Economic Policies
#32Key Findings
With a growing need for structural reforms, Slovakia receives a relatively low overall ranking (rank 32) with regard to economic policies. Its score on this measure has increased by 0.2 points as compared to its 2014 level.
The first COVID-19 wave hit as a new government took power. In response, policymakers pursued a fiscally expansionary policy that included loan guarantees and sectoral aid. GDP fell substantially for several quarters in 2020, but then rebounded strongly, and settled into modest growth of 3% in 2021, hampered somewhat by ongoing global supply chain disruptions.
The unemployment rate had fallen to 5.6% in 2019. This rose to just 6.7% during the pandemic, with job retention and short-time work schemes playing a key role in moderating the increase. The crisis exacerbated structural problems such as a shortage of skilled workers and a lack of digital skills. R&D policy in general is comparatively weak.
A proposed new reform package would make the tax system more competitive, but would reduce vertical equity and entail revenue losses. The government’s fiscal deficit rose from 0.9% of GDP to 6.2% in 2020 and 7.4% in 2021. Gross debt rose to more than 60% of GDP in 2021. Both rates are expected to decline in 2023.
The first COVID-19 wave hit as a new government took power. In response, policymakers pursued a fiscally expansionary policy that included loan guarantees and sectoral aid. GDP fell substantially for several quarters in 2020, but then rebounded strongly, and settled into modest growth of 3% in 2021, hampered somewhat by ongoing global supply chain disruptions.
The unemployment rate had fallen to 5.6% in 2019. This rose to just 6.7% during the pandemic, with job retention and short-time work schemes playing a key role in moderating the increase. The crisis exacerbated structural problems such as a shortage of skilled workers and a lack of digital skills. R&D policy in general is comparatively weak.
A proposed new reform package would make the tax system more competitive, but would reduce vertical equity and entail revenue losses. The government’s fiscal deficit rose from 0.9% of GDP to 6.2% in 2020 and 7.4% in 2021. Gross debt rose to more than 60% of GDP in 2021. Both rates are expected to decline in 2023.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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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.
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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.
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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.
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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.
The new center-right government took over during the first wave of the COVID-19 pandemic. It tried to dampen the output decline by pursuing substantial fiscal expansion and by keeping firm insolvencies low through loan payment deferrals, loan guarantees and sectoral aid to compensate for the lockdown’s adverse effects (IMF 2021; OECD 2022; Simons 2022). Along with resilient export demand, these measures helped mitigate economic contraction in 2020, which was lower than the euro area average.
In its April 2020 government manifesto, the new government also committed itself to far-reaching structural reforms aimed at improving the business environment by stepping up investment in infrastructure, R&I, human capital and public services. In October 2020, the Ministry of Finance published a working document called “Modern and Successful Slovakia” which also served as first draft of Slovakia’s national recovery plan. However, this draft was not coordinated with OL’aNO’s coalition partners and led to protracted negotiations within the coalition. Investments and reforms adopted in 2020 and 2021 remained modest. From 2022 to 2024, the EU’s Recovery and Resilience Facility could bring Slovakia around €4.59 billion. However, Slovakia performs rather poorly when it comes to drawing EU funds; during the programming period between 2014 and 2020, the government only drew 30.71% of the available funds. Hence, the expected boost by the Recovery and Resilience Fund will very much depend on a more efficient performance of the government in this regard. At the end of 2021, Slovakia was behind schedule in implementing those reforms agreed upon as preconditions for the release of the first tranche of money from the Recovery and Resilience Facility.
As COVID-19 restrictions were eased and economies gradually reopened, the Slovak economy rebounded in spring 2021 (OECD 2022). Real GDP grew by 3% in 2021. This was less than in most other East-Central European countries, as Slovakia’s industry-heavy economy has been heavily hit by global supply chain disruptions and especially the semiconductor shortage which constrained the automotive industry in 2021 and will continue to do so in 2022.
Citations:
IMF (2021): Slovak Republic. IMF Country Report No. 21/133, Washington, D.C.
OECD (2022): Economic Survey Slovak Republic. Paris (https://doi.org/10.1787/78ef10f8-en).
Simons, J. (2022): Slovakia: Moderate but inclusive COVID-19 response, in: D. Bohle, E. Eihmanis, A. Toplišek (eds.), The Political Economy of COVID-19 Responses in East-Central Europe. San Domenico di Fiesole: European University Institute, 155-173 (https://op.europa.eu/de/publication-detail/-/publication/0bb54570-b3be-11ec-9d9 6-01aa75ed71a1/language-en).
In its April 2020 government manifesto, the new government also committed itself to far-reaching structural reforms aimed at improving the business environment by stepping up investment in infrastructure, R&I, human capital and public services. In October 2020, the Ministry of Finance published a working document called “Modern and Successful Slovakia” which also served as first draft of Slovakia’s national recovery plan. However, this draft was not coordinated with OL’aNO’s coalition partners and led to protracted negotiations within the coalition. Investments and reforms adopted in 2020 and 2021 remained modest. From 2022 to 2024, the EU’s Recovery and Resilience Facility could bring Slovakia around €4.59 billion. However, Slovakia performs rather poorly when it comes to drawing EU funds; during the programming period between 2014 and 2020, the government only drew 30.71% of the available funds. Hence, the expected boost by the Recovery and Resilience Fund will very much depend on a more efficient performance of the government in this regard. At the end of 2021, Slovakia was behind schedule in implementing those reforms agreed upon as preconditions for the release of the first tranche of money from the Recovery and Resilience Facility.
As COVID-19 restrictions were eased and economies gradually reopened, the Slovak economy rebounded in spring 2021 (OECD 2022). Real GDP grew by 3% in 2021. This was less than in most other East-Central European countries, as Slovakia’s industry-heavy economy has been heavily hit by global supply chain disruptions and especially the semiconductor shortage which constrained the automotive industry in 2021 and will continue to do so in 2022.
Citations:
IMF (2021): Slovak Republic. IMF Country Report No. 21/133, Washington, D.C.
OECD (2022): Economic Survey Slovak Republic. Paris (https://doi.org/10.1787/78ef10f8-en).
Simons, J. (2022): Slovakia: Moderate but inclusive COVID-19 response, in: D. Bohle, E. Eihmanis, A. Toplišek (eds.), The Political Economy of COVID-19 Responses in East-Central Europe. San Domenico di Fiesole: European University Institute, 155-173 (https://op.europa.eu/de/publication-detail/-/publication/0bb54570-b3be-11ec-9d9 6-01aa75ed71a1/language-en).
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Before the COVID-19 pandemic, the unemployment rate had fallen to 5.6% in 2019, the lowest level in Slovak history. Introducing various job retention and short-time work schemes, the government helped limit rising unemployment to about 6.7% in 2020 and 2021. Thus, the pandemic resulted in a decline in hours worked rather than in spiraling unemployment. The government also improved benefits for the unemployed, both by extending the duration of existing entitlements and by introducing a new benefit for self-employed individuals affected by the pandemic (SOS benefit) (Gerbery 2020).
While labor market policies have kept unemployment numbers low, the COVID-19 pandemic has aggravated some of the already existing structural problems of the Slovak labor market such as the shortage of highly qualified workers in several sectors and the lack of digital skills. Women have been disadvantaged due to the closing of daycare centers and schools. Other vulnerable groups such as low-skilled workers, young people and marginalized Roma have also suffered disproportionally. Similar to other OECD countries, the work model has changed. In spring 2021 and in response to the pandemic and digitalization developments, the government amended its labor code to provide a legal framework for remote work (Liptáková 2021).
Citations:
Gerbery, D. (2020): Slovakia’s responses to the COVID-19 outbreak in the fields of employment and social protection. European Social Policy Network, ESPN Flash Report 2020/53, Brussels: European Commission.
Liptáková, J. (2021): Amended Labour Code reflects the pandemic, in: Slovak Spectator, June 4 (https://spectator.sme.sk/c/22676843/amended-labour-code-reflects-the-pandemic.htm).
While labor market policies have kept unemployment numbers low, the COVID-19 pandemic has aggravated some of the already existing structural problems of the Slovak labor market such as the shortage of highly qualified workers in several sectors and the lack of digital skills. Women have been disadvantaged due to the closing of daycare centers and schools. Other vulnerable groups such as low-skilled workers, young people and marginalized Roma have also suffered disproportionally. Similar to other OECD countries, the work model has changed. In spring 2021 and in response to the pandemic and digitalization developments, the government amended its labor code to provide a legal framework for remote work (Liptáková 2021).
Citations:
Gerbery, D. (2020): Slovakia’s responses to the COVID-19 outbreak in the fields of employment and social protection. European Social Policy Network, ESPN Flash Report 2020/53, Brussels: European Commission.
Liptáková, J. (2021): Amended Labour Code reflects the pandemic, in: Slovak Spectator, June 4 (https://spectator.sme.sk/c/22676843/amended-labour-code-reflects-the-pandemic.htm).
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
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. in the 2016-2020 term, tax policy 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 thus largely ignored the long-standing calls by the European Commission, the OECD (2022: 35-37) 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.
The first finance minister of the new center-right, Eduard Heger, started to design a tax reform along these lines, announcing a lower tax burden on labor and a higher taxation of property and consumption. The coalition crisis in February 2021 and persistent controversies within the governing coalition delayed the specification of the reform. It wasn’t until November 2021 that the new minister of finance, Igor Matovič, eventually presented the details of the much-awaited reform. This “tax revolution,” with a still unclear implementation schedule, consists of four parts: The first part contains a family package that involves a child allowance increase and an allowance for leisure activities. The second part contains a labor package introducing a flat 19% personal income tax and a combined social insurance contribution rate of 39% paid by employers alone. The third part is a business package that focuses on reducing the corporate income tax from 21% to 19%. Finally, the fourth package entails tax relief measures, also for the self-employed, and reduces the VAT to 10% for restaurants and other hospitality businesses. The implementation of these measures would bring tax relief for employers and employees alike; it would make the Slovak tax system more competitive, but reduce vertical equity and entail revenue losses, at least in the short term.
Citations:
OECD (2022): Economic Survey Slovak Republic. Paris (https://doi.org/10.1787/78ef10f8-en).
The first finance minister of the new center-right, Eduard Heger, started to design a tax reform along these lines, announcing a lower tax burden on labor and a higher taxation of property and consumption. The coalition crisis in February 2021 and persistent controversies within the governing coalition delayed the specification of the reform. It wasn’t until November 2021 that the new minister of finance, Igor Matovič, eventually presented the details of the much-awaited reform. This “tax revolution,” with a still unclear implementation schedule, consists of four parts: The first part contains a family package that involves a child allowance increase and an allowance for leisure activities. The second part contains a labor package introducing a flat 19% personal income tax and a combined social insurance contribution rate of 39% paid by employers alone. The third part is a business package that focuses on reducing the corporate income tax from 21% to 19%. Finally, the fourth package entails tax relief measures, also for the self-employed, and reduces the VAT to 10% for restaurants and other hospitality businesses. The implementation of these measures would bring tax relief for employers and employees alike; it would make the Slovak tax system more competitive, but reduce vertical equity and entail revenue losses, at least in the short term.
Citations:
OECD (2022): Economic Survey Slovak Republic. Paris (https://doi.org/10.1787/78ef10f8-en).
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
Before the COVID-19 pandemic, Slovakia managed to reduce the general government fiscal deficit from about 8% of GDP in 2009 to 0.9% in 2019. While the consolidation of the budget was facilitated by strong and higher-than-expected economic growth, the Smer-SD led governments also succeeded in limiting expenditure growth.
Relatively low fiscal deficits and public debt before the pandemic provided the space for a significant fiscal expansion. General government fiscal deficits reached 6.2% in 2020 and 7.4% in 2021, letting the gross public debt-to-GDP ratio from less than 50% in 2019 to more than 60% in 2021. The government expects the general government fiscal deficit to fall below 3% in 2023 and the gross public debt-to-GDP ratio to fall below 60% in 2023. In order to make the fiscal adjustment credible, the government has proposed amendments to the existing fiscal rules, including a modification of the prevailing debt rules, the introduction of multi-annual expenditure ceilings and an expansion of the responsibilities of the independent Council for Budgetary Responsibility (Rada pre rozpočtovú zodpovednosť, CBR) (OECD 2022: 28-34).
Citations:
OECD (2022): Economic Survey Slovak Republic. Paris (https://doi.org/10.1787/78ef10f8-en).
Relatively low fiscal deficits and public debt before the pandemic provided the space for a significant fiscal expansion. General government fiscal deficits reached 6.2% in 2020 and 7.4% in 2021, letting the gross public debt-to-GDP ratio from less than 50% in 2019 to more than 60% in 2021. The government expects the general government fiscal deficit to fall below 3% in 2023 and the gross public debt-to-GDP ratio to fall below 60% in 2023. In order to make the fiscal adjustment credible, the government has proposed amendments to the existing fiscal rules, including a modification of the prevailing debt rules, the introduction of multi-annual expenditure ceilings and an expansion of the responsibilities of the independent Council for Budgetary Responsibility (Rada pre rozpočtovú zodpovednosť, CBR) (OECD 2022: 28-34).
Citations:
OECD (2022): Economic Survey Slovak Republic. Paris (https://doi.org/10.1787/78ef10f8-en).
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
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, have stagnated between 2012 and 2020, at least relative to GDP, and stand at less than half of the EU average. In its Innovation Scoreboard, the European Commission (2021) ranks Slovakia among the last group, the “emerging innovators.” According to the Scoreboard, Slovakia also is among the countries showing the least progress from 2014 to 2020.
The new center-right government has launched some initiatives to strengthen the research and innovation capacity of the Slovak economy (OECD 2022: 46-51). In addition to committing itself to increasing R&I funding from the national budget by 0.05% per year over the period 2021-30, it has announced its intent to improve the quality of tertiary education, to foster the remigration of talented Slovaks from abroad and to streamline the public governance of research and innovation. As Slovakia ranks among the EU member states with the lowest absorption of European Structural and Investment Funds (ESIF) for R&I, the government and the European Commission called upon the OECD to assist in developing recommendations for improving absorption (OECD 2021). As it stands, however, little reforms have been implemented.
Citations:
European Commission (2021): European Innovation Scoreboard: Innovation performance keeps improving in EU Member States and regions, Brussels, June 21 (https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3048).
OECD (2021): Promoting research and innovation in the Slovak Republic through an effective use of European funds. OECD, Public Governance Papers No. 04, Paris (https://dx.doi.org/10.1787/f0e9d786-en).
OECD (2022): Economic Survey Slovak Republic. Paris (https://doi.org/10.1787/78ef10f8-en).
The new center-right government has launched some initiatives to strengthen the research and innovation capacity of the Slovak economy (OECD 2022: 46-51). In addition to committing itself to increasing R&I funding from the national budget by 0.05% per year over the period 2021-30, it has announced its intent to improve the quality of tertiary education, to foster the remigration of talented Slovaks from abroad and to streamline the public governance of research and innovation. As Slovakia ranks among the EU member states with the lowest absorption of European Structural and Investment Funds (ESIF) for R&I, the government and the European Commission called upon the OECD to assist in developing recommendations for improving absorption (OECD 2021). As it stands, however, little reforms have been implemented.
Citations:
European Commission (2021): European Innovation Scoreboard: Innovation performance keeps improving in EU Member States and regions, Brussels, June 21 (https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3048).
OECD (2021): Promoting research and innovation in the Slovak Republic through an effective use of European funds. OECD, Public Governance Papers No. 04, Paris (https://dx.doi.org/10.1787/f0e9d786-en).
OECD (2022): Economic Survey Slovak Republic. Paris (https://doi.org/10.1787/78ef10f8-en).
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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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.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
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 area 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. Slovakia also supported the OECD-led approach of a global minimum corporate tax, preferring a collective solution to individual measures.