THE ELITE club of leading world economies has confirmed Slovakia’s hopes: the country is emerging from a deep economic crisis and this year its economy is expected to grow by 4.1 percent. Next year, Slovakia might produce 3.5-percent growth year-on-year, says the Organisation for Economic Cooperation and Development (OECD) in its latest analysis.
However, the country’s economic vigour is by no means assured and Slovakia’s homework for achieving sustainable growth includes reforms to the country’s pension and tax systems, and effective steps on unemployment. The country’s persistently high jobless rates have secured Slovakia an unenviably high ranking among OECD members in this area. The OECD also said in its economic survey, released on November 10, that the deterioration of the public finances should be addressed.
Observers say that effective reforms are doable and that the government can start right away by making the country’s Labour Code more flexible and the pension system more reflective of the state of the public finances.
OECD Secretary General Angel Gurría visited Slovakia in late November and noted that there were already signs of improvement. He said that by consolidating its public finances, Slovakia was on the right path.
“Slovakia is carrying out the right measures,” Gurría said after meeting Prime Minister Iveta Radičová, as quoted by the TASR newswire. “It is moving forward with fiscal consolidation, is displaying strong willpower to observe fiscal discipline and is carrying out reforms. These steps make Slovakia different, sending out a signal to the markets that the country is open for business, is doing business and is a good place for business.”
According to the OECD analysis, the global recession affected the Slovak economy to a greater extent than most other OECD countries, “primarily owing to its exposure to world trade and its specialisation in cyclical export goods, notably cars”.
“Challenges for re-establishing a sustainable high growth trajectory are countering the risk of increasing long-term unemployment, bringing government finances back on a sustainable path and reaping the benefits of a transition to greener growth,” the OECD wrote.
The OECD suggests that the focus should be on reducing government spending, most notably via reforms to the first pillar of the pension system.
According to Peter Goliáš of the Institute for Economic and Social Reform (INEKO), Slovakia should link the retirement age to life expectancy, reduce the annual adjustment of pensions to the level of inflation, make it obligatory for young people to join the second (privately managed) pillar of the pension system, and turn pensioners’ Christmas bonus into a social subsidy, which would protect only those threatened by poverty.
“In addition, it is necessary to gradually eliminate the advantages of public sector pensions and special pension bonuses in some professions such as the military, police, judges and prosecutors,” Goliáš told The Slovak Spectator.
Radovan Ďurana of the economic think tank INESS suggests that the way the current pension system is tuned will be sustainable only at the expense of high subsidies from the state budget. Despite the high burden of contributions paid by citizens the expenses of the social insurer Sociálna Poisťovňa considerably exceed its income, by roughly €800 million, even without the effect of the introduction of the second pension pillar, Ďurana said.
The OECD notes that Slovakia’s unemployment rate rose substantially during 2009 – by 3 percentage points to 14 percent – and that the main challenge is to prevent further growth in long-term unemployment, which was already very high before the financial downturn.
There has never been an easy solution to the problem of persistently high joblessness. Nevertheless, Goliáš says that the future form of the Labour Code, which is expected to stop the simultaneous granting of advance notice of dismissal and severance payments, and to consider the overall flexibility of the relationship between employers and employees, will be very important. The planned transitory labour market for the long-term unemployed should also help.
According to Goliáš, the future development of unemployment will depend on these changes as well as the recovery of the economies of Slovakia’s main trading partners, which makes it is very difficult to predict.
Ďurana said that Slovakia previously experienced a shortage of qualified labour, but that returning to such a situation will be more complicated because sharp economic growth driven by foreign demand is unlikely to return.
“This is precisely why the role of the government is so important in creating a suitable environment for investments and the creation of jobs,” Ďurana said. “The effort to reduce the tax and payroll tax burden, the highest enforceability of the law, and a flexible labour market are unavoidable preconditions for reducing unemployment.”
The OECD suggests that there is a need to make “adjustments to minimum wage regulations and legal extension of collective wage bargaining contracts so that they do not hinder the determination of market clearing wages”.
As for the tax system, Ďurana said that it should be stable, predictable and should not lead to superfluous administrative spending.
“The law on income taxes and VAT should be revised so that it is possible to significantly shorten its wording, while the opportunities to use electronic communication should be widened,” Ďurana told The Slovak Spectator.
Goliáš suggests that Slovakia should use real estate taxes more effectively.
“Slovakia is the second worst in their use, although these taxes are the least harmful to economic growth,” Goliáš said. “The reform of social and health contributions in a way that reduces the overall burden, as well as their administrative burden, is important as well. There should be a unified return for tax and social and health contributions.”
According to Goliáš, a specific problem is the situation in the health-care sector, where the indebtedness of hospitals must be stopped, for example by turning them into joint-stock companies via partial privatisation, limiting concentration in the health insurance market and regulating payments.
In terms of the deterioration in the public finances, raising public sector efficiency can free up resources and help stimulate productivity and thus potential growth, the OECD says.
“A long-term problem for the public sector is also non-functional programme budgeting, where spending is not linked to concrete, measurable goals and it is thus impossible to monitor its effectiveness,” Goliáš said.
According to Ďurana, the public sector needs, along with legislative changes such as electronic procurement, auctions and central procurement, a change in the motivation of the responsible state officials.
“The effectiveness of procurement should be reflected in the size of their bonuses,” Ďurana said.
