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IMF advises Slovakia to keep current VAT rate

PRESERVE the 20-percent VAT rate and focus more on boosting state revenues rather than further cutting of expenses: this was the International Monetary Fund’s (IMF) advice to Slovakia after spending two weeks in the country. The IMF estimates that the plan to reduce VAT to 19 percent would account for 0.3 percent of annual GDP.

PRESERVE the 20-percent VAT rate and focus more on boosting state revenues rather than further cutting of expenses: this was the International Monetary Fund’s (IMF) advice to Slovakia after spending two weeks in the country. The IMF estimates that the plan to reduce VAT to 19 percent would account for 0.3 percent of annual GDP.

“The country would then be forced to find somewhere else or reduce expenditures,” head of the IMF mission in Slovakia James John told a press conference in Bratislava on June 17, when unveiling the IMF’s recommendations to the country, as cited by the TASR newswire. He added that Slovakia needs higher revenues to support infrastructure and employment.

Slovakia temporarily increased VAT by one percentage point to 20 percent as of 2011 within the package of measures to consolidate public finances, while the plan was to return it to 19 percent when the public-finance deficit falls below 3 percent of GDP. This already happened in 2013, according to the spring deficit and debt notification of the European Union’s statistics office, Eurostat. But the Finance Ministry is waiting for the autumn notification to be calculated using a new methodology.

But there are doubts over whether decreasing VAT by one point would bring any price reduction. Finance Minister Peter Kažimír pointed out that consumer prices have not grown during the first five months and that inflation is estimated at 0.3 percent.

“The difference between 19 and 20 percent is too small to achieve a reduction in prices,” said Kažimír, as cited by TASR.

On the other hand, experts believe that money which would not go into state coffers would remain in the hands of firms and partly also people. While firms would be able to invest more, people would have more money to spend.

“The private sector is a more effective manager than the state,” J&T Bank analyst Stanislav Pánis told the Hospodárske Noviny daily.

The IMF also praised Slovakia for its current economic growth, its effective reductions in the deficit to below the level set by the EU and its 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 long-term joblessness. Another priority should be overcoming regional disparities, the official added. This should be aided largely by means of investments in infrastructure, improvements in business conditions, better law enforcement and support for vocational training, the SITA newswire reported.

John praised the Slovak government’s courage to eliminate tax evasion. He also recommended accelerating preparations for introducing a real-estate tax based on the value of real estate. The IMF would also welcome the reduction of debt through privatisation of state assets, according to TASR.

The IMF estimates that Slovakia’s economy will grow by 2.4 percent in 2014, mirroring the predictions of the Finance Ministry and the National Bank of Slovakia. According to the conclusions of the IMF mission, the recent increase in domestic demand should improve confidence and bring further investments. On the other hand, further escalation of tensions in Ukraine might have a negative impact on Slovakia’s economic growth, SITA wrote.

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