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Monday, December 5, 2022

(INTERVIEW) Dr Janez Šušteršič: “In Slovenia, above all, we need a serious look at the tax system and to decide what we want, and based on that, make a comprehensive reform”

By: Vida Kocjan

Last week, we spoke with Dr Janez Šušteršič, former finance minister in the Slovenian government and a good expert on the situation both in Slovenia and elsewhere, via Skype (he was in Moldova). There, as an international expert, he participates in a project that helps the Moldovan government in the EU accession process.

Demokracija: The first hundred days of the government coalition led by Robert Golob have passed. What is your assessment of these first hundred days?

Šušteršič: In my opinion, they mainly dealt with politics and the political part of their programme, that is, with RTV Slovenia and the elimination of the harmful consequences of the previous government, as well as with health care, where we will have to wait to see if the measures will work. Opinions are very different, including that of doctors, it is hard for me to judge. In the economic field, measures were mainly announced, some were also done, e.g., the value added tax (VAT) was reduced for energy products, regulation of the prices of motor fuels (gasoline and diesel) was introduced. The rest, however, is more or less still being predicted, and it is not yet clear what the measures to help the economy will look like. This is a general assessment. The problem is that there are many predictions that do not come true because they cannot, for example the prediction about the purchase of all Slovenian grain. We immediately asked the question how, and it quickly turned out that it was not possible. This was, let’s say, one such big debacle. Even the announcement that some companies are supposed to stop for half a year is such that we all wish that it was another ill-conceived statement, that this was something that was not meant seriously.

Demokracija: Have you heard anywhere else that they would close or implemented a lockdown of companies?

Šušteršič: No. The lockdown made sense during the epidemic with the new coronavirus, but it was for epidemiological reasons to prevent infections from spreading. But now companies are thinking, even if they have problems with deliveries, because the whole world has them, and if they are a bit late with a customer, the customer can understand that in this situation. That is, companies will try to work as long as they can. When they cannot anymore, they can decide to go on vacation for a month, for example, but it has to be their decision. In that case, it is also right that the workers get compensation, but the government itself cannot decide that companies should close because the government thinks they cannot work.

Demokracija: How else do you assess the government’s measures to mitigate the costliness?

Šušteršič: I think it is appropriate that the prices of energy products are regulated at this time, because these are fluctuations that are partly caused by real matters, such as the war in Ukraine, and to a large extent it is also a psychological reaction of the markets. Energy markets have become very similar to the stock market. The same applies to the market for pollution permits. That price fluctuations can occur due to speculation or due to expectations, psychology, it is very difficult to accept that one economy or people depend on what is happening there. It seems to me that in such a period, when there are such pronounced fluctuations, which are also partially unfounded, it makes sense to ensure price stability. It would also make sense to tax the extra profits of energy companies and traders due to high prices.

We do not yet know how the economy will fare. There is a lot of talk about a cap on the prices of energy products, which should be agreed at the European level. But when you regulate a certain price, then of course there are losses on the other side. We see that some gas suppliers are already stopping deliveries, only the largest will remain on the market. Regulated prices also send the wrong signal to consumers, although I am not afraid of that in this situation. Regardless, for households we already know where the regulated prices are, these prices are higher than they were a year ago. So that this signal that energy products are more expensive will reach people or it has already reached them and will stay. I believe that such price regulation makes sense in this period. In the slightly longer term, it is necessary to consider both the restructuring of the industry and a different energy vision in Europe, as well as a different way of functioning of these markets.

I miss that there is more talk about helping companies to restructure. It is one thing to survive this year, but another is, of course, to go into serious energy restructuring of production, material restructuring. Above all, the state should be here to financially support such restructuring. Some of this money is also foreseen in the Recovery and Resilience Plan, but not much is heard about it.

Demokracija: Neighbouring countries are adopting really extensive packages of measures or aid, Croatia for example 2.8 billion euros, Austria and others have packages worth several billion euros. With us, there are mostly promises and predictions, but the measures are minor…

Šušteršič: In Slovenia, subsidies are provided for costs, in a certain percentage of cost increases, but this is something that is difficult to determine. I have to say that when the corona started, all of us economists mostly agreed that this was not the time for the government to save. It is similar now. This crisis will have to be survived, but of course care must be taken that money is not allocated to meaningless measures and those that would work weakly. The state cannot help for a long time either. We saw it with corona as well – at the beginning there was more aid, but a smaller lockdown, but then we were able to go everywhere in Europe, to policies where at least the economy was functioning normally. We have all adapted to this way of working. And it will have to be similar here. Now we have to think for say one year, when there is this shock and the state has to help, and in the meantime companies and consumers have to adapt. Because the fact that energy will be expensive, much more expensive than it was, is, in my opinion, a reality that will remain.

Demokracija: What do you think about the so-called European formula, when electricity prices are linked to the price of gas?

Šušteršič: When I realised this and other colleagues realised it too, it was quite a surprise, because it was not important before. This was put in place to promote renewable resources. In this situation, when the price of gas is so high, this is pointless, and fortunately the President of the European Commission, Ursula von der Leyen, has already said that this will have to be changed. It took a year for this to be said, but it is right to change it.

Demokracija: What about the state budget, an amending state budget for 2022 is being adopted, the Fiscal Council has warned that higher income from inflation should not be used for higher spending, but rather for debt repayment. How do you look at it?

Šušteršič: The question is what the goal is. The Minister of Finance Klemen Boštjančič said that this is a technical budget, that on the one hand, higher revenues have been included, and on the other hand, expenses that they are obliged to cover according to the legislation. Regarding the latter, I think the Fiscal Council is right. It is necessary to decide which expenditures are important and which are not, and also to think about changing some law, and possibly redistributing money from some other purposes for what is now important, i.e., solving the crisis. From this point of view, I agree with the Fiscal Council. Another thing is, if the key priority now is to help companies in recession, then the state must help. But we have to know that every spending by the state, every increase in spending again stimulates inflation. If we solve the crisis in this way, then we will have inflation of around 10 percent for several years. If we want to help people and the economy, the price will be even higher debt and several years of high inflation.

Demokracija: So, what can we expect in terms of inflation?

Šušteršič: Inflation is basically one of the simpler things in economics. Prices can rise as much as there is money. In other words, if the supply of money were to be reduced, the rise in prices would stop. Not energy products, but other things, because people will spend less on other things. This can cause a problem, especially in service industries and in industries such as fun electronics or white goods. Things that we are used to replacing every few years, we will not now, because we will spend the money on energy and essential consumption. If the only goal is to reduce inflation, the measures are clear. Interest rates rise, there are fewer credits because they are more expensive, wages have to rise less than inflation rises… Then you just run out of money, prices stop, and you cannot raise them anymore because nobody has money left to buy. Although this is unpleasant, such an action causes unemployment, but it reduces inflation. Therefore, this should be compared with other goals. At this time, the more important goal for the government is for the economy to survive, for jobs to be preserved through the coming recession, for inflation to remain high for some time, because the policies themselves will also encourage it for some time.

Demokracija: Prime Minister Golob said that the government’s goal is to keep inflation at 10 percent…

Šušteršič: This is high, but above all, it does not depend on him.

Demokracija: How can the government affect inflation?

Šušteršič: By regulating prices, which also causes disruption in the market, by reducing budget expenditures. In other words, if it reduces budget expenditures, reduces demand and consumption, there will be less money, as we said before. However, the government does not intend to do this, of course.

Demokracija: Now we are witnessing a basket of 15 or 20 food items, which is supposed to be a soft measure to prevent costliness in the food field. Is it possible that this would have an impact on the measurement of inflation, that it would be in the basket of the Statistical Office of the Republic of Slovenia?

Šušteršič: No. This is certainly not the case, because the Statistical Office of the Republic of Slovenia has its own methodology. It tracks a lot of prices every month and then also has a methodology to calculate inflation from that price data. One very important thing about this methodology is how to deal with day-to-day fluctuations, such as discounts and the like. And that is exactly what this government analysis does not have. It is interesting to see what the basket was like in a particular store, but all of us who go to the store know that the same store is not always the cheapest and that it also depends on what you want to buy, where there is a promotion that day, or a discount for pensioners or a discount on a loyalty card. That is, retail prices in stores change daily. In addition, even if something is expensive, you might buy something similar, which is not so expensive. I think that this inflation that we talked about, and also the fact that people are afraid of how they will pay the basic bills, forces us all to pay a lot more attention to prices in the store than maybe we used to. Some were paying attention all the time because they had to, some not so much. This attention and sensitivity of customers is also the biggest pressure on stores. And sending some researchers on one specific day at a specific time to see what the prices are at that moment is not very valuable. Only maybe in the sense that now the methodology is public, and retailers are aware of how they monitor it and because of that retailers will keep the prices of those 20 products that they monitor down because stores will want to do well in these comparisons. This is also the only possible effect of this monitoring.

Demokracija: The government does not intend to reduce public spending. However, how do you assess the remuneration of non-governmental organisations, these days they agreed with the trade unions on the payment of a costliness supplement to employees in the public sector, otherwise presented as part of the holiday allowance, and on the increase of wages in the public sector. What will this mean?

Šušteršič: As far as I have been able to read, the agreed salary increase is 4.5 percent. Then there are some corrections of wage disparities. In any case, this is only about half of this year’s inflation, which I do not think is controversial from a macroeconomic point of view. I have said before that wages should not rise as much as inflation. It is clear that freezing salaries in these conditions would not work and would not make sense. However, there is something in this agreement that we are closely monitoring in the private sector. This is a promise that holiday pay will be calculated. The concept of holiday pay does not exist in the legislation. Reimbursement must be paid by July 1st. If you pay it after July 1st, it is taxed just like wages. So, it can happen similar to what happened with the firefighters, when the government promised something again and did not think about taxes. It may happen that in the public sector they will receive a calculation of the holiday allowance in November, and then the recipients will pay income tax and contributions on it. And there will actually be much less of this money than the government promises because it will get a third or more back.

Recourse is limited to one amount, they will stay within that, because they have paid relatively low recourse in the public sector, but it cannot be paid after July 1st, unless this is agreed by a collective agreement and the employer is insolvent. That is, the government would have to say that it is insolvent in order to pay it out as tax-free. But there is always the possibility that they will change some law on the last day. Or they will come up with some very creative interpretation of the law, and then we in the private sector will say, okay, because then we can also pay part of the recourse in November, if we have not reached the upper limit yet. So, this can still be very interesting.

Demokracija: How do you view non-governmental organisations or those from the Institute March 8 or Ljubljana cyclists who brag about filling laws instead of the government, and the like, while the government, on the other hand, rewards them financially?

Šušteršič: Civil society is certainly useful for society, it must be lively and active, and also as diverse as possible. In a country like ours, I think it is completely normal that non-governmental organisations also get public money, because we do not have very strong donors in the country that they can live and work on. Of course, through public tenders, with clear goals and criteria for what the money is given for, where there is a social benefit. I think we can all observe together that the result of these tenders are mainly non-governmental organisations with a more left-wing ideology. Then a different government comes in and changes it a little for a year or two, and then it goes back again.

What really worries me more is that some non-government people now have the privilege of working with legislators. I believe that the role of NGOs is control, pressure, not cooperation. For me, the biggest alarm was the statement that, for example, the Institute March 8 wants to cooperate with the government in the referendum campaign. When the people decide, the NGOs should say their point of view, they can do their campaign, but not that they want to cooperate with the government. In doing so, they cross a line that should not be crossed. It is similar with journalists. If you want to be a journalist, you cannot be an activist of one political option. As it applies to professionals, it also applies to civil society.

Demokracija: Now you are in Moldova, what are you doing there?

Šušteršič: We have workshops where we will teach or practiced estimating the costs of the measures that the Moldovan government will take to bring it closer to the European Union.

dr Janez Šušteršič (Photo: Veronika Savnik)

Demokracija: How do they cope with the costliness in Moldova, do they have very high inflation?

Šušteršič: Inflation is high, over 30 percent, and poverty is also increasing after a long time. But I have heard that there are ideas to reduce taxes, that is income tax, corporate tax and at the same time increase value added tax, which is really not the right time with the inflation they have.

Demokracija: Would lowering taxes be a welcome measure for Slovenia at this time?

Šušteršič: I think that in Slovenia we need above all to take a serious look at the tax system and to decide what we want and make a comprehensive reform based on that. As an example: in Germany, they raised the general income tax relief because of the costliness. I do not think this is the best course of action because it is disproportionate and not targeted. In our country, it would be important to maintain above all that the tax scale must be adjusted to inflation every year. In other words, the correction of income tax class boundaries. If this is not corrected, then even if your salary rises by 10 percent and your purchasing power remains the same, the state will collect more from you, because a larger part of your income falls into a higher income tax bracket. I think this is crucial and should be fixed now.

As for the general allowances, it is true that if you raise the general allowance, those with the highest salaries get the most. That is why it seems to me that, if we are talking only about the costliness, it makes much more sense to help those with the lowest incomes with subsidies or transfers. Because they have the biggest problem. Others will grumble and be able to afford less than they can now, but we will still pay the bills and our lives will not be in danger because of it. Some will be, they will be affected by the so-called energy poverty, and these should be helped through transfers, not through taxes.

Demokracija: The previous Prime Minister Janez Janša established expert groups, appointed experts, consulted with them and the like, this is not heard of now…

Šušteršič: You can hear a bit about it. Some economists were invited to these meetings with the opposition around energy measures. The Minister of the Economy, Matjaž Han, has an expert body, which consists of people from the economy and some economists. However, we do not hear anything about them making any suggestions. We can hear a group for covid a lot, but basically no one in the government pays much attention to it. I think the idea that we will overcome covid now with recommendations and without restrictions, when there is another serious wave, is a dangerous illusion. This does not work anywhere in Europe. I have been to a lot of airports this year, practically nobody wears a protective mask anymore. There were three or four of us wearing masks on the plane. In airport lines, where people stand right next to each other, practically no one has a mask. The same can of course be seen in shops or public transport, except where masks are mandatory. So, I have the feeling that we mainly want to enjoy the fact that there are no more government restrictions, but we do not want to impose them ourselves. Humans are generally like this, even in other areas, that until something seriously affects us, we are not careful. We know these stories from all areas of life.

56-year-old Dr Janez Šušteršič is a publicist, economist, and former finance minister. He studied economics at the University of Ljubljana, where he obtained a doctorate in political economy of transition. He was also a visiting student at the University of Zurich. Between 2001 and 2007, he was the director of the Office for Macroeconomic Analysis and Development (Umar). From 2005 to 2007, he was the vice-chairman of the Economic Policy Committee of the Council of the EU in the composition of finance ministers (Ecofin), and in 2012 he became the Minister of Finance of the Government of the Republic of Slovenia. He now advises governments in Southeast and Eastern Europe.

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