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Economy grows, but policies lacking

JUST a few days before the parliamentary elections it is clear that economy-related issues, whether domestic or international, are not a topic of heated pre-election discussion.

Some view social packages as non-systemic measures.(Source: Sme)

SLOVAKIA is heading towards the March 5 parliamentary election amid sound macroeconomic conditions. And even though analysts, economists and others keep calling for the need to increase the competitiveness of Slovakia’s economy there are few economic issues with urgency.

The Slovak economy grew by 3.6 percent year on year in 2015 when its growth accelerated to 4.2 percent y/y during the final quarter of 2015. The growth was one of the factors behind the upgrade of the prognosis for collection of taxes and levies for 2015-2019, increasing revenues by about €400 million for each year. The jobless rate continues to fall too, and Slovakia closed 2015 with an average registered unemployment rate of 11.5 percent – 1.29 percentage points less than in 2014. Real wages are rising and the Finance Ministry estimates they will increase by 3.1 percent in 2016.

Amidst these positive economic indicators, the development of Slovakia’s small and open economy remains highly dependent on outside factors and developments in the economies of its main trade partners. Economic analysts and representatives of employers calling for reforms to increase competitiveness of the country point out that the Robert Fico government has failed to carry them out. While they praise the consolidation of public finances, they are critical that it has largely been done by boosting revenues and not cutting spending.

While the ruling Smer party is expected to win the next parliamentary election, some public opinion polls indicate that it would need a coalition partner to form the cabinet. This may be a reason why opposition parties in their election programmes have been vague. Smer held a programme conference just 21 days before the elections, a reaction to falling poll numbers, analysts say.

Smer’s election programme

Prime Minister Robert Fico said the party was waiting to unveil its plans so that they could base them on the latest economic indicators.

“We wanted to know where we are [before elections] and whether we can make clear pledges that we want to adopt,” said Fico at the conference as cited by the TASR newswire.

At the conference held in Banská Bystrica on February 13, Smer extended its original five election priorities that fit on a single sheet of paper, into three pages with four main goals. They promised to increase the minimum wage, now at €405 per month, to €500, continue in reduction of levies, create 100,000 jobs, reduce the unemployment rate to below 10 percent, extend the 10 percent VAT on more basic foods and reduce regional disparities. It also wants to increase the standards of living of Slovaks in order it achieves 85 percent of the average of the EU in 2020 and that the Slovak economy becomes the best performing among V4 countries (the Czech Republic, Poland, Hungary and Slovakia) by 2020. Smer did not elaborate on how to achieve these goals.

Smer voiced its plan to create the government with one of the standard political parties, where it listed the opposition Christian-Democratic Movement (KDH) and Most-Híd; as well as its former coalition partner, the Slovak National Party (SNS) as meeting this criterion, with newcomer Sieť a possibility too.

Analysts do not perceive results of Smer’s programme conference as a real election programme.

“Primarily I miss in this programme focus on reforms or changes by which it wants to achieve these goals,” Martin Reguli, analyst from the F. A. Hayek Foundation, told The Slovak Spectator.

Reguli does not evaluate the goals themselves positively, especially the increase of the minimum wage or social packages.

“Social packages are non-systemic measures on the side of expenditures without planned reforms or recovery of public finances,” said Reguli.

Martin Vlachynský, analyst of the Institute for Economic and Social Studies (INESS) think tank pointed out for The Slovak Spectator that the goals set by Smer are things that no cabinet can secure directly.

“The cabinet cannot directly create jobs, neither can it increase labour productivity and thus wages,” said Vlachynský. “But it can help this by improving the business environment – via lower taxes, simpler regulations, more flexible labour code, removal of various surcharges that make the final price of electricity more expensive and so on.”

In this term Vlachynský highlights that there is not even a mention about the business environment in the election programme of Smer; “rather contrary to this, the proclaimed increase of the minimum wage has the potential to continue to create a burden on employment of long-term unemployed and low-qualified people, especially in poor regions.”

Fiscal policy

The Fico government consolidated public finances during its term when it reduced the general government deficit from 4.2 percent of GDP in 2012 to the forecast 2.5 percent in 2015.

In terms of consolidating state finances “the cabinet chose fruits hanging low,” Radovan Ďurana of INESS told The Slovak Spectator. “It increased payroll taxes of the self-employed, reduced net incomes of those working on temporary employment agreements (na dohodu), reduced the second pillar and increased taxes for companies. This way it achieved reduction of the deficit, but at the detriment of economic growth, while the structure of expenditures and extensive waste has remained in most places untouched. We assess negatively the unwillingness to reduce expenditures; hundreds of millions of euros are still spent ineffectively.”  

Reguli evaluates positively consolidation of the deficit and a general improvement of the development of Slovakia’s debt while he shared the opinion that the cabinet achieved this via increase of revenues in the form of scrapping of the flat tax, increase of levies, introduction of tax licences and others.

“It has not conducted any reform of public expenditures in education, health care and social affairs,” Reguli told The Slovak Spectator. “Contrary to this it has brought in many non-systemic measures that will be difficult to cancel in the future. Social packages are a very good example of these measures. In this case certain groups of citizens are supported by money from the rest of society.”

2016-2020 priorities in fiscal policy

The cabinet has set fiscal goals in a way that it relies upon the growth of tax revenues and reduces the deficit this way, according to INESS.

“But this is not sustainable in the long term,” said Ďurana. “During the time of economic slowdown and decline of tax revenues the cabinet would again get into huge problems as it happened in 2009 and 2010. During this time Slovakia’s debt doubled and now represents a risk that allows neither the minister nor taxpayers to sleep calmly.”

When looking at election programmes of political parties in terms of whether they address the above challenges, Ďurana said that efforts to curb corruption or waste are found in programmes of all parties except for Smer.

“But efforts must be materialised in willingness to curb ineffective generousness of the social system, lay-off of employees who carry out useless activities or cancel the ministerial approach to management of the public administration,” said Ďurana. “Here only deeds will show how seriously they mean their promises and [proposed] measures.”

According to Reguli, the new government should endeavour to reduce expenditures via reforms of social benefits, health care and education, “where it is necessary to increase wages of teachers, but there exists space for modernisation and increase of effectiveness”.  

Business environment worsened

While economic analysts and employers see some positive measures improving the Slovak business sector, in general they evaluate the Fico cabinet and steps it has taken over the last four years negatively. Among the negative measures they list revision to the Labour Code making the labour market less flexible, increased payroll taxes and the failure to improve law enforcement. Among the positive features they list some reduction of red tape and mitigation of some regulations.

“A quality environment (i.e. a position somewhere up to the 20th ranking in the Doing Business, while in the edition for 2016 Slovakia was 29th), is still an unreachable Atlantis for Slovak business people,” Vlachynský told The Slovak Spectator.

He added that apart from the increase of taxes (and also levies for the self-employed) and introduction of new taxes, the cabinet significantly worsened administration of taxes, tightened accounting rules, made the Labour Code tougher, made employment via job agencies more difficult, and significantly increased costs of employing of low qualified labour through a higher minimum wage and the obligation to pay payroll taxes also by those working “na dohodu”.

“The chance to improve recovering of receivables and make restructuring process more effective has also been ignored,” said Vlachynský.

Vlachynský also pointed out that Slovak companies pay one of highest end electricity prices east of Berlin.

Among positive measures Vlachynský listed willingness to withdraw from some regulatory measures, for example cancelation of the duty to deposit the basic capital at a bank account or preparation of the so-called €1 company. He also pointed to automation of some administrative operations what will make the life of a business person easier, but Vlachynský says the slow pace of these changes also make it a weakness.

Reguli of the F. A. Hayek Foundation cited the use of investment stimuli in an inconsistent manner as another negative.

The National Union of Employers (RÚZ), the Federation of Employers’ Associations (AZZZ) and the Business Alliance of Slovakia (PAS) praised the revision to the law on education implementing elements of dual education, tax support for companies investing into R&D, ban of shell companies with unknown owners in public procurement, reduction of VAT evasion, introduction of reverse charge in the construction sector, introduction of virtual cash desks, the concept to support startups and the launch of the electronic market. 

Priorities for the business sector

While Slovakia suffers from overinflated bureaucracy and a large group of the long-term low-qualified unemployed, these two fields should be goals of the new cabinet regardless of its ideological inclination, according to Vlachynský.

“Concrete measures do not require fundamental fiscal sacrifices, only political will and readiness for action,” said Vlachynský. “The new cabinet should not resign itself either to the difficult fight with low law enforceability in Slovakia because this is a cornerstone of every healthy economy.”

In terms of individual political parties, Vlachynský pointed out that the current ruling party Smer does not bring any election programme while several other parties with sound chances to become parliamentary parties offer functional individual measures, but in many cases a sheltering scheme is missing.

Reguli believes that quality of the business environment may be increased via reduction of income and payroll taxes and gradual reduction of the regulatory burden. In terms of priorities he pointed out problems cited in various international rankings, for example indices of competitiveness, economic freedom and so on that list the labour market and lack of reforms in governmental expenditures as the main problems. Reguli believes that if the cabinet conducts reforms in the labour market, cuts government spending and business regulations, the business environment would improve.

“If the next cabinet conducted these three main reforms, it would win great support also of the business sector and might move Slovakia into position when foreign investments would be arriving as well as local companies being created,” said Reguli.

PAS lists priorities for the education sector and contends that technical education lags behind demands of a modern economy. Other issues to be addressed include the health care, corruption, clientelism, cronyism, nepotism in the public administration and tax fraud. PAS also calls for a real digitalisation of the public administration and support for creation of new jobs, especially via innovation, services, digital economy, Industry 4.0, reduction of the red tape and too often changes in legislation.

RÚZ would like to see the next cabinet to focus on a policy of competitiveness.

“The policy of competitiveness must be an absolute priority as this is basically the only tool the current cabinet has in hands that could create conditions for a higher economic growth,” Martin Hošták, secretary of RÚZ, told The Slovak Spectator, adding that Slovakia lost its monetary tools in 2009 and possibilities to stimulate the economy by fiscal policy are limited. In this respect RÚZ considers the need to reform labour-related legislation as inevitable, more reform of education as necessary, and need to be more active in combating of corruption.

When looking at programmes of individual parties, Reguli does not see any party courageous enough to run with distinct priorities in the abovementioned fields since the current Fico cabinet effectively defends its measures, for example social packages, and by this rolls back the opposition into situation when, by rejecting these measures they can be isolated.

Reguli does not expect that Smer to have any fundamental priorities in above mentioned fields. In case of opposition parties, but none of them offer unambiguous promises in these fields. This is also because there is no principally liberal party, though some promises of reforms can be found in Most-Híd.

Reguli also pointed out that in Slovakia voters do not put any significant stress on the election programmes of political parties and that in Slovakia campaigns as well as billboards are primarily about faces.

“The parties are more about personalities and concrete slogans,” said Reguli, adding that it may be also that current political parties by setting concrete promises do not want to ruin their chances to become a future partner of Smer in the next cabinet.

PAS, when looking on the programmes of individual parties sees that some of its priorities have made it to parties’ programmes and hopes that these will be addressed.

“We recently published Decalogue of Requirements of Entrepreneurs from Political Parties,” Peter Kremský, executive director of PAS told The Slovak Spectator, adding that they are now analysing the election programmes and whether they meet with their requirements and that they will release a comparison shortly.

The Decalogue includes, among others, requirements to reduce income and payroll taxes, reduce red tape, make doing business easier, revive public finances, improve education, support competition and open the joint EU market.

The AZZZ has also formulated 10 priorities that the next cabinet should realise in order it wants to be successful and beneficial for Slovakia. These priorities include stable political environment and consolidated public finances, reduction of income and payroll taxes, a clear orientation towards the European agenda, continuation of judicial reforms, improved law enforceability and increase quality of the legislative process, proper social dialogue, more effective drawing of EU funds, bigger support for R&D and equal conditions for support of domestic and foreign investors.

“What business people need the most is especially a stable political environment,” Rastislav Machunka of AZZZ told The Slovak Spectator. “They need a cabinet for bad weather that will offer expertise instead of populism; it will be able not only write down a quality programme [for the four-year term] but it will also stick to it and fulfil it.”

Neither AZZZ nor RÚZ assess programmes of individual parties.

“For us it will be important to communicate with the new cabinet, regardless of its composition,” said Hostak. “The priority is that the cabinet cooperates with employers and reflects their requirements.”

Machunka added: “AZZZ does not interfere into election fight of political parties and thus it will not comment on any concrete election promises. As social partners we are interested in participation of creation of the programme manifesto of the new cabinet.” 

 

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