Slovakia

   

Economic Policies

#33
Key Findings
Despite steady economic growth, Slovakia receives a relatively low overall ranking (rank 33) with regard to economic policies. Its score on this measure has increased by 0.3 points as compared to its 2014 level.

Growth rates have been above 3% for several years, driven by external demand and household spending. Overall investment returned to growth in 2017. New auto-production agreements are positive, but increase the country’s dependence on this single sector.

Unemployment rates are moderately high but falling. Long-term unemployment rates are very high in cross-EU comparison, and labor-market participation rates are low in a number of groups. Labor mobility is also low, creating significant geographical differences in unemployment rates. A shortage of skilled labor for industrial production has emerged.

Tax policy has most recently focused on fighting tax evasion. However, the tax system has been reformed numerous times in recent years, drawing complaints about a lack of certainty. Deficits have been reduced to sustainable levels, thanks both to strong growth and restrained expenditures. R&D policy is underdeveloped.

Economy

#26

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
With real GDP growing by almost 3.5% in 2016 and 2017, the Slovak economy remains among the strongest growing EU and OECD countries in the period under review. For 2018 and 2019, even higher growth rates are expected. Growth continues to be driven by household spending growth and net exports. After the sharp decline of public investment in 2016, overall investment is set to return to growth in 2017 and supposed to accelerate further in 2018. The British carmaker Jaguar Land Rover (JLR) with whom the Slovak government signed a major agreement in December 2015 plans to launch its production by the end of 2018. The plant to be constructed near Nitra is a €1.4 billion project providing work to more than 1,000 people. A further car company, the Chinese producer of e-cars Zhi Dou, is interested in investing in Slovakia. These developments strengthen Slovakia’s position as the world’s largest producer of cars per capita, but will further increase the already-high dependence of the Slovak economy on a single sector and on export performance. Moreover, long-term growth prospects still suffer from weak infrastructure, a lack of skilled labor, low R&D spending and deficits in public governance.

Citations:
European Commission (2018): Country Report Slovakia 2018. SWD(2018) 223 final. Brussels (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-slovakia-en.pdf).

OECD (2017): Economic Survey Slovak Republic 2017. Paris.

Labor Markets

#39

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
4
Due to the strong growth of the Slovak economy, the unemployment rate has gradually fallen in the last years and has declined to about 8% in 2017. At the same time, however, several structural problems persist which have not been adequately addressed by the third Fico government. Long-term unemployment is one of the highest in the European Union, and the labor market participation of groups such as Roma, young people, women with children, the elderly and low-skilled persons is relatively low. As labor market mobility within Slovakia is low, regional differences in (un-)employment are strong. A more recent problem is the growing shortage of qualified labor for industrial production. While labor market programs have been refined and the implementing of an action plan for the integration of long-term unemployment adopted in November 2016, has started, spending on labor market policy and the rate of participation in such measures are still low.

Citations:
European Commission (2018): Country Report Slovakia 2018. SWD(2018) 223 final. Brussels, 22-26 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-slovakia-en.pdf).

Ministry of Finance (2017): National Reform Programme of the Slovak Republic 2017. Bratislava, 10. (https://ec.europa.eu/info/sites/info/files/2017-european-semester-national-reform-programme-slovakia-en.pdf).

Taxes

#23

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
6
The introduction of a flat-tax regime in 2004 played a major role in establishing Slovakia’s erstwhile reputation as a model reformer and an attractive location for investment. Whereas the first Fico government left the flat-tax regime almost untouched despite earlier criticism, the second Fico government in 2012 reintroduced a progressive income tax and increased the corporate-income tax, thereby increasing vertical equity to the detriment of competitiveness. Under the third Fico government, the focus has rested on the fight against tax evasion and improvements in tax collection. In addition, the government adopted a number of minor tax changes, including a lowering of the corporate-income tax rate from 22% to 21%, increases in the caps on social insurance contributions and a temporary doubling of the special levy on businesses in regulated industries (energy, telecoms, public health insurance, etc.). The introduction of reverse charge on VAT for imported goods was deferred and made subject to a pre-defined level of public budget deficit, which means it will likely not come into effect before 2020. These changes have lacked a clear direction and have further undermined the reliability of the tax system. While corporate-income tax revenues in 2017 were lower than expected, stronger-than-expected revenues from VAT, personal income tax and social insurance contributions helped to reduce the fiscal deficit.

Citations:
European Commission (2018): Country Report Slovakia 2018. SWD(2018) 223 final. Brussels, 16-17 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-slovakia-en.pdf).

Paur, D. (2017): Uncertainty in Corporate Tax. Institute for Financial Policy, Policy Brief 2017/5, Bratislava (http://www.finance.gov.sk/en/Default.aspx?CatID=740).

Budgets

#26

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
Slovakia managed to reduce its fiscal deficit from 8% in 2009 to 3% in 2015 and 1.7% in 2016. For 2017, a deficit of below 1.5% is expected, for 2018 even a balanced budget. While the consolidation of the budget has been favored by strong and higher-than-expected economic growth, the government has also succeeded in limiting expenditure growth. In the period under review, the government continued its “Value for Money” project and initiated a second round of spending reviews. At the same time, its calls for exempting state spending on roads and highways from counting toward the constitutional debt ceiling have raised concerns about the credibility of the country’s fiscal framework. Because of population aging, and the lack of pension and health care reform, the long-term risks for public finances have remained high.

Citations:
European Commission (2018): Country Report Slovakia 2018. SWD(2018) 223 final. Brussels, 9, 17-18 (https://ec.europa.eu/info/sites/info/files/2018-european-semester-country -report-slovakia-en.pdf).

Research and Innovation

#36

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
3
Slovakia has a weak and underdeveloped research and innovation policy. R&D intensity, the number of patent applications and levels of employment in knowledge-intensive activities are below the EU average. Expenditure on R&D, both public and private, has gradually risen, but has done so from a very low level and remains relatively low. The increased private sector investment in R&D has not been not sufficient to compensate for the state failure in managing R&D. Competencies have been divided between the Ministry of Economy, and the Ministry of Science, Education, Research and Sports, with each ministry managing its own network of agencies. Originally planned for 2017, the transformation of the organizations of the Slovak Academy of Sciences into public-law institutions, which aimed at facilitating cooperation between the academy and business, was eventually postponed. Weaknesses in the distribution of funds became manifest in summer 2017 when Minister of Education Peter Plavčan resigned following a scandal surrounding the misuse of EU funds for research. His successor, Martina Lubyová, scrapped the call of her predecessor and announced an action plan guaranteeing more transparency for the funding procedures in research.

Citations:
Baláž, V., K. Frank, T. Ojala (2018): RIO Country Report Slovakia 2017. Luxembourg: EU (https://rio.jrc.ec.europa.eu/en/country-analysis/Slovakia/country-report).


Ministry of Finance (2017): National Reform Programme of the Slovak Republic 2017. Bratislava, 10. (https://ec.europa.eu/info/sites/info/files/2017-european-semester-national-refo rm-programme-slovakia-en.pdf).

Global Financial System

#19

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
7
As a small country, Slovakia has very limited capacity to influence the regulation or supervision of the global financial markets. Regarding these issues, it tends to follow the EU mainstream. Slovakia has been supporting the international regulation of financial markets, including the creation of a banking union and implementing all European Union directives regarding supervision of financial markets as well as the establishment of the European Fund for Strategic Investments. Slovakia supports also the transparency of tax systems in order to enhance investment activities and the monitoring of cross-border financial flows both within Europe and globally.
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