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. In tandem with developments in its main trading partner economies, the economy is now recovering at an above average pace. 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.

Six years after Slovakia initiated a broad ranging series of reforms which generated high growth and rapid convergence the government again finds itself in front of major challenges, albeit within a much less benign international environment...

After falling significantly during the crisis, real GDP growth is recovering swiftly, helped by a pick-up in demand in Slovakia’s main trading partners. Unemployment rose substantially during 2009 and in early 2010 and the overall crisis-induced increase is now higher than on average in the OECD. The main challenge is to prevent a further build-up of long-term unemployment, which was already very high before the crisis. This will require reviewing the existing labour market programmes and ensuring wage flexibility by reforming minimum wage regulations and legal extension of wage contracts. The budget deficit has risen to around 8% of GDP, and the government is planning a major consolidation effort. The focus should be on containing government spending, including by implementing important reforms to the first pillar of the pension system. Phasing out tax exemptions and raising taxation of immobile bases should also be considered. In addition, fiscal institutions should be strengthened.

Given the deterioration in public finances, there is now very little scope for higher spending. Raising public sector efficiency would free up resources and yields better outcomes with the same inputs, helping to stimulate productivity and thus potential growth. Raising efficiency in tax collection (notably VAT) is urgently needed, plans to unify the collection of tax and social security contributions should be implemented swiftly and drawing on EU funds needs to become more efficient. In addition, raising the efficiency in healthcare should be a priority. This involves dealing with the high out-of-pocket payments and reforming the remuneration structure of doctors. Pharmaceutical spending is excessive and can be reduced, notably by further fostering generic substitution. Impediments to competition among health insurance funds should be reconsidered and the risk-equalisation system should be improved.

The transition to a greener economy supported by international environmental commitments and national policies will entail structural changes in consumption patterns and industry structures, resulting in a reallocation of resources in and between countries. Slovakia will need to build an effective framework for green growth to maximise its chances of exploiting cleaner sources of growth and to seize the opportunities to develop new green industries, jobs, and technologies. This requires addressing environmental externalities (for example by extending environmental taxation and removing subsidies) and improving the adaptive capacities of the economy through eco-innovation. Reforms to support innovation and R&D spending, such as making existing R&D public support more efficient, strengthening the protection of property rights and developing the venture capital market are needed. Also, administrative entry barriers in the product market should be reduced, competition in energy markets and in telecommunication fostered, and the tertiary education system reformed.