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IMF: Lowering VAT to 19 percent would harm budget

Rather than cutting the VAT rate back to 19 percent, Slovakia should retain the current level of 20 percent, head of International Monetary Fund (IMF) mission in Slovakia James John told a press conference in Bratislava on June 17, when unveiling the IMF’s recommendations to the country.

Rather than cutting the VAT rate back to 19 percent, Slovakia should retain the current level of 20 percent, head of International Monetary Fund (IMF) mission in Slovakia James John told a press conference in Bratislava on June 17, when unveiling the IMF’s recommendations to the country.

John, who has spent two weeks in Slovakia with the IMF team observing and evaluating the country’s economic performance, went on to say that if Slovakia resorted to cuts in VAT, this could result in losses to state coffers to the tune of 0.3 percent of GDP. The country would then be forced to compensate for these losses either by searching for other resources or by cutting its expenditures. The IMF representative added in this context that Slovakia needs to increase its expenditures on infrastructure and to boost employment, which could be hampered due to such cuts in VAT.

Despite this, Slovak legislation states that the VAT rate should be reduced automatically when the public-finance deficit falls below 3 percent of GDP. Finance Minister Peter Kažimír reiterated, as quoted by the TASR newswire, that the government will base its decision-making on the valid legislation. Moreover, in order to reach any decision, the ministry needs to wait for official notification on the country’s economy to be issued by Eurostat in October – based on new methodology.

The IMF also praised Slovakia for the current growth in its economy, effective reductions in the deficit below the level set by the EU and a strong banking system. John went on to say that the high unemployment rate is still a big challenge for the country, mainly in terms of the long-term jobless. Another priority should be overcoming marked regional differences, added the official. This should be aided largely by means of investments in infrastructure, improvements in business conditions, better law enforcement and support for vocational training.

John praised the Slovak government’s courage to eliminate tax evasion, the SITA newswire wrote. He also recommended to accelerate the preparations for the introduction of real-estate tax based on the value of real estate. The fund would welcome as well the reduction of the debt through privatisation of state assets.

It is expected that the increase in domestic consumption after two years of decline and improving conditions for Slovakia's trading partners will lead to growth of almost 2.5 percent in 2014 and 3 percent in the medium term, TASR quoted from the IMF findings. According to the conclusions of the IMF mission, the recent increase in domestic demand should improve confidence and bring further investments. The healthy banking sector will also have a favourable effect. However, there is also a risk that if geopolitical tensions between Russia and Ukraine intensify, Slovakia could be affected by energy-supply cuts.

(Source: TASR, SITA)
Compiled by Zuzana Vilikovská from press reports
The Slovak Spectator cannot vouch for the accuracy of the information presented in its Flash News postings.

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