Slovakia

   

Economic Policies

#32
Key Findings
Despite steady economic growth, Slovakia receives a relatively low overall ranking (rank 32) 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 steady and robust, reaching above 4% in 2018. This trend has been driven largely by household spending growth, a solid labor-market recovery and a rise in exports. New auto-production agreements are positive, but have increased the country’s dependence on this single sector.

Unemployment rates have fallen steadily, passing the 7% mark in 2018. Long-term unemployment rates are high, and labor-market participation rates are low among Roma, young people, women with children and low-skilled people. 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. Revenues have grown thanks to the growing economy, but remain low in relation to GDP. Deficits have been reduced to sustainable levels, thanks both to strong growth and restrained expenditures, with a balanced budget expected in 2019. Public debt levels nonetheless remain relatively high.

Economy

#28

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 at a robust pace of 3.4% in 2017 and more than 4% in 2018, the Slovak economy remains among the strongest growing in the EU and the OECD in the period under review. Growth continues to be driven by solid household spending growth and a strong labor market recovery. Moreover, the economy displays a solid rise in exports. Both private and government investment is likely to accelerate in 2018 and 2019. The British-Indian carmaker Jaguar Land Rover (JLR) launched its brand-new production plant in Nitra end of October 2018. More than 1,300 people are currently working at the plant; in 2020 2,800 are intended to be employed. This development strengthens Slovakia’s position as the world’s largest per capita producer of cars, 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 (2019): Country Report Slovakia 2019. SWD(2019) 1024 final, Brussels (https://ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-c ountry-report-slovakia_en_0.pdf).

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, falling below 7% in 2018. Further improvement of the labor market is expected in the medium term. At the same time, however, several structural problems persist which have not been adequately addressed by the Fico and Pellegrini governments. Long-term unemployment is one of the highest in the EU, 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. The Pellegrini government has sought to reduce it by simplifying recruitment procedures for non-EU workers and expediting permit issuance. However, the new provisions apply only to certain sectors and administrative barriers are still relatively high. Spending on active labor market polices in Slovakia remains one of the lowest in the EU.

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. Since 2016, tax policy has focused 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.). Both the Fico and the Pellegrini governments have thus largely ignored the long-standing calls by the European Commission, the OECD and the IMF to change the tax mix by financing a reduction of the relatively high tax burden on labor by increases in real estate tax, excises or environmental taxes. While tax revenues have soared on the back of a growing economy, they remain low in relation to GDP. Despite the improvements made in tax compliance, more could be done to reduce tax gaps.

Budgets

#19

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 the general government fiscal deficit from about 8% of GDP in 2009 to 3% in 2015 and 1.7% in 2016. The deficit went further down in 2017 and fell to about 0.8% of GDP in 2018. 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, it continued its “Value for Money” project and initiated a third round of spending reviews covering poverty and social exclusion, agriculture, the public wage bill and health care. The new Minister President Pellegrini has stuck to the third Fico government’s commitment to a balanced budget. As a matter of fact, the better-than-expected economic performance has enabled the government to pass a balanced budget for 2019, one year earlier as foreseen in the 2016 government manifesto. While Slovakia has a relatively high public debt, risks to the public finances are largely long-term and related to population aging and the lack of pension and health care reform. The budgeting framework still shows certain gaps in terms of coverage, time horizons and reliance on cash accounting.

Citations:
European Commission (2019): Country Report Slovakia 2019. SWD(2019) 1024 final, Brussels, 19-20 (https://ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-country-report-slovakia_en_0.pdf).

Research, Innovation and Infrastructure

#37

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 all well below the EU average and the lowest among the four Visegrád countries. 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 sufficient to compensate for the state failure in managing R&D. Corporate funds account for only a quarter of the total Slovak funding, and almost 90% of all foreign resources are EU money.

During the period under review, the matter of the Slovak Academy of Sciences (SAV) has shown the government’s lack of strategic vision. Ever since 2016, the transformation of the SAV from a budget-based to a more independent organization has been on the way. Originally prepared by the then-Minister of Education, Science and Research Pellegrini, this institutional shift was aimed at fostering the cooperation between the academy and the business sector. In 2018, however, the controversies over the changes between the SAV and Minister of Education Martina Lubyovár escalated due to personal animosities between the minister, who had been a member of the SAV, as well as controversies over the SAV’s land ownership. Initially, the ministry designed a registration process that was criticized by the SAV as too complex and cumbersome. Eventually, the ministry initiated an amendment that effectively reversed the whole transformation process. Passed by parliament, this amendment was vetoed by President Andrej Kiska. In September 2018, however, parliament overrode the president’s veto, leaving further institutional changes at the SAV in limbo.

Global Financial System

#15

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 System
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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