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DEFICIT PLANS STILL ON TARGET, BUT BUSINESSES’ TAX BILLS RISE

New government brings new approach to taxes, pensions, labour law

The landslide victory of Robert Fico in the March 10 general election which left his Smer party with 83 seats, and hence an overall majority of 16 in the 150-seat parliament, has brought in its wake a number of changes with the potential to affect the labour market, business environment, health-care and education sectors, as well as the country’s pension scheme. Speaking as the prime minister of Slovakia’s first single-party government since the end of communism in 1989, Fico said shortly after taking office on April 4 that he would not promise any “castles in the air” but rather a government programme that would be the result of intensive dialogue and work between government officials and a wide circle of social partners.

Robert Fico took over as prime minister from Iveta Radičová in April 2012.(Source: Sme Tomáš Benedikovič)

The landslide victory of Robert Fico in the March 10 general election which left his Smer party with 83 seats, and hence an overall majority of 16 in the 150-seat parliament, has brought in its wake a number of changes with the potential to affect the labour market, business environment, health-care and education sectors, as well as the country’s pension scheme. Speaking as the prime minister of Slovakia’s first single-party government since the end of communism in 1989, Fico said shortly after taking office on April 4 that he would not promise any “castles in the air” but rather a government programme that would be the result of intensive dialogue and work between government officials and a wide circle of social partners.

Fico brought four non-partisan ministers into the cabinet: Minister of Economy Tomáš Malatinský, the former head of the Federation of Employers’ Associations (AZZZ), Justice Minister Tomáš Borec, the one-time chairman of the Slovak Bar Association, Health Minister Zuzana Zvolenská, who had served as chief executive of the privately-owned Dôvera public-health insurance company as well as its state-owned counterpart, Všeobecná Zdravotná Poisťovna (VšZP), and Miroslav Lajčák, who left a high-profile EU position to head Slovakia’s Foreign Ministry.

The government pledged in its programme to ease the impacts of the European economic crisis and strengthen economic security for Slovak citizens, and committed itself to reducing the country’s public finance deficit to 3 percent of GDP or less in 2013. It also promised to curb the high level of unemployment among young people and tackle long-term unemployment. Furthermore, Fico’s team said it would improve the enforceability of the law in Slovakia and work towards systematically eliminating corruption at all levels of society.

Shortly after taking over, the government announced plans to eliminate the flat tax, make changes to the private pension savings scheme and the Labour Code, and Fico also started toying with the idea of creating a single public-health insurer in Slovakia, putting Slovakia’s two existing privately-owned public-health insurers on alert.

THE ECONOMIC FUNDAMENTALS

While in the third quarter of 2012 the wider eurozone slipped back into recession, Slovakia’s economy continued to grow, though it experienced a mild slowdown from the second quarter figure of 2.6-percent growth to post a 2.2-percent rise in July-September output year-on-year, the Slovak Statistics revealed in a flash estimate published on November 14. Bank analysts estimate that GDP growth in Slovakia will average 2.3 percent in 2012. Last year Slovakia’s economy grew by 3.3 percent, a slowdown from the 4.2-percent growth posted in 2010.

The jobless rate in Slovakia in September stood at 13.44 percent, representing a rise of 0.07 percentage points year-on-year, the Labour, Social Affairs and the Family Centre announced on Monday, October 22. The European Commission’s autumn prognosis, published on November 7, forecast that Slovakia’s unemployment rate in 2013 would be the fifth highest in the EU, at 13.5 percent.

EU-harmonised inflation in Slovakia reached 3.9 percent year-on-year in October, 0.1 percentage points higher than the figure recorded in September. Meanwhile, harmonised inflation calculated using the national methodology averaged 3.9 percent in the 12 months to October, 0.1 percentage points lower than the previous month, according to the Slovak Statistics Office (ŠÚ).

THE ROAD OF AUSTERITY


During his first official trip to Brussels after taking office in April, Fico told the president of the European Commission, José Manuel Barroso, that the consolidation of public finances in Slovakia, which is one of the poorest countries in the EU, has a moral aspect and that the state cannot expect people who live on low pensions to carry the cost of repairing the state’s finances. Fico has said several times that the biggest burden of the austerity measures should be carried by banks, corporations and high-income groups in society.

The government experienced an early headache in August, when it learned that Slovakia’s state coffers were even more depleted than expected, primarily due to a shortfall in tax revenues. The Fico team thus has the challenge of filling a further €233-million gap if it wants to push the public finance deficit under 3 percent of GDP next year, as required by Slovakia’s EU obligations.

The Finance Ministry’s Financial Policy Institute (IFP) has scaled down its previous estimates for tax and payroll tax revenues for 2012 and 2013 by approximately 0.2 percent and 0.3 percent of GDP, respectively, “without considering the positive impacts of the consolidation package on part of the revenues”.

Finance Minister Peter Kažimír said that the government would try to find the missing money in its own coffers as opposed to imposing further tax hikes. Radovan Ďurana of the INESS economic think tank told The Slovak Spectator back in August that the shortfall represents 1 percent of the tax and payroll tax revenues of the state and thus could be relatively easily covered by savings in the public administration.

Meanwhile, in line with its previous declarations, the cabinet approved an increase in corporate income tax from 19 to 23 percent. The current 19-percent tax rate would continue to apply to personal income tax up to a tax base of 176.8-times the current subsistence level; incomes above this tax base, will be taxed at a rate of 25 percent. Individuals earning more than €3,246 per month from 2013 would be affected. Together, these measures effectively put an end to Slovakia’s 19-percent flat tax, which at one time was considered to be among the country’s biggest strengths in the eyes of foreign investors. The tax drafts have been through their first reading in parliament and are expected to sail through with ease given Smer’s dominance in the house.

LEVIES FOR BANKS AND CORPORATIONS


The government introduced a temporary special levy, applicable from September 2012 until the end of 2013, on companies doing business in regulated sectors. A tax levied at a monthly rate of 0.363 percent, or 4.356 percent per annum, on profits exceeding €3 million per year will affect companies at least 50 percent of whose total revenues come from regulated operations. This should raise approximately €312 million during 2012 and 2013, with the government promising that the revenues will be channelled into a special non-budgetary account to be used for government projects to support economic growth and employment. Businesses and the opposition parties criticised the move, calling it non-systematic.

Parliament also extended the basis on which banks in Slovakia pay an existing special levy. While banks had been paying the levy at a rate of 0.4 percent on corporate deposits since the start of 2012, since September 1 they have also had to pay it on private individuals’ deposits. The government expects the levy to bring additional income of €27.5 million this year and an extra €110 million next year. This is also designed to be a temporary measure and will end once banks have paid a total of €1 billion. The Slovak Banking Association, which campaigned against the special levy on banks, claims that its members will end up paying, on average, 55 percent of their profits in taxes and levies.

PENSION PILLAR AND PAYROLL CHANGES


The Fico government has also made the most radical change to Slovakia’s three-pillar pension scheme since it was launched nearly 10 years ago: it dramatically reduced the amount that contributors pay into the second, private pension-saving pillar. By diverting payments from personal pension savings accounts into the general account of the state-owned social insurance provider, this move will boost state income by €660 million in 2012 and 2013. The change limits employee contributions to personal second-pillar savings accounts to only 4 percent of salaries, down from the previous 9 percent.

The new legislation also increased the minimum assessment base that self-employed people can use to calculate their social and health insurance contributions from the beginning of 2013, boosting it from the current 44.2 percent of the average wage to 50 percent of the average wage in Slovakia two years previously. This will result in self-employed people’s minimum social and health insurance contributions rising from the current €160.24 per month to €185.30. The coefficients used to calculate contributions made by self-employed persons for social insurance and health insurance are simultaneously being reduced over the next three years, which will also result in higher deductions.

THE BUDGET PLANS


When introducing his state budget, Fico described it as an “absolutely realistic” plan, which guarantees Slovakia a position at the core of the eurozone. The budget targets a deficit for 2013 of €3.06 billion, €616 million lower than the €3.675-billion budget deficit planned for 2012. Revenues are planned to be €14.177 billion, €552 million higher than this year, while spending compared to 2012 will be curbed by €65 million, to stand at €17.235 billion. The government is thus aiming for a public finance deficit of 2.9 percent of GDP in 2013, 2.4 percent in 2014, and 1.9 percent in 2015, the TASR newswire reported.

When it comes to individual ministries, the Education Ministry will get a bigger bite than last year, as will the Transport Ministry, whose annual budget will increase by €162 million to €2.036 billion. The largest expenditure item in transport will be spending on the development of road and railway infrastructure.

The budget is expected to pass parliament easily, with a final vote due to take place soon after this guide went to print.

REVAMPED LABOUR CODE


Though changes to the Labour Code had been expected from the very day the government changed, the eventual blueprint of the revision to the country’s principal labour legislation touched a raw nerve with foreign chambers of commerce and employers, among others. The government claimed that the changes were meant to redress the balance in relations between employees and employers, which Fico said was significantly harmed to the detriment of employees by the Labour Code amendment of the previous cabinet, led by Iveta Radičová.

Though the version that sailed through parliament and will take effect in January 2013 has evolved since the first blueprint, the new code still has its critics, who say it will make employers more cautious when it comes to hiring new staff. They also say that the code will harm Slovakia’s competitiveness.

The changed code shifts the status of people working on fixed-term employment contracts closer to that of regular employees in terms of working hours and minimum wages. The revision also reintroduces entitlement to a layoff notice period as well as severance pay. In addition, it curbs the ‘chaining’ of fixed-term employment contracts, whereby currently it is possible to extend a fixed-term employment contract three times over three years.

A SINGLE HEALTH INSURER?


What once seemed a piece of political rhetoric for the benefit of voters has now evolved into a plan approved by the Fico cabinet: the creation of a unitary health insurance system. The government is considering three ways of creating just one public-health insurance company, down from the current three, two of which are private. The launch of the single health insurer is slated for 2014. The acquisition of the shares of the two private health insurance companies has been identified as the best method of removing them from the market, but two other options remain: to take over management of the private insurers’ client portfolio; or to expropriate the private health insurance companies for an appropriate sum.

Despite Fico’s avowed determination to remove them, the two privately-owned insurance companies are not quite ready to quit the public-health insurance market yet, and claim that the government’s plan is at odds with the constitution.

THE DECLINE IN THE RANKINGS


In 2012 Slovakia continued to perform weakly in several crucial rankings, with the Global Competitiveness Report prepared by the World Economic Forum (WEF) sending out some particularly worrying signals. Slovakia dropped from 69th to 71st place out of the 144 countries reviewed, its worst-ever ranking since the country’s original inclusion in 1997. It was the weakest performer in the central European region and the third weakest in the European Union, according to the WEF ranking.

Slovakia scored very poorly for the efficiency of its legal framework in settling disputes, perceived favouritism in decisions by its government officials, low public trust in its politicians, the high burden of government regulation and the low quality of government services for improved business performances. Investors say Slovakia’s recent ranking is a warning sign and that the country needs to address these issues.

Slovakia’s position in the Global Innovation Index drawn up by INSEAD, the European Institute for Business Administration, slipped from 37th to 40th, while in the Legatum Prosperity Index by the Legatum Institute it fell from 32nd to 36th place. Slovakia also reported significant drops in both the Economic Freedom of the World index by the Fraser Institute and the Index of Economic Freedom by the Heritage Foundation and the Wall Street Journal. While in the former it fell from 13th to 31st place, in the latter it dropped from 37th to 51st position.

When asked about the rankings, Economy Minister Tomáš Malatinský told The Slovak Spectator that “it is relevant to compare countries within one region with a similar political culture and market economy, where Slovakia prevails in the assessment of the World Bank within the Visegrad Four group”.

THE STATE OF THE JUDICIARY AND CORRUPTION


However, the perceived lack of efficiency of Slovakia’s legal framework and the state of the country’s judiciary have long topped the list of concerns not only of foreign investors but also of political ethics watchdogs and foreign diplomats serving in Slovakia.

Mistrust in judicial institutions continues to prevail in Slovakia, as highlighted by a survey published in July 2012 by the Institute for Public Affairs think tank, revealing that 37 percent of those polled said they trusted the Supreme Court, led by Štefan Harabin, while 54 percent said they did not.

“We’re very concerned generally about the state of the judiciary because we think that a healthy judiciary which has integrity is one of the pillars of any democracy,” said Theodore Sedgwick, the US Ambassador to Slovakia, in a late-October interview with The Slovak Spectator, adding that there are 130 American companies present here. “The American Chamber of Commerce did a survey of small and medium-sized enterprises and 10 percent of those had confidence in the judiciary. That’s an unacceptable number, and so if Slovakia is interested in attracting foreign direct investment it needs to correct this area and instil confidence in the judiciary.”

European investors in Slovakia who are not overcome by global economic gloom place more effective law enforcement and a revamped, more responsive education system high on their list of goals, according to a major survey conducted by seven European countries’ chambers of commerce operating in Slovakia.

“The fight against corruption should be a top priority, as suggested by the results of a recent survey among 212 European investors in Slovakia,” Markus Halt, spokesperson of the German-Slovak Chamber of Commerce, told The Slovak Spectator in April. “Foreign companies are very unsatisfied with the efforts of previous governments.”

The survey also found that if Slovakia wants to retain its appeal as a target for foreign direct investment it will need to work harder to fix certain problems in the judicial system.

“A reform of the judicial system that contributes to faster and more effective jurisprudence is strongly needed,” Halt stated, adding that another major task from the point of view of foreign investors is reform of the education system, a goal particularly advanced by companies operating in the industrial sector.

EDUCATION CHALLENGES


The current interconnection of business and academia is not at the required level in Slovakia, experts agree. Businesses have been calling for stronger orientation of schools towards the needs of the labour market, stressing that qualified and trained workers are significant assets. The American Chamber of Commerce has, for example, made reform of the education system one of its key areas of interest through its 2012 Year of Education initiative. Education Minister Dušan Čaplovič has diagnosed three ills of the education system: a lack of qualified labour to work in some industrial sectors; an overly complicated system of school financing; and too many young people studying humanities subjects. The minister’s cure, in the form of a new law approved by MPs on September 20, includes, among other things, stricter conditions for the admission of students to secondary grammar schools – known to Slovaks as gymnasiums; these tend to be the most academic schools and are viewed as natural feeders into the university system – as well as new powers for Slovakia’s eight regional governments (VÚCs) to decide on the number of first-grade classes that can be opened at such schools.

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