Slovakia

   

Economic Policies

#31
Key Findings
Despite steady economic growth, Slovakia receives a relatively low overall ranking (rank 31) with regard to economic policies. Its score on this measure has increased by 0.4 points as compared to its 2014 level.

The previous years’ robust growth rates declined to about 2.3% in 2019, hampered by slower growth in Germany and Brexit-related uncertainty. Goods exports declined in the second half of 2019. The business environment is losing ground, with competitiveness undermined by regulatory burdens, an unclear economic vision and a lack of innovation.

Unemployment rates have fallen steadily, reaching below 6% in 2019. Long-term unemployment rates remain high, and labor mobility is also low, creating significant geographical differences in unemployment rates. A shortage of skilled labor for industrial production has emerged. The government has focused on increasing the minimum wage rather than on active labor market policies.

Tax 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 budget deficits hovering around 1%. Public debt levels nonetheless remain relatively high. R&D policy is underdeveloped.

Economy

#29

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
After years of economic boom, Slovakia experienced an unexpected slowdown in economic growth in 2019. Real GDP growth fell from 4.0% in 2018 to about 2.3% in 2019, as slower economic growth in Germany and uncertainty produced by Brexit affected Slovakia’s export-oriented economy. In the second half of 2019, exports of goods, a strong pillar of the Slovak economy, declined.

The slowing of economic growth has revealed the risks and limits of Slovakia’s strategy of economic development with its strong reliance on the car industry and export performance. Future growth and prosperity will require strategic investment in education, innovation, infrastructure and energy technology. The Slovak business environment is slowly losing ground, as competitiveness is being undermined by high regulatory burdens, limited law enforcement, a lack of judicial and police independence, an unclear long-term economic vision, limited government responsiveness, low ICT adoption rates and a lack of innovation capability.

Citations:
European Commission (2020): Country Report Slovakia 2020. SWD(2020) 524 final, Brussels (https://ec.europa.eu/info/sites/info/files/file_import/2020-european-semester-country-report-slovakia_en_0.pdf).

OECD (2019): OECD Economic Surveys: Slovak Republic 2019. Paris.

Labor Markets

#38

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. This trend continued in 2019 with unemployment declining to below 6%, the lowest rate since the independence of Slovakia in 1993. At the same time, however, several structural problems persist which have not been adequately addressed by successive governments. Long-term unemployment is one of the highest in the European Union, and the labor market participation of groups such as Roma, 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. More recent problems include the growing shortage of qualified labor for industrial production and the rising number of unfilled public sector vacancies due to low salaries. The Pellegrini government has sought to reduce the labor shortage 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 European Union. Instead of improving active labor market policy, the government has focused on increasing the minimum wage and certain one-time bonuses. With a view to the upcoming February 2020 parliamentary elections, the monthly minimum wage will be raised from €520 to €580 as of January 2020.

Citations:
OECD (2019): OECD Economic Surveys: Slovak Republic 2019. Paris, 43-54.

Taxes

#18

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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 through increases in real estate tax, excises or environmental taxes.

While tax revenues have soared on the back of a growing economy, the tax-to-GDP ratio has remained broadly stable. At about 34%, it is below the EU average and close to that of Slovakia’s regional peers. The small fiscal deficit suggests that tax revenues are sufficient to finance the budget.

Vertical equity has benefited from the reintroduction of a progressive income tax in 2012. While the share of indirect taxes is low, social insurance contributions, which are relatively unprogressive, account for a relatively high share of revenue.

While the corporate income tax rate is relatively low, the tax wedge on labor is high. Moreover, households lose the dependent spouse allowance when a secondary earner enters the labor market. This represents a financial disincentive that significantly reduces female labor market participation.

Environmental taxes as a whole stood at 2.5% of GDP in 2018. The implicit tax rate on energy stood at 164.3, one of the lowest rates in the European Union, in 2017. While taxes on energy were above the EU average, there is still space to increase taxes on transport (0.3% in 2018; compared to an EU average of 0.5%) and sources of pollution (0.03% in 2018; compared to an EU average 0.08%). Differentiating tax rates according to the carbon content of the energy source and indexing the rates to inflation could also encourage more environmentally conscious behaviors in consumers. Excise duty rates on diesel are significantly lower than those on unleaded petrol, despite diesel having a higher carbon and energy content than unleaded petrol. The tax system also favors the private use of company cars, which counteracts the incentives provided by energy and vehicle taxation to reduce fuel consumption.

Citations:
European Commission (2020): Country Report Slovakia 2020. SWD(2020) 524 final, Brussels, 22-24 (https://ec.europa.eu/info/sites/info/files/file_import/2020-european-semester-c ountry-report-slovakia_en_0.pdf).

Budgets

#18

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 1.1% 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. The Pellegrini government stuck to the third Fico government’s commitment to achieve a balanced budget in 2019. Due to the unexpected economic slowdown, however, this goal could not be met and a fiscal deficit of about 0.9% has materialized. 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 healthcare reform. The budgeting framework still shows certain gaps in terms of coverage, time horizons and reliance on cash accounting. In the period under review, the government continued its “Value for Money” project, and finalized a third round of spending reviews covering agriculture, social inclusion policies and the public wage bill.

Citations:
OECD (2019): OECD Economic Surveys: Slovak Republic 2019. Paris, 26-32.

Research, Innovation and Infrastructure

#38

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 are the lowest among the four Visegrád countries. Expenditure on R&D, both public and private, has gradually risen, but 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.

Two recent developments might help to improve R&I performance. First, the IT security provider Eset plans to build a large research and innovation campus near Bratislava. Second, in October 2019, the Ministry of Education, Science, Research and Sport announced the largest ever investment in science and research in Slovakia. Between 2019 and 2023, Comenius University and the Slovak University of Technology will receive €111 million, largely from EU funds, to improve their R&D and innovation capacities. While this project will improve the country’s research infrastructure, it also highlights Slovakia’s dependence on EU funding for research and innovation.

Global Financial System

#10

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. However, Slovakia has been a member of the euro zone since 2009 and 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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