30.
- Recommended strategic process for 2025 and subsequent budgets (summary of steps):
  - April: Government sets strategic priorities integrated with Preparation of the FSR and the PEL; consolidation needs and political choices for tax increases or spending cuts agreed.
  - Budget negotiations should proceed within political frame set by leaders and adopt a medium-term focus to decide structural reform or consolidation measures for outer years.
  - The strategic decision-making step through a fiscal strategy report in Spring 2024 is an important next step; initially may focus on next year’s budget but should gradually extend to outer years as baseline scenarios become available.
- The document provides a procedural flow (steps 1–11) linking CBR publication of PEL to MFSR translation to cash basis, calculation of contingency margin, baseline scenarios, Cabinet (CoM) decisions on consolidation, tax and spending measures, structural reforms, political expenditures, establishment of initial ceilings, and start of budget negotiations.

### Contingency margin under the PEL (opening comment)
- Inclusion of a contingency margin for uncertainties in the macroeconomic and fiscal forecast is considered appropriate.
- The PEL will be based on an ‘original forecast’ of economic growth, inflation, wage developments and revenues; forecasts are likely to evolve during the four-year PEL period and increasingly deviate from the original forecast while the ceiling will normally not be revised for macroeconomic updates.

*Source: IMF Technical Report (excerpts from chapters/boxes on EU proposed net expenditure ceiling, Slovakia Stability Program, legislature fiscal powers, and budget preparation).*

### Section 1, the escape clause that requires a recalculation of the ceilings by the CBR only kicks in if tax

### Section 1, the escape clause that requires a recalculation of the ceilings by the CBR only kicks in if tax revenues deviate by more than 3 percent of GDP or if GDP growth is negative. Smaller shocks will have to be absorbed within the unchanged ceilings.

### Inflation and wage risk to expenditure ceilings
- Higher than expected inflation and wage growth lead to pressure under the limit; lower than expected inflation would free fiscal space.
- Parts of the budget that are partially or wholly linked to inflation, such as pensions, are particularly constrained by higher inflation.
- Suggested policy: establish an increasing contingency margin under the public expenditure limit, in line with the amended organic budget law of 2022 (Amending Act No. 523/2004 Coll. On Budgetary Rules of Public Administration, etc., Art 30a, (5): “Within the limit of public expenditure, increasing reserves are obligatory budgeted over time so as to ensure that unforeseen budgetary effects are covered”).

### Trade-offs in sizing the contingency margin
- The size of the contingency margin is a trade-off between prudence and available fiscal space:
  - A larger reserve reduces available fiscal space when ceilings are binding and consolidation is needed.
  - A larger reserve provides protection when inflation is higher than expected and creates substantial fiscal pressure.
- Historical forecast errors:
  - Preliminary analysis shows average forecast errors are positive (forecast inflation exceeded realized inflation on average) over 2004-2021; inclusion of 2022 changes the picture due to the energy crisis.
  - Almost half of observations in the 2004-2022 period show years when inflation was higher than expected.
  - Wage-growth forecast errors display a similar pattern: average positive errors, but negative errors in more than half of years.
- Approaches to set the minimum contingency margin:
  - Extreme approach: base on the maximum strain from previous episodes of higher-than-expected inflation and wage growth.
  - More realistic approach: tolerate some risk and factor in regular underspending (e.g., if on average spending is one percent below budget, set margin somewhat lower than macro forecast errors).

### Example and guidance from Sweden (Box 8)
- Sweden uses a nominal expenditure ceiling and a budgeting margin since 1997 to buffer unexpected macro developments.
- Table 2 (Sweden. Ceilings and Margins) highlights budgeting margin for 2023-2026:
  - Expenditure ceiling (SEK billion): 1665 (2023), 1745 (2024), 1825 (2025), 1860 (2026)
  - Budgeting margin (SEK billion): 71 (2023), 82 (2024), 136 (2025), 169 (2026)
  - % of expenditure ceiling: 4,3% (2023), 4,7% (2024), 7,5% (2025), 9,1% (2026)
  - Ceiling-limited expenditure (SEK billion): 1594 (2023), 1663 (2024), 1689 (2025), 1691 (2026)
- Required minimum budgeting-margin profile (percent of expenditure ceiling):
  - year t: 1,0%
  - year t + 1: 1,5%
  - year t + 2: 2,0%
  - year t + 3: 3,0%
- Compounded required minimum (percent of expenditure ceiling):
  - year t: 1,0%
  - year t + 1: 2,5%
  - year t + 2: 4,3%
  - year t + 3: 7,1%
- Actual margin (average 2014-2023) (percent of expenditure ceiling):
  - year t: 3,0%
  - year t + 1: 3,6%
  - year t + 2: 5,0%
  - year t + 3: 7,3%
- Policy notes:
  - The 1 percent reserve for an inflation error translates into a fixed amount for year t and all following years; yearly policy rates should be compounded.
  - Budgeting margins are larger than the required minimum, especially in early years of the medium-term budget.
  - Guidelines are not legislative but breaches have led to ex-post criticisms from oversight bodies.

### Cumulation of contingency margins and illustrative hypothetical example
- Unexpected inflation/wage compensation creates a level change in spending that persists into subsequent years; contingency margins should therefore be cumulated over time.
- Table 4 (Hypothetical Example of a Contingency Margin (CM)) — exact figures preserved:
  - Public expenditure limit  billion Euro: 44.3 (2024), 46.5 (2025), 48.8 (2026), 51.3 (2027)
  - Contingency margin (CM) %: 1.00% (2024), 1.12% (2025), 1.20% (2026), 1.30% (2027)
  - CM for 2024 @ 1% billion Euro: 0.443 (2024), 0.465 (2025), 0.488 (2026), 0.513 (2027)
  - CM for 2025 @ 1.12% billion Euro: 0.521 (2025), 0.547 (2026), 0.575 (2027)
  - CM for 2026 @ 1.2% billion Euro: 0.586 (2026), 0.616 (2027)
  - CM for 2027 @ 1.3% billion Euro: 0.667 (2027)
  - Total contingency margin billion Euro: 0.443 (2024), 0.986 (2025), 1.620 (2026), 2.370 (2027)
  - Total contingency margin % of PEL: 1.0% (2024), 2.12% (2025), 3.3% (2026), 4.6% (2027)
  - PEL net of margin billion Euro: 43.9 (2024), 45.5 (2025), 47.2 (2026), 48.9 (2027)
- Example implication: if contingency reserve for 2025 can be reduced from 2.1 percent to 1% after updated forecasts, this would free up approximately 580 million for the 2025 budget or for debt reduction.

### Process for setting and updating contingency margins and Treasury account interaction
- Annual process stylized:
  - At the start of the budget process (March/April in year T), set or revise contingency margins for T+1 and outer years based on prudence, fiscal space, and uncertainty on inflation/wage growth.
  - When macro forecasts are updated (e.g., September/October), revise contingency margins: if updated forecasts exceed earlier estimates, compensate relevant budget chapters for years T+1 to T+3; if not, revise margins downwards and decide on use of freed resources.
  - Decision remains on how much to keep aside in the actual budget reserve for T+1 (the Treasury Account reserve).
- Annual assessment: each year evaluate how much forward-year contingency margin can be freed; example given of freeing approximately 580 million for 2025 if conditions permit.
- Fiscal sustainability preference: default use of freed reserves should be to reduce public debt, especially when debt exceeds thresholds set by debt brakes.

### Limits to increasing and reducing contingency margins
- Increasing contingency margin further to cover other unexpected budgetary shocks (e.g., social security or local government over-expenditure) is not appropriate; better to enhance control or arrange with other entities.
- Reducing contingency margin because of reserves in the General Treasury Account is not appropriate: Treasury reserves have specific purposes and should not automatically lower the contingency margin.

### Recommendations on contingency margin
- Recommendation 6: Analyze forecast errors, and develop a policy for the contingency margin (Action: IFP in conjunction with the Budget Policy Section, time horizon: September 2023).

### Reserves in the General Treasury Account: size, structure, and reform options
- The General Treasury Account includes unallocated state budget expenditure and is included in the budget law.
- 2023 allocation in the General Treasury Account: 6.9 billion of funds for:
  - reserve of Euro 2.4 billion,
  - relations with the EU Euro1.5 billion,
  - debt expenditure Euro 1.3 billion,
  - other expenditure Euro 1.6 billion.
- Legal basis: 2004 Budgetary rules on Public Administration Budget (Art. 10.1) allows reserves to “cover the time or amount of uncertain necessary or unforeseeable expenditures” but lacks specific governance rules or access criteria; detailed reporting on use of reserves is included in annual accounts.
- Scale of reserves:
  - The 2.4 billion euros of reserves in 2023 equals 7.6 percent of the state budget and 4.2 percent of the general government budget.
  - The increase compared to 2022 driven by additional reserves for Ukraine, energy policy and new legislation; reserves lower in 2024-2025 largely due to absence of reserves for the Ukraine war and surge in energy prices.
- Treasury Account structure in 2023: eight separate reserves; practice originated to limit MFSR discretion but MFSR can reallocate across reserves before or during the budget year.
- Table 5 (Slovakia. Reserves in the Treasury Account) — exact figures preserved (Euro million):
  - Reserve of EU Funds/levies: 558 (2022 Budget), 537 (2022 Realized), 405 (2023 Budget), 239 (2024), 216 (2025)
  - Reserve for new legislation: 131 (2022 Budget), 131 (2022 Realized), 858 (2023), 985 (2024), 1053 (2025)
  - Reserve for emergencies: 11 (2022 Budget), 7 (2022 Realized), 21 (2023), 21 (2024), 21 (2025)
  - Reserve of the judiciary: 10 (2022 Budget), 0 (2022 Realized), 10 (2023), 10 (2024), 10 (2025)
  - Reserve for public salaries: 276 (2022 Budget), 265 (2022 Realized), 188 (2023), 168 (2024), 213 (2025)
  - Reserve for healthcare: 220 (2022 Budget), 220 (2022 Realized), 0 (2023), 0 (2024), 0 (2025)
  - Reserve for Covid: 717 (2022 Budget), 525 (2022 Realized), 0 (2023), 0 (2024), 0 (2025)
  - Reserve for Ukraine: 0 (2022 Budget), 0 (2022 Realized), 100 (2023), 0 (2024), 0 (2025)
  - Reserve for energy policy: 0 (2022 Budget), 0 (2022 Realized), 860 (2023), 0 (2024), 0 (2025)
  - Reserve of the government: 5 (2022 Budget), 1 (2022 Realized), 5 (2023), 5 (2024), 5 (2025)
  - Reserve of the prime minister \ a: 2 (2022 Budget), 2 (2022 Realized) — included in Government Office from 2023 onwards
  - Total reserves: 1930 (2022 Budget), 1688 (2022 Realized), 2447 (2023), 1428 (2024), 1518 (2025)
- Governance and transparency issues:
  - Multiple reserves reduce transparency and limit National Council leverage because MFSR can reallocate without ex-ante access criteria.
  - Recommendation: a single reserve with agreed ex-ante access criteria and timely reporting would improve transparency and rationalization.

### Rationalization of Treasury Reserves — proposed lines of reform
- The MFSR might consider:
  - Pool the eight reserves into one;
  - Define access criteria based on urgency, non-foreseeability, unavoidability, and inability to absorb within existing budget appropriations;
  - Evaluate past use of reserves against these criteria and decide on possible reductions;
  - Include a reasonable estimate of reserves for outer years (vs. current focus on budget year);
  - Continue regular ex-post reporting on use and report against the access criteria.
- Recommendation 7: Rationalize presentation of the Treasury Reserves in the budget as a single reserve with well-defined access criteria and regular reporting to the National Council (Action: Budget Policy Section, April 2024 with 2025 budget).

### Setting sector ceilings and no-policy-change baselines
- After setting aggregate PEL and reserves, allocate remaining available limit across budget chapters and outyears to individual chapter ceilings; medium-term focus is crucial.
- Expenditure prioritization is aided by clear understanding of the cost of maintaining existing policies per budget chapter.
- No-policy change baselines:
  - Baselines estimate the medium-term cost of continuing existing policies at current service levels, excluding one-off activities but including future price impacts and demand-driven volume changes.
  - For the Slovak Republic, a four-year baseline is appropriate (consistent with the period of the expenditure limits).
- Benefits of baseline estimates:
  - Provide robust aggregate estimate of cost of existing policies to assess fiscal space or consolidation needs;
  - Validate top-down expenditure projections;
  - Serve as starting point for ministries’ expenditure limits and clarify consolidation effort per ministry;
  - Identify program-level spending pressures and pinpoint areas for policy change;
  - Simplify budget negotiations by reducing time spent debating cost of existing programs and allowing focus on new proposals and quality assessment.

*IMF | Technical Report — Section 1 (content unit 1svkea2023001).*

### 51.      In the Slovak Republic, work has been undertaken on developing a baseline projections

### In the Slovak Republic, work has been undertaken on developing a baseline projections methodology

### Methodology development and current use
- IFP has developed a baseline projections methodology in partnership with VFM and the Budget Policy Section to construct baseline estimates for different types of expenditure, provide guidance on appropriate price adjustments and where volume projections may be required.
- The methodology could be used to prepare baseline projections within the MFSR and, in the longer run, by other budget chapters.
- The VFM Department used this methodology to prepare baseline projections for selected budget chapters, most notably the health sector, forecasting the cost of the full range of medical services and medicines.
- The zero-based budgeting approach to major capital works implemented by the VFM Department provides an appropriate no-policy change baseline for existing approved projects.

### Role of budget chapters and current practice
- Budget chapters prepare their own estimates of future expenditure needs for budget negotiations; these estimates include projected cost of existing activities and new policy proposals.
- Estimated cost of existing activities commonly reflects expected price increases and constitutes a form of baseline projection used to compare with the budget ceiling.
- Both the Budget Policy Section and budget chapters would benefit from calculating expenditure baselines consistently to provide a common basis for budget negotiations and to make transparent fiscal consolidation needs for each budget chapter.
- Current concern: the Budget Policy Section is wary of providing expenditure baselines to line ministries due to risks that baselines could be seen as budget allocations or interpreted as admission that Ministry of Finance ceilings are inadequate.

### Communication, training, and agreed methodology
- Communication and training of line ministries are crucial for rolling out baselines; messaging should emphasize:
  - Baselines are a starting point for the budget process and precede spending prioritization to meet expenditure limits.
  - In a fully developed framework, baselines provide a commonly agreed basis for important policy decisions in settling the budget.
  - Agreement requires a commonly understood methodology and dialogue to resolve differing views.

### Phased rollout and timetable
- The task of developing agreed quality expenditure baselines for all budget chapters is significant and best suited to a staged approach to develop methodology and ensure consistency and quality before engaging line ministries.
- Preparing a complete set of baselines within the Ministry of Finance would provide a more robust estimate of aggregate medium-term expenditure under current policies and improve assessment of consolidation effort required to meet medium-term expenditure limits.

Phase 1 (Budget Policy Section)
- Use the methodology developed by IFP, VFM and the Budget Policy Section, taking the 2024 Budget as a starting point, updated where necessary for the outcome of the 2023 year.
- Baselines should be constructed using economic parameters provided by the Institute for Financial Policy and should aim to be completed by the end of March 2024.
- Baselines to be prepared based on parameters available in January 2024 so they can be used to assess fiscal space at the strategic phase and in setting budget chapter expenditure limits at the end of April.

Phase 2 (Engage budget chapters)
- Share methodology with budget chapters and ask them to prepare a set of baselines in early 2025.
- Preparation involves budget areas of each chapter and analytical institutes in several line ministries.
- Provide a manual and training; the manual will make clear baselines are not budget allocations and that consolidation efforts are expected from budget chapters reflected in their expenditure limits.
- Budget Policy Section to refine baselines based on information provided by chapters for assessing fiscal space and calculating budget chapter expenditure limits.

Phase 3 (Agreement and updating)
- Budget chapters to update baselines in early 2026 in consultation with MFSR, with disagreements escalated and resolved by ministers prior to the budget process.
- Baselines to provide the basis for setting budget chapter expenditure limits in May 2026.

### Frequency of baseline updates
- Short term: annual updates of baselines prior to starting the budget process to provide quality information for assessing fiscal position and setting budget chapter expenditure ceilings.
- Longer term: with broad agreement on methodology, consider increasing frequency; a twice a year update would provide one early update (prior to the strategic phase) and a second update of forward years in budget finalization.

### Allocating consolidation in budget chapter ceilings
- Expenditure baselines at the budget chapter level provide a starting point for allocating consolidation efforts.
- Consolidation can be decided at the strategic phase and include across-the-board measures (e.g., public sector wages) or targeted savings from spending reviews.
- Example: If a spending review identified proposed measures of 200 million euro per annum in a budget chapter, a proportion of these savings could be applied to that chapter’s ceilings; chapters achieving larger savings could be allowed to reallocate funds to other initiatives.
- In absence of specific options, MFSR can allocate savings based on government priorities or commitments (e.g., defense or quarantined benefit payments).
- Budget Policy Section should allocate remaining consolidation efforts based on capacity within each budget chapter or on a proportional basis.
- The allocation process should be transparent and ideally agreed by the Council of Ministers as part of the Fiscal Strategy Report in April each year.

### Budget finalization implications
- Binding expenditure limits affect finalizing the budget in August/September and will require strong coordination to achieve the limits.
- Outcomes of negotiations on budget chapters and changes to economic forecasts (e.g., an increase in projected inflation in the September macroeconomic update) can impact expenditure forecasts for pensions and other entitlements and may require additional consolidation measures.
- Reinforces need for strong internal coordination within the MFSR and a more structured forum to coordinate process and advice across the ministry.

### Recommendations (exact formulations and actions/time horizons)
- Recommendation 8. Prepare initial baseline estimates for all budget chapters. (Action: Budget Policy Section; time horizon: March 2024)
- Recommendation 9. Provide guidance and training to line ministries to prepare baselines their expenditure baseline by budget chapters for the 2026 budget (Action: Budget Policy Section,IFP,VFM; time horizon: May 2025)
- Recommendation 10. Agree on updated expenditure baselines between line ministries and the MFSR (Action: Budget Policy Section; time horizon: March 2026)

### Control of spending by ‘other entities’ (general government outside the state budget)
Key facts and figures
- The budget of ‘other entities’ is approximately Euro 24.7 billion in 2023, corresponding to around half of general government expenditure.
- The state budget contributes Euro 2.2 billion in transfers to these entities.
- After correcting for state budget transfers, the budgets of ‘other entities’ make up 38 percent of the public expenditure ceiling.
- For budgeting purposes, entities are grouped into 36 categories.
- Figure 4 (budget shares of ‘other entities’ in 2023) reports:
  - Social insurance: 36%
  - Healthcare insurance: 16%
  - Medical facilities: 8%
  - Municipalities / local government: 28%
  - Railways: 4%
  - Public universities: 3%
  - Highways: 2%
  - Other: 3%
- Example of entity budget range: from 6 million euro for the Press Agency to 11 billion euro for the Social Insurance Agency.

Findings and constraints
- MFSR has limited control over spending of most ‘other entities’; these entities approve their own annual budgets and governance arrangements limit government decision-making power beyond transfers.
- Some large entities’ expenditure (e.g., social welfare and health areas) is often demand-driven, further limiting government influence.
- Good expenditure projections and monitoring (e.g., monthly reporting instead of quarterly) are crucial; further efforts to strengthen control are needed under the public expenditure limit.

Possible instruments to strengthen control (combination tailored per entity)
- Bring the entities’ cash balances within the Treasury Single Account—to monitor expenditure in real time.
- Integrate all revenues and expenditure in the state budget—strongest case where entities are entirely within the public sector, predominantly budget-funded, and not subject to private competition (e.g., railways).
- Integrate revenues and expenditure that are outside the state budget under the line ministries’ sectoral ceilings to align incentives and make line ministers responsible.
- MFSR or the respective line ministry to agree with the ‘other entities’ on their budget—formal agreements at ministerial or board level on permitted expenditure levels, with variations approved by the Minister of Finance.
- Consider penalties for entities that have unapproved expenditure (e.g., reduction in transfers from the budget, sanctioning the Board of Directors).

Governance levers
- Line ministries largely responsible for exerting influence (appoint board members, set strategic direction).
- Example: Article 10 of the 2022 Amendment to the Budgetary Rules states that “the Ministry of Health of the Slovak Republic shall ensure compliance with the limit of public expenditure on public health insurance and the general budget for medical facilities included in the central administration”; similar provision exists for the Ministry of Education.

Recommendation 11 (exact formulation and action/time horizon)
- Recommendation 11. Determine for each of the ‘other entities’ how to strengthen government control on their budgets, which to integrate within the state budget, and explore the strengthening of the responsibility of the line ministers in the budget law (Action: BPS and VFM; time horizon: September 2023).

### Managing virements (in-year reallocations)
- The number of approved virements grew by about 10 percent annually, from approximately 2,750 in 2018 to more than 3,900 in 2022.
- Virements include:
  - Virements between programs of the same chapter (budget neutral).
  - Transfers from one type of expenditure to another in the same budget chapter (budget neutral).
  - Transfers of the European Union and national co-financing from paying unit to final recipient.
  - Virements that add budget from the treasury chapter to the line ministry chapters (budget neutral at the state budget level).

_Imf | Technical Report_

### 82.      Both the Acts on Budget Rules and on the State Budget set limits on in-year amendments

### 82.      Both the Acts on Budget Rules and on the State Budget set limits on in-year amendments to the state budget but provides considerable room for the MFSR to adjust the allocations

### Virements: role and problems
- The Acts on Budget Rules and on the State Budget limit in-year amendments but allow the MFSR considerable room to adjust allocations using virements, enabling quick responses to unforeseen, urgent budgetary needs.
- In combination with drawing on the unallocated contingency reserves included in the budget (see Section III), the MFSR may use virements to react quickly to new events without requiring approval from the legislature.
- Identified problems from the absence of strict rules governing virements:
  - There is little incentive for line ministries and ‘other entities’ to propose a budget with the correct breakdown, as the figures can be amended later.
  - The budget approved by the National Council may be revised significantly during implementation without its consent, since virements only need to be notified to the Council ex post (twice a year), undermining the oversight role of the National Council.
  - Managing these virements creates considerable work for the Budget Policy Section of the MFSR, as well as the budget sections at budget chapters’ level, diverting resources away from more strategic work.
  - The current procedures reduce the strategic approach to budgetary resources, as virements are approved on a case-by-case basis, and not grouped together for integrated decision-making.

### Policy options to contain virements in 2024
- The MFSR could tighten its policy in the coming months so that the quality of the budget proposals for 2024 will be improved before submission to the National Council in October 2023.
- Possible policy measures drawn from other countries’ experience:
  - i) strict criteria for accepting or rejecting requests for transfers by line ministries and ‘other entities’;
  - ii) a threshold for a minimum size of virements that can be submitted by line ministries (thus requiring them to approve smaller in-year adjustments themselves);
  - iii) grouping virements into 4-5 windows a year, each window lasting one week;
  - iv) excluding some types of virement during some windows (e.g. additional funding virements only during budget-decision making by the Council of Ministers).
- Implementation caveats:
  - Implementation will be gradual to avoid substantial negative consequences on budget execution or the government’s ability to react to unforeseen and urgent events.
  - The MFSR will need to build capacity in budget sections of line ministries and ‘other entities’ to work with revised procedures and processes.
- Recommendation 12: Decide upon and announce a stricter policy on virements (Action: Budget Policy Section; time horizon: August 2023).

### Organizational issues: summary
- The report discusses three organizational issues to improve the Government’s ability to implement expenditure limits:
  - (a) internal coordination of fiscal and budgetary policy issues within the MFSR;
  - (b) procedures for preparing the government’s macroeconomic and tax forecasts;
  - (c) strengthening the organization of the MFSR’s Budget Policy Section.

### A. Internal coordination within the MFSR
- Current situation:
  - No structured process for discussing and coordinating issues related to fiscal policy, fiscal rules, and budget preparation at a high level.
  - During the budget planning process the Budget Policy Section discusses issues with IFP and the VFM Unit on an ad-hoc basis.
- Proposed change:
  - Establish a high-level Committee of Director-Generals and their Directors including officials from the Budget Policy Section, the IFP and the Value for Money Unit.
  - Committee responsibilities: preparation of Slovakia’s Stability Program, the Fiscal Strategy Report, the macroeconomic and tax forecasts, and the setting of the PEL ceilings and reserve; coordinating advice for the Minister and State Secretaries on key fiscal and budgetary issues.
  - Committee would not be involved in annual budget negotiations (managed by the Budget Policy Section).
  - Meeting frequency: regularly from March to May each year and intermittently at other times; could be chaired by a rotating Director-General.
- Recommendation 13: Establish a high-level committee of Director-Generals and their Directors to coordinate the work of the MFSR on key fiscal policy and budgetary issues and prepare policy advice for the Minister and State Secretaries. (Action: IFP / Budget Policy Section / VFM Unit; time horizon 2023-2024).

### B. Procedures for preparing official macroeconomic and tax forecasts
- Current arrangements:
  - Two independent committees, chaired by the IFP, prepare macroeconomic and tax forecasts used by the MFSR.
  - The Macroeconomic Forecasting Committee provides real GDP and inflation forecasts.
  - The Tax Forecasting Committee projects all tax revenues (according to the national classification), some non-tax revenues, and some expenditure items.
  - Members with voting rights vote on whether forecasts are conservative, realistic, or optimistic; committees must agree with an absolute majority.
  - Statutes require collaborative discussion and publication of minutes; the IFP is stated to be “independent of the Minister of Finance and the political level of government in its forecasting activities”.
- Practical constraints:
  - Committees have extremely limited time to finalize forecasts, leaving insufficient time for fully collaborative discussion.
  - Example timeline and time pressure:
    - May 22: start of the macro forecasting process;
    - June 5 or 6: release of national accounts and labor market data by the SOSR;
    - June 12: IFP sends macro forecasts to the Macroeconomic Committee;
    - June 14-16: Macroeconomic Committee meets and evaluates the IFP’s forecasts;
    - June 20: IFP sends the tax forecasts to the Tax Committee;
    - June 22-24: Tax Committee meets and evaluates the forecasts;
    - June 30: legal deadline for publishing forecasts.
  - As a result, initial forecasts prepared by the IFP are rarely changed.
- Suggested improvements:
  - Allow more time for collaborative processes so committee members (notably the CBR and NBS) can have their inputs incorporated into revised forecasts resubmitted for approval.
  - Options to create more time include encouraging the SOSR to produce national accounts data earlier (by say two weeks) and/or moving back the date forecasts are delivered to the National Council.

### C. Organization of the Budget Policy Section
- Current pressures and challenges:
  - Crisis measures related to Covid-19, the war in Ukraine, escalation of energy prices, and increased election year spending have strained the Budget Policy Section.
  - Ad-hoc spending decisions by the National Council, a steep increase in virements and supplementary budgets, and the PEL introduction have intensified pressure.
- Structure, capacity and workload:
  - The Budget Policy Section’s current structure and capacity: 78 staff (established in 2003).
  - Current practices focus on preparing the annual budget, monitoring execution, and making a large number of in-year reallocations (currently around 3,900 per year).
  - Functional split: responsibilities for preparing and executing the budget are split between two separate sections; the VFM Unit (outside the Budget Policy Section) deals with spending reviews and most investment project evaluations.
  - Line ministries mirror this structure with separate technical budget departments and analytical “institutes”.
- International practice and potential reforms:
  - Other EU and OECD countries have more integrated structures: more staff devoted to challenging line ministries on forecasts and priorities; responsibility for evaluating capital projects; integrated teams handling both preparation and execution; close involvement in spending reviews.
  - Example: Netherlands’ Budget Department pools resources into teams by line ministry, supervises recurrent and capital spending and related ‘other entities’, approves changes, monitors execution, prepares budget decisions, establishes baseline estimates, and evaluates effectiveness and efficiency of spending.
- Implications for Slovakia:
  - Moving towards a modern structure could improve efficiency but would require new staff resources and retraining and should be phased in slowly to avoid disruption.
  - Over time, some functions of the VFM Unit (capital projects and spending reviews) could be transferred to the Budget Policy Section.
  - Reducing the workload from virements could free resources for higher priority work.
  - Including all staff working on a particular line ministry in the same unit would provide greater flexibility.
  - A comprehensive audit of functions, business processes and staffing is required before redesigning the department.
- Recommendation 14:
  - (i) Undertake an independent review of the Budget Policy Section’s functions, business processes, staff resources and training needs;
  - (ii) prepare a phased action plan for implementing the new structure.
  - (Action: Minister with the Budget Policy Section; time horizon 2024-2025).

*Source: 1svkea2023001 - 82.      Both the Acts on Budget Rules and on the State Budget set limits on in-year amendments*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1svkea2023001.pdf_