EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 1024 final COMMISSION STAFF WORKING DOCUMENT Country Report Slovakia 2019 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP

2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Reform priorities 3.1.Public finances and taxation 3.2.Financial sector 3.3.Labour market, education and social policies 3.4. Competitiveness and investment Annex A: OVERVIEW TABLE Annex B: Commission Debt Sustainability Analysis and fiscal risks Annex C: Standard Tables Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for SLOVAKIA References LIST OF Tables Table 1.1:Key economic and financial indicators — Slovakia Table 2.1:Summary table on 2018 CSR assessment Table C.1:Financial market indicators

Table C.2:Headline Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth LIST OF Graphs Graph 1.1: Real GDP growth and its components Graph 1.2: GNI per person in purchasing power standards Graph 1.3: Gross fixed capital formation Graph 1.4: Current and capital account balance Graph 1.5: Activity, employment and unemployment rates Graph 1.6: Labour shortage index Graph 1.7: Regional disparities Graph 1.8: Consumer inflation (y-o-y, %) Graph 1.9: Loans to sectors (y-o-y, %) Graph 1.10: House prices Graph 2.1: Overall multiannual implementation of 2011-2018 country-specific recommendations (CSR) to date Graph 3.1.1: Value-added tax compliance gap (2012-2016) Graph 3.1.2: Liabilities of health sector units included in general government (2012-2017)

Graph 3.1.3: Medical personnel by NUTS 2 Graph 3.2.1: SK Banks return on equity Graph 3.2.2: NPL and performing forborne loans Graph 3.2.3: House price to income ratio Graph 3.2.4: Valuation Gap Graph 3.2.5: Debt / GDP, Households Graph 3.3.1: Unemployment rate by regions December 2018 Graph 3.3.2: Link between unemployment rate (% x axis, Q1-2017) and share of Roma population (%, y axis) Graph 3.3.3: Employment rates by age group and sex, 2017 Graph 3.3.4: Regions of poverty Graph 3.3.5: Early Leavers (age 18-24) from education and training by NUTS 2 regions Graph 3.4.1: Evolution of labour productivity and gaps (GVA per worker in PPS) Graph 3.4.2: Business expenditures on R&D in % of GDP Graph 3.4.3: Digital Connectivity Index () Graph 3.4.4: Public procurement LIST OF Boxes Box 2.1: EU funding helps to connect regions and to foster development in Slovakia Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 3.4.1: Investment challenges and reforms in Slovakia

Executive summary Slovakia's impressive economic development since EU accession has laid the foundations for stronger future growth. ( ) Efforts to strengthen the public finances have helped to create stability and have paved the way for policies to help Slovakia modernise and innovate. However, persistent weaknesses in certain aspects of the labour market, in education, infrastructure, public administration and corruption still limit productive potential. A combination of well-designed reform policies and strategic investment could alleviate these barriers to growth, shield the economy from a potential slowdown and allow the Slovak economy to move up the value chain. Economic growth has accelerated further due to a synergy of supporting factors. According to the latest Commission forecast, real Gross Domestic Product (GDP) is projected to have increased by 4.2 % in 2018 due to solid growth in household spending amidst a strong labour market recovery and large average pay increases. Investment, especially in the private sector has been picking up. Real GDP growth is expected to remain buoyant at 4.1 % in 2019 before easing slightly to 3.5 % in 2020. A combination of strong domestic demand and increasingly strong growth in net exports underpins this favourable outlook. While private sector investment growth is likely to normalise in the medium term, external demand will act as an important source of economic growth, partly owing to expanding production facilities in the export-heavy manufacturing sector. The government deficit is projected to move further towards a balanced budget position in 2019 and the ratio of government debt to GDP ratio is projected to decline to under 47 % of GDP. The labour market situation improved due to strong economic growth. The employment rate (of people aged 20-64) rose to 72.5 % in the third quarter of 2018 and the unemployment rate fell to an all-time low of 6.1 % in the fourth quarter (seasonally adjusted). It is unlikely that the recent pace of job creation can be sustained in view of widespread labour shortages, an already high activity rate and high long-term unemployment reflecting mismatches between companies’ needs and the available workforce. Job opportunities for disadvantaged groups remain scarce, while relatively few workers move within Slovakia for better work opportunities and large regional disparities continue to make it difficult for the economically weaker regions in eastern Slovakia to catch up. Poor educational outcomes and inequality based on socioeconomic background are obstacles to inclusive growth. Economic convergence may potentially resume and could help reduce existing inequalities. As economic growth is expected to remain well above the EU average, Slovakia's income per capita is likely to begin to catch up again with the EU average. The current expansion in the manufacturing sector is concentrated in the west of the country and its benefits will not necessarily spill over to weaker regions. Improvements in the quality of public institutions and targeted investment may help reduce long-standing regional and socioeconomic inequalities. Growth in house prices appears to have peaked, as macroprudential policy measures help to contain credit growth. Low interest rates and limited housing supply still support house prices, but a range of indicators suggest no signs of significant housing market overvaluation. Budgetary consolidation is set to continue, supported by a favourable economic environment. Addressing the various investment needs in Slovakia — including those in education, innovation, infrastructure and energy technology — will help secure future growth and prosperity. Strategic investments in education and training and in research and development can help to bring out the best in young and future workers and researchers. Making the economy more knowledge-based will require investments in digital connectivity and the digital transformation of enterprises. Inadequate road and rail transport networks hinder smooth and efficient transport and transit. Sustainable and green investment can improve the energy efficiency of industries and buildings and support climate change adaptation, waste and water management, biodiversity and improved air quality. Shortages of skilled labour and future economic and social trends will require investment in improving people’s skills and in social infrastructure. This includes more accessible social housing, better healthcare, long-term care and childcare, with appropriate attention being paid to regional disparities. Annex D identifies key priorities for support by the European Regional Development Fund, the European Social Fund Plus and the Cohesion Fund over 2021-2027, building on the analysis of investment needs and challenges outlined in this report. Slovakia has made some progress in addressing the 2018 country-specific recommendations. There has been some progress in: ·Increasing the cost-effectiveness of the healthcare sector and addressing staffing shortages; ·Reinforcing activation and upskilling measures, in particular by delivering on the Action Plan for the Long-Term Unemployed; ·Fostering employment opportunities for women by extending childcare capacities; and ·Increasing the use of quality-related and lifecycle cost criteria in public procurement operations. There has been limited progress in: ·Improving the quality and inclusiveness of education; ·Tackling corruption; ·Improving the effectiveness of the justice system; and ·Reducing the fragmentation of the public research system and stimulating business innovation.

Regarding progress towards its national targets under the Europe 2020 strategy, Slovakia currently meets, or is on track towards meeting, the targets in relation to the employment rate, greenhouse gas emissions, energy efficiency and reducing the number of people at risk of poverty and social exclusion. The target for renewable energy use is currently not met but could potentially be met through dedicated policy efforts. The distance to the targets for R&D intensity and tertiary education remains significant, and although it is progressively narrowing in the latter case, a sustained effort would be needed to attain the R&D target. Meeting the target for early school leaving will be challenging as the situation has continuously deteriorated over the past years. Slovakia faces challenges with regard to a number of indicators of the Social Scoreboard supporting the European Pillar of Social Rights. While both employment and unemployment rates are improving at a fast pace, the long-term unemployment rate remains high despite recent decreases. Early school leaving is becoming more prevalent, enrolment rates of young children in childcare remain very low and availability of childcare facilities continues to be underdeveloped. On the positive side, income and employment inequalities remain low and so do the poverty levels, even though the impact of social transfers on reducing poverty has deteriorated. Access to public services, including healthcare, is difficult in particular in some regions. Key structural issues analysed in this report, which highlight particular challenges for Slovakia's economy, are the following: ·Buoyant revenues are helping to lower the budget deficit while efforts to boost tax compliance continue. While progress has been made in reducing non-payment of value-added tax, the effectiveness of tax compliance measures in reducing the high value-added tax gap remains to be seen. Property and environmental taxation remain a weak revenue source, but thematic public spending reviews are increasingly shaping public services and resource allocation for the better. ·Healthcare and pension systems are the source of long-term sustainability challenges. Slovakia’s projected rise in age-related costs is attributable to pension and healthcare spending in broadly equal amounts. The implementation of reforms to improve the cost-effectiveness of the health system continues, but public hospitals are still making large losses and were again granted debt relief in 2018. Staffing shortages in the healthcare sector represent a growing challenge, particularly in rural areas. The main features of the eHealth system, launched in 2017, are operational, and the implementation of diagnosis-related groups for monitoring purposes is gradually progressing. Public health promotion and disease prevention continue to offer chances to increase healthy life years and reduce healthcare costs. ·Slovakia's financial sector is financially sound but rising private indebtedness poses vulnerabilities. Regulatory measures to tame debt accumulation by households have helped to slow loan growth, but demand and supply conditions for mortgage credit make further debt growth likely in the medium term. Although house prices continue to rise appreciably and affordability is stretched, there are no signs of a significant overvaluation yet. ·The labour market is tightening further, exposing a number of structural challenges. Demographic trends and changing production methods will require workers to adapt by investing in skills. The number of unfilled vacancies is rising and requires effective implementation of active labour market policies and raising intra-country mobility. Long-term unemployment remains stubbornly high even though it is declining due to the implementation of the Action Plan for the Integration of the Long-Term Unemployed, adopted in November 2016. The low labour market participation of the Roma remains of concern. ·A stronger labour market is reducing poverty levels but some regions lag behind significantly. The situation is particularly critical in the south-eastern parts of the country, where high poverty and social exclusion levels are acute in the marginalised Roma communities. The effectiveness of policies to improve the social inclusion of disadvantaged groups is hampered by insufficient social housing, inefficient governance structures and the low attractiveness of social work. ·Education and training are being reformed but their low quality and inclusiveness represents a weakness. Spending on education has been falling in recent years relative to GDP and educational outcomes have worsened. Despite pay rises for teachers, salary levels are still not sufficiently attractive to attract enough well-qualified prospective staff. Inclusion of Roma in education remains problematic. New measures have been taken to encourage children’s participation in early childhood education and care, but a shortage of childcare facilities continues to hinder female labour market participation. Reforms aimed at improving higher education quality could provide a boost to Slovakia's human capital. Vocational education and training reforms are helping to align the supply and demand for skills. ·Productivity gains have driven past convergence and can enhance Slovakia's future economic potential. Cohesion policy remains an important driver of productivity-enhancing reforms, but insufficient administrative capacity to manage funding limits its transformative potential. Promoting research and innovation is a prime avenue for unlocking productivity gains but this is still hampered by a fragmented public research system. Boosting private and public R&D investment, consolidating the public research system to make it attractive for top researchers, and supporting smart specialisation and digitalisation are key policy priorities. Promoting the circular economy and resource efficiency, including by protecting environmental assets such as clean air, water and forests, is critical in order to make Slovakia's productivity growth sustainable. ·The public administration and the wider business environment remain weak. Despite the efforts carried out within the Better Regulation Strategy (RIA2020), insufficient cooperation between administrative levels and frequent legislative, regulatory and tax changes make government less effective. Efforts have been made to improve quality and competition in public procurement. Corruption continues to pose a challenge, and organisational and procedural weaknesses at the police and prosecutor’s level, as well as weak whistleblower protection, hinder the fight against corruption. Improving the effectiveness of the justice system remains a challenge. While the overall efficiency has been improving, concerns over the perceived independence of the judiciary persist. 1. Economic situation and outlook Growth performance Slovakia is enjoying very good economic times. After expanding by 3.2 % in 2017, economic growth (real GDP) is projected to have picked up to 4.2 % in 2018 (Graph 1.1). Continued and substantial improvements in the labour market have led to higher private consumption which supported the economic expansion. While public investment activity has followed a somewhat uneven pattern since 2015, reflecting the transition between the programming periods for EU funds, private investment has also played a significant role in accelerating GDP growth, especially in 2018. Graph 1.1:Real GDP growth and its components Source: European Commission The economic expansion is likely to ease slightly in 2019 when exports are forecast to boost the economy. Economic growth is expected to reach 4.1 % in 2019 and to ease to 3.5 % in 2020. Private consumption is set to remain the key driver of economic expansion for the coming years. A newly built car factory will increase exports significantly in 2019, despite an expected slowing in foreign demand. Investment activity is likely to ease after the strong performance in 2018. Growth in households’ real disposable income is expected to slow down in the medium term due to higher inflation and slower employment growth. This will be an important factor slowing the economic expansion beyond 2020. The expected deceleration in foreign demand is another factor likely to limit economic growth in the medium term, as are rising labour shortages. In spite of the swift economic expansion, convergence has yet to re-ignite. Real GDP per person based on purchasing power standards has stood at round 77 % of the EU average since 2014, and gross national income per person also remained broadly stable since 2013 at around 76 % of the EU average (Graph 1.2)( ). By contrast, real GDP per person growth between 2014 and 2017 outpaced EU average growth by more than 5 pps cumulatively, relative price level developments offset these gains. These divergent trends are explained by different data trajectories in the underlying price adjustment. However, Slovakia’s relatively fast economic growth trend, combined with less divergent price level developments, may revive nominal convergence of Slovakia over the medium term. Graph 1.2:GNI per person in purchasing power standards Source: European Commission Potential growth The economic expansion features both cyclical and structural components. While recent investment activity has stimulated potential growth in parallel with actual GDP, the predominantly consumption-led economic expansion in 2018 has driven GDP growth to rates above potential. As a result, overall economic growth is accompanied by a widening positive output gap reflecting the progressive tightening in the labour market and historically low cost of credit.

Potential growth is projected to sustain a solid pace exceeding 3 % over the next few years. However, the demographic outlook, with a projected decline in the working-age population( ), indicates that labour is likely to drag on potential growth in the years to come. Moreover, despite Slovakia having higher gross fixed capital formation as a share of GDP than the EU, economic convergence has stalled in recent years. Deepening the capital stock and investing in intangible capital and high value-added technologies can help diversify the economy and sustain economic growth and convergence. Household consumption Significant gains in the labour market have boosted private consumption. Solid growth in the real disposable income of households, a favourable macroeconomic climate together with low credit costs have set favourable conditions for private spending. Private consumption is expected to remain the main driver of growth in the coming years. The progressive tightening of the labour market and the resulting rapid wage growth is expected to feed into consumer price inflation in the coming years. Nevertheless, growth of household consumption in real terms is projected to remain around 3 %, which leaves the household saving rate broadly stable at close to 7.5 %. Investment Total investment has only recently reached the pre-crisis level. After a period of muted investment activity, EU funds drawdown and stronger private investment activity helped to reverse the declining trend in potential growth. A surge in investment activity in 2018 directed mainly at the construction of a new car factory significantly contributed to overall economic growth (Graph 1.3). The high growth of investment in 2018 is unlikely to be matched in 2019, making it a less important contributor to growth. Public investment is expected to assume a more prominent role thanks to some major public investment projects. Given the past experience with EU investment funds, the approaching end of the programming period of EU funding is also likely to spur public investment. Slovakia’s large stock of inward foreign direct investment dominates the country’s negative net international investment position. Although foreign direct investment outflows have gained importance since early 2016, its net (inward) stock as a share in GDP returned to above 50 % in 2017. However, overall flows of foreign direct investment are spread unevenly across the country, not least because foreign firms typically locate their headquarters in major cities. Some regions have not attracted major domestic or foreign investment in recent years, exacerbating the already high regional disparities present in many economic and social areas. Graph 1.3:Gross fixed capital formation Source: European Commission Export performance and competitiveness Foreign trade is likely to accelerate Slovakia’s economic growth in 2019. After a rather muted contribution to economic expansion in 2018, the positive effect of new investment on Slovakia’s export capacities and trade performance is expected to be built over 2019-2020. This should result in substantial export market share gains. Imports are expected to lag behind exports as high import-intensive investment is projected to slow. This should further support the net trade effect on economic growth. A solid foreign trade performance has been accompanied by slight erosion of price competitiveness of Slovak exports. The unit labour cost-based real effective exchange rate weakened mainly due to rising labour costs. As a result of labour market tightening, average nominal wages increased by 6.1 % from EUR 935 in Q3-2017 to EUR 992 in Q3-2018. Labour costs are set to grow further in the next years, outpacing the expected productivity gains. Strong investment into manufacturing — the economy’s dominant export sector — between 2014 and 2017 has strengthened labour productivity in the sector cumulatively by almost 12 %, thus mitigating negative costs developments. The expected slowdown in investment activity is likely to slow productivity gains, thus leading to faster rise in unit labour cost. Graph 1.4:Current and capital account balance Source: European Commission The current account balance is expected to remain in a deficit. Acceleration in exports due to new production facilities in 2019 is expected to mitigate the negative contribution of the income balance to the current account (Graph 1.4). The income balance is expected to remain negative over 2019-2020 on the back of dividend outflows. Mostly negative past net financing flows have built up a considerable negative net international investment position (-65.6 % of GDP in 2017). Foreign direct investment, which represents a safer and more stable form investment instruments, forms the bulk of the liabilities. However, the share of riskier instruments, such as short-term and long-term debt, has increased significantly since 2009 and stood at -15.1 % of GDP in 2017. Labour market and social situation Labour market conditions are improving amid strong employment growth. Total employment is above 2.5 million and the employment rate (20-64) increased to 72.5 % in Q3-2018 (+1.4 pps yearly, seasonally adjusted), with a particularly strong job creation in the manufacturing sector. The unemployment rate has declined continuously since 2013 and in Q4-2018 reached an all-time low of 6.1 %. The activity rate (15-64) inched up to 72.4 % in Q3-2018 while labour shortages are on the rise. Labour market slack shrank by Q3-2018 (year-on-year) due to the strong fall in both the underemployed (from 59 000 to 49 000) and the number of discouraged workers ( ) (from 46 000 to 40 000). Graph 1.5:Activity, employment and unemployment rates Source: European Commission The tightening of the labour market increases labour shortages and fuels wage growth. The European Commission’s quarterly labour shortages indicator, which measures the proportion of companies reporting a lack of qualified labour as a production constraint, rose by 7 pps in 2017 and stood at 19.3 % in 2017. This is the highest level recorded since EU accession in 2004 (European Commission, 2018). Reported labour shortages were particularly high in industry, followed by the construction sector and services (Graph 1.6). Half of the companies that tried to recruit Information and Communications Technology specialists reported problems in filling these vacancies. Increasing labour shortages are helping to bid up wages at a faster rate and to increase net earnings, which are still at relatively low levels in comparison to other EU countries. Graph 1.6:Labour shortage index Source: EMPL calculations on the business and consumer survey. Annual data obtained from raw quarterly/monthly seasonally adjusted data. The number of unfilled vacancies is rising in the public sector. Low salaries in public services are among the contributing factors, especially in more expensive regions and some professions such as nurses, teachers and social services workers. In the medium-term perspective, these sectors are also to be further affected by the age structure of their staff and difficulties in replacing retiring staff. In the education sector, close to 40 % of employees are above the age of 50 and the situation is only slightly better in healthcare and social work (Lubyová, M., Miroslav, S. et al., 2016).

The low labour market participation of women and disadvantaged groups and regional disparities hamper social cohesion. The employment rate of the low-skilled rose in 2017 to 37.3 % but it is still only half the equivalent rate for the medium and highly educated. The rate of young people not in employment, education or training, remains relatively high and the Roma population faces persistent challenges in entering employment. The gender employment gap is decreasing but women with young children tend to stay outside the labour market longer than in most EU countries, partly due to the lack of available childcare facilities. Poverty rates remain low but social exclusion remains a serious challenge in some regions. In 2017, the at-risk-of poverty or social exclusion rate decreased further and reached 16.3 %, significantly below the EU average of 22.4 % ( ), reflecting also low income inequality. However, close to 200 000 Roma people live in marginalised communities often without access to basic infrastructure and public services. Income and wealth are comparatively evenly distributed but inequality of opportunities remains high. For Slovakia, the S80/S20 indicator, which measures the ratio of incomes of the richest 20 % of households compared to the poorest, is among the lowest in the EU (3.5 compared to the EU average of 5.1 in 2017). This is due to low wage dispersion, rather than the redistributive effect of the tax and benefit system. Gross disposable household income per person grew at only around half the rate of GDP per person between 2010 and 2017, indicating that increases in income have reached households only to some extent, i.e. low inclusiveness of growth. Wealth inequality is also among the lowest in the EU, partly due to a high rate of home ownership. Inequality of opportunities remains high, as shown by the high poverty risk faced by children of low-skilled parents. Regional disparities Despite almost unrivalled economic growth compared to most EU countries, regional disparities remain large. In 2016, GDP per head (in power purchasing standards) ranged between 184 % of the EU average in the capital region and 53 % in the less developed NUTS 2 region of Východné Slovensko (Graph 1.7). The capital region also outperforms the remaining regions in a wider range of economic indicators such as the level of investment, labour productivity and salaries. Graph 1.7:Regional disparities Source: European Commission Labour market and social indicators show more acute challenges in Eastern and South-Eastern Slovakia. Territorial disparities in terms of labour market and social inclusion indicators remain significant. The regional dispersion in employment rates is substantial and persistent. The continuous outflow of medium- and highly skilled graduates, most notably from Eastern Slovakia to the West or other EU countries, may further intensify the regional differences (European Commission, 2018g). With the exception of the capital region, all regions in Slovakia had population growth below the EU average in the period 2010-2016. The health status of the population and the access to healthcare services in these regions is also affected by the regional differences. The current shape of regional disparities is a result of several factors. These include weaker infrastructure, an underdeveloped business environment, a low rate of innovation and an unfavourable educational structure in some of the regions. Lagging regions are not uniform and display idiosyncratic development needs. Examples include the transition of Horná Nitra from coal mining, the catching-up of the least developed districts and targeted measures to empower the marginalised Roma communities (see Section 3.4.3). Inflation Annual consumer price inflation settled at 2.5 % in 2018 and is set to remain elevated. The services sector has become the key driver of price dynamics, closely followed by processed food. After years of negative contributions, energy prices have begun to add to overall inflationary pressures. By contrast, non-industrial energy goods contributed only mildly to the overall price increase in 2018. Food prices are expected to ease somewhat while the prices of some energy items that are regulated by a state agency are expected to rise in 2019. Importantly, the swift growth of wages is set to spill over into services prices in the coming years. Overall, consumer price growth is expected to remain around 2.5 %. Graph 1.8:Consumer inflation (y-o-y, %) Source: European Commission Credit growth The buoyant economy is set to support credit growth for both households and non-financial corporations. Record-low interest rates and favourable labour market outcomes have and will continue to stimulate credit growth to households, even if it may have peaked in the first half of 2017. Since then its annual growth has eased, but it remains above 10 %. Slower mortgage lending growth appears to be the major factor underpinning the slowdown in total credit to households. Furthermore, macro-prudential policy measures effective from July 2018 (NBS, May 2018) are likely to relax demand pressures in the housing market by restricting credit supply. Credit flows to non-financial corporations remain strong. Loans for investment purposes kept growing solidly at a rate of 8 % year-on year, while growth in loans to small and medium-sized enterprises slowed to below 5 %. Private debt levels entail certain vulnerabilities. Sustained growth in household and corporate sector indebtedness may pose a risk to the stability of the economy in the event of a negative economic shock. Household debt reached 40.6 % of GDP in 2017 and continues to rise. Similarly, the indebtedness of non-financial corporations has risen significantly and increased by 10 pps of GDP between 2013 and 2017 to 55.5 % of GDP. Graph 1.9:Loans to sectors (y-o-y, %) Source: ECB, European Commission Housing market Despite fast price rises, the housing market does not show major signs of overvaluation yet. Although property prices keep increasing, developments so far have been broadly in line with the strong economic and financial fundamentals. Property price growth reached a peak at the turn of 2017 and has eased since. Strong demand that pulled property prices out of their post-crisis slump reflects favourable affordability backed by record-low credit costs (NBS 2017) and gains in real disposable income by households. The increase in building permits and residential investment have also mitigated demand pressures on prices. Envisaged slower employment growth and the tightening of credit standards by the National Bank of Slovakia are likely to restrain demand and shield the housing market from overheating. Graph 1.10:House prices Source: National Bank of Slovakia

Public finances The general government deficit has been declining since 2015 mainly due to the favourable economic climate. The deficit reached 0.8 % of GDP in 2017 and is expected to have declined to 0.6 % in 2018. The booming labour market significantly strengthened the revenue side in recent years as labour income tax and social security contributions soared. Similarly, value added tax collection continues to improve above the pace of private consumption growth. Corporate income tax revenue also recovered in 2017. The budgetary outlook appears favourable in the medium term. The government intends to achieve a balanced budget for the first time in 2019. A new insurance premium tax was brought in and further measures to improve tax collection, such as online cash registers and special fuel markers, are also envisaged. Most of the revenue increases will be used to cross-finance expenditure measures in net terms, notably a substantial increase in public wages in 2019 (European Commission, 2018i). The debt-to-GDP ratio is expected to have declined to just below 49 % in 2018, with further declines expected from 2019 onwards. Table 1.1:Key economic and financial indicators — Slovakia Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for real GDP and HICP, Autumn forecast 2018 otherwise) 2. Progress with country-specific recommendations Since the start of the European Semester in 2011, 63% of all country-specific recommendations addressed to Slovakia have recorded at least ‘some progress’. () By contrast, 37% have recorded 'limited' or 'no progress' (see Graph 2.1). For instance, some progress has been achieved in the area of taxation and tax compliance, in reforming the pension system, increasing labour market participation and in reducing poverty. Graph 2.1:Overall multiannual implementation of 2011-2018 country-specific recommendations (CSR) to date Source: European Commission Slovakia has seen a gradual improvement in its fiscal position, but long-term challenges persist. Following the timely correction of Slovakia’s excessive deficit situation by 2013, the general government deficit was reduced further until 2017, when the deficit reached -0.8 % of GDP. The fiscal consolidation was driven by buoyant revenue growth as well as adjustments on the expenditure side. Tax revenues growth was supported by swift and tax-rich economic growth, but was also facilitated by policy efforts to improve tax collection and reduce tax fraud, particularly in value-added tax. Ensuring gong-term fiscal sustainability remains a challenge in light of considerable spending pressures from population ageing, which are projected to push up pension and healthcare spending levels over the coming decades. Improving the cost-effectiveness of the healthcare system has been a long-standing challenge the Slovak government has paid considerable policy attention to, with efficiency savings and strategic reorganisation plans beginning to materialise. Labour market policies have helped to underpin a significant improvement in the jobs market, with a much-needed focus on disadvantaged groups. The previously high unemployment rate has witnessed a remarkable decline from 2014 onwards and has now reached historic lows of close to 6%. Improving support for the long-term unemployed and other vulnerable groups has been high on the government's agenda for a number of years. Improving the range and effectiveness of active labour market policies remains a challenge and is make more acute by growing labour shortages. Some advances have been made in providing better-targeted and individualised support for jobseekers, particularly the long-term unemployed, but support services are still relatively thin. Very little progress has been made in tackling low Roma participation in the labour market. Education and childcare reforms have been undertaken but they may take further time and effort to produce better outcomes. Progress has been made towards increasing the capacity of and access to early childhood education and care, particularly for the over threes, but the lack of childcare supply continues to be an issue. Mediocre education results at secondary level and a lack of job-market relevance and international attractiveness of universities have made education reforms and better funding a key policy priority, however tangible reform results can only be observed in the area of vocational education and training. Recent pay rises for teachers came as natural response to the tightening labour market, but as such are insufficient in raising the attractiveness of the profession. Supporting socially inclusive education, including of Roma pupils, deserves continued efforts and political commitment. Reforming public services and the public administration has proven to be a slow process, but with notable progress in some areas. The Slovak government has committed itself to greater efficiency and effectiveness in public spending and administration, an ambition underpinning the strategic spending reviews under the Value for Money initiative. Progress here is all the more important given persistent weaknesses in public administration and justice system, which still affect the business environment and deter entrepreneurship and investment. Human resource management and lacking analytical capacity in the civil service has been improved. There are clear signs of progress in modernising public procurement, where lack of competition and transparency have been long-standing challenges. Perceptions of corruption remain stubbornly high and have been met with only limited determination to prosecute high-level corruption cases. Slovakia has made some progress in addressing the 2018 country-specific recommendations. ( ) Some progress has been made with respect to the fiscal-structural part of the first country-specific recommendation, where relevant advances in improving the cost-effectiveness of the healthcare system are to be noted. Some progress is also visible in the second country-specific recommendation, as various activation and job-matching measures and programmes have been introduced. The implementation of the Action Plan for the long-term unemployed is progressing and a planned 1,800 new childcare places have been created in 2018. A new national reform programme for the development of education and upbringing (2018-2027) adopted in 2018 aims at improving the quality of education, increasing children's participation in early childhood education and care, and primary education, including measures dedicated to Roma children, however, the progress has been limited so far. Only limited progress has been made in addressing the third recommendation. The Public Procurement Office has helped to speed up public procurement procedures and increase the absorption of EU funds. By contrast, no discernible progress has been made in combatting the problem of corruption. Only limited progress has been made towards improving the effectiveness of the justice system as concerns over the independence of the judiciary persist. Limited progress has been made in stimulating business innovation, and measures to consolidate the public research system and make it more efficient have not yet been adopted.

Table 2.1:Summary table on 2018 CSR assessment Source: European Commission Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in in Slovakia Slovakia is one of the largest beneficiaries of EU solidarity. In the current Multiannual Financial Framework, Slovakia receives more than EUR 15 billion in support to address development challenges. This is equivalent to around 2.5 % of GDP annually. This significant budget is to be invested in various areas, from creating jobs and growth to supporting sustainable transport as well as protecting the environment and investing in research and innovation. At the end of 2018, around 70 % of the total available funds equalling some EUR 10.7 billion had already been allocated to specific projects in various sectors. EU funds have helped to address policy challenges identified in the 2018 country-specific recommendations. Slovakia progressed with the implementation of the Action plan for the Integration of the Long-Term Unemployed, driven by the European Social Fund, supporting disadvantaged groups with training and individualised services. European Structural and Investment Funds will also help to build or modernise up to 500 childcare facilities, out of which 300 will target the municipalities with high share of marginalised Roma communities. The European Social Fund further contributes to the reform of vocational education and training, in particular in dual education. By 2018, investments mainly driven by European Structural and Investment Funds have led to the construction or modernisation of 110 km of motorways and expressways to bring regions closer together and to unlock their economic potential. EU Funds also supported the digitisation of state administration and public services. In addition, the Commission can provide tailor-made technical support at the Member State’s request via the Structural Reform Support Programme to help Member States implement growth-sustaining reforms to address challenges identified in the European Semester process or other national reforms. Slovakia, for example, received support to improve its public finance performance, including through national capacity building to run expenditure review processes and achieve smarter expenditure allocation as well as through the design of a strategy to foster voluntary tax compliance. The Commission is also assisting the authorities in their efforts to improve the efficiency of the health system, in particular by providing options for optimising the hospital network in order to deliver effective healthcare and strengthen the role of general practitioners. EU funds help to mobilise private investment. European Structural and Investment Funds mobilise additional private capital by allocating nearly EUR 900 million in the form of loans, guarantees and equity. This investment is expected to leverage additional private investment with a multiplier of approximately 14 for guarantees, 2.2 for loans and 1.7 for equity investments. In addition, the European Fund for Strategic Investments has allocated a total of EUR 537 million to projects in Slovakia, triggering EUR 1 billion in additional private and public investments. 11 531 small and medium-sized enterprises and mid-cap companies are expected to benefit from better access to finance. EU funds and programmes under direct management complemented the European Structural and Investment Funds. Under the Connecting Europe Facility, EUR 710 million were allocated mostly to railway projects on strategic transport networks in Slovakia. Horizon2020 provided almost EUR 90 million to 285 Slovak research institutions, innovative firms and individual researchers. EU actions strengthen national, regional and local authorities and the civil society. More than EUR 300 million have been allocated to strengthening capacity of public administration at different levels by prompting close cooperation with stakeholders. As regards multi-layer cooperation, the Prešov region was a pioneer of the Catching up Regions Initiative which will help to unlock the potential of Eastern Slovakia, with the World Bank being a key partner. The second active initiative in Slovakia, the Coal Regions in Transition Initiative, will help with the socio-economic and technological transformation of the Horna Nitra region for a future after the phasing-out of coal mining. More information at: https://cohesiondata.ec.europa.eu/countries/SK 3. Reform priorities 3.1.Public finances and taxation Taxation and tax compliance Slovakia’s fiscal deficit is falling and fiscal revenues in relation to GDP are increasing from low levels. The general government deficit fell from 2.6 % of GDP in 2015 to 0.8 % in 2017, and government debt was reduced to 50.9% of GDP over the same period. In 2017, the tax-to-GDP ratio stood at 33.0 % of GDP (EU average: 39.0) and is projected to remain around that level in both 2018 and 2019 (Commission 2018 autumn forecast). Revenues from labour taxes are the biggest source of tax revenue. ( ) Labour taxes and social security contributions are particularly important in the current tax mix (53.9 % of total taxation; 49.7 % in EU in 2016). By contrast, the shares of revenues from consumption and capital taxes on total taxation are below the EU average. Taxes on production and imports are some of the lowest in the EU. The preponderance of employment-related revenues exposes public finances to cyclical and structural changes in labour market, including from greater automation and the move to industry 4.0 (see section 3.3). Revenue from recurrent property taxes and environmental taxation are both among the lowest in the EU. While these tax types are considered less detrimental to growth, total revenue from recurrent taxes on immovable property stood at 0.4 % of GDP in 2017 (European Commission, 2019b), which is considerably lower than the EU average of 1.6 %. Revenue from environmental taxes, at 1.8 % of GDP in 2017, is also somewhat below the EU average of 2.4 %. The implicit tax rate on energy was among the lowest in the EU in 2016, at 115.2% (EU: 246.8 %)( ). This is an indication that Slovakia may be underutilising property and environmental taxation as revenues. Well-designed policies could potentially shift the tax-burden away from labour, shield vulnerable groups such as low-income families from undue tax rises, and reduce distortions from direct taxation. The tax wedge ( ) on labour is higher than the EU average across the income scale. The highest difference in the tax wedge was for a single low-income earner (at 67 % of the average wage) with two children, which stood at 28.5 % in 2017, compared to an EU average of 17.9 %. Also, the tax wedge for first earners with two children and income at 67 % of average wage was 3.2 pps higher than the EU average in 2017. When the secondary earner enters the labour market, the primary earner loses the dependent spouse allowance. This represents a financial disincentive to female labour market participation and may partly explain Slovakia's low female employment rate of 64.7% in 2017. Nevertheless, Slovakia’s relatively low inactivity trap suggests the disincentive is not especially pronounced. Graph 3.1.1:Value-added tax compliance gap (2012-2016) Source: Centre for Social & Economic Research/CASE (2018) Tax compliance has improved. Between 2015 and 2016, compliance in paying value-added taxes improved, with the value-added tax gap decreasing by 3.6 pps. However, the level of corresponding revenues lost in 2016 was estimated at 25.7 % of theoretical value-added tax liability, considerably above the EU average of 12.3 %. The rise in value-added tax compliance suggests that policy measures taken in recent years (such as the ‘control statement’) have started to show effect, even if it is still too early for a comprehensive evaluation. However, measures like the reduction of fees for the issuance of tax rulings only had limited effects. Voluntary tax compliance may potentially improve if guided by appropriate policy efforts, while call centres and pre-filled tax returns continue to provide useful and practical support to taxpayers. Anti-fraud measures should improve control efficiency and increase value-added tax collection. Notably, a unified analytical centre is planned to be set up. Moreover, entrepreneurs will be obliged to use online cash registers ('eKasa'), which is likely to improve value-added tax collection and tackle fraud at the retailers’ level. Similar improvements are anticipated from the introduction of fuel additives ('nano-markers'), which should help reduce the high tax gap in the excise duties on mineral oils due to smuggling and counterfeiting of fuels. ( ) The true impact of these measures is likely to become visible by the end of 2019. In 2018, specific anti-avoidance measures were introduced. Greater use of fair value instead of the historical prices should strengthen the tax regime for mergers and acquisitions. Anti-avoidance measures introduced in 2018 include an exit tax and rules on hybrid mismatches. Controlled foreign corporation rules for legal entities apply as of 1 January 2019. Taken together, these measures are expected to increase the amount of the tax levied. Specific base erosion and profit shifting challenges were addressed by strengthening various legal definitions (e.g. beneficiary; owner of income; permanent establishment of foreign companies operating through digital platforms; and income from sources in Slovakia). In addition, the definition of tax residence for individuals was broadened by including non-residents with strong ties to living in the country. The taxation system imposes considerable compliance costs on businesses. Slovakia shows a relatively high cost of tax compliance for businesses — which captures both the effect of the tax rules themselves as well as the costs of interacting with tax authorities — compared to other EU Member States, particularly for direct taxes. Entrepreneurs call for greater stability and predictability of the tax environment. ( ) Audit activities and cross-checking remain cornerstones of the compliance strategy. The frequency of value-added tax audits declined in 2017 amidst a shift towards income tax audits. Voluntary compliance is likely to be encouraged through the introduction of a tax reliability index ( ) adopted in December 2018 that assesses a taxpayer's risk profile on the basis of publicly known criteria. Top-ranked tax-payers will be entitled to enhanced services. ( ) Fiscal framework and spending review Regular spending reviews supported the public discussion on the quality of public finances. Since 2016, spending reviews prepared in the context of the ‘Value for Money’ project have covered numerous areas such as healthcare, information technology, transport, education, environment, labour market and social policies, agriculture, marginalised Roma communities and the public wage bill. ( ) Selected studies were made also in the area of defence. Reviews are followed by interim implementation reports prepared by the Implementation Unit at the Office of the Prime Minister. Spending review assessments are to be integrated in the budgetary process. So far spending reviews have had a limited impact on government priorities and spending plans. The amendment of the Act on Budgetary Rules, approved by the government, will oblige subsequent governments to carry out spending reviews covering an amount equivalent to at least half of the expenditure volume in the general government budget over a four-year period. Reviewing the implementation of these spending reviews recommendations would be a mandatory part of the budgetary documentation. The budgeting framework still shows certain gaps in terms of coverage, time horizon and reliance on cash accounting. The State Budget Act determines budgetary aggregates only for a part of the public administration and one year ahead. However, the ceilings do not cover the local government sector, social security and other general government entities. To address these shortcomings, binding expenditure ceilings were planned in the constitutional law of 2011 but have not been introduced. Yet, based on a recently published discussion paper by the Ministry of Finance, the government plans to launch simulated expenditure ceilings in 2019 (Ministry of Finance 2018e).() The purpose and impact of this initiative remains to be assessed in future. Debt sustainability analysis and fiscal risks

Public finance faces primarily long-term risks. ( ) The fiscal sustainability gap indicator S2 shows that, relative to the baseline no-policy-change scenario, a cumulated improvement of 2.5 pps of GDP in the structural primary balance would be required to stabilise the debt-to-GDP ratio over the long term. This result is due to the projected increase of ageing costs (contribution of 2.4 pps of GDP), and a slightly unfavourable initial budgetary position (contribution of 0.1 pps of GDP). Pensions and healthcare outlays are projected to remain the main drivers of Slovakia’s long-term ageing costs (European Commission 2019). Taken jointly, these two items are expected to contribute by 1.8 pps of GDP (European Commission, 2019a; European Commission, 2017c) As a result, the S2 indicator implies that long-term fiscal sustainability risks are medium for Slovakia. ( ) This assessment excludes the adverse potential impact from capping the retirement age in the constitution, which is currently under discussion in Parliament. Healthcare Despite regular debt relief from the public budget, the healthcare sector continues to accumulate debt. At the end of 2017, the sector’s total debt amounted to EUR 1.46 billion ( ) (Graph 3.1.2). More than half of this amount represented overdue liabilities, mostly to providers of medical supplies, followed by the Social Insurance Agency. In 2018, the government carried out the first step of a three-step debt settlement plan for hospitals. This round for EUR 187 million ( ) should help reduce the growth rate of future arrears. To be eligible to participate in the final two steps of the programme, health providers are required to negotiate a restructuring plan with the Ministry. However, the pattern of regular debt relief by the government does not appear to tackle the root causes leading to the steady accumulation of arrears in hospitals. Despite the savings associated with the implementation of measures from the Value for Money spending review, revenues from health insurers fail to cover the operating costs of all hospitals, pointing to possible under-budgeting and inadequate monitoring and management practices. Graph 3.1.2:Liabilities of health sector units included in general government (2012-2017) Source: Ministry of Health of the Slovak Republic The implementation of reforms to improve the cost-effectiveness of the health system continues. ( ) Measures implemented in the context of the first spending review have reduced wasteful spending on health by about EUR 108 million per year in 2017 and 2018 vis-à-vis a target of EUR 190 million. The interim implementation report on the second healthcare spending review showed that only limited savings were generated in the first half of 2018. These were achieved mainly in public health insurance, while spending in hospitals has continued to grow. The greatest savings were attained through the review of medical aids and limiting the over-consumption of pharmaceuticals and cost-control improvements at the National Insurance Company. The main features of the eHealth system, launched in 2017, are operational, and the piloting of the diagnosis-related group system — so far only for monitoring purposes — is gradually progressing. An ambitious reform of the hospital network to streamline the use of inpatient resources by concentrating hospital capacity both regionally as well as functionally was recently developed, with a project timeline to 2030. Health workforce shortages are a challenge that disproportionately affects citizens in rural and disadvantaged areas. The number of nurses per capita is lower than the EU average (5.7 compared to 8.4 per 1000 population in 2016) and has decreased sharply in the past years due to the increasing number of nurses leaving to work abroad. Recent estimates by the Ministry of Health show that hospitals face a shortage of over a thousand nurses, and that only 44 % of domestic nursing graduates actually take up nursing jobs (Ministry of Health, 2018). To improve recruitment and retention rates, the government plans to increase salaries for nurses, midwives and health care assistants by between 10-16 % in 2019, and to set up incentives for nursing graduates to start their career in Slovakia. While the number of doctors in Slovakia is in line with the EU average, recruiting doctors in certain regions is a challenge. The difference in the doctors-to-population ratio between the capital region and the rest of the country (Graph 3.1.3) is one of the highest in the EU, posing barriers for citizens' ability to access care in a timely and equitable manner. The lack of general practitioners and excessive avoidable hospitalisations indicate a need to strengthen primary care. Slovakia has one of the lowest shares of general practitioners in the EU, and only 9 % of medics decide to specialise in general practice (Giorno, C. and K. Londáková, 2017c). Shortages of general practitioners may lead to above-average rates for avoidable hospital admissions negatively affecting efficiency and quality of care. Significant differences in the geographical distribution of general practitioners are observable as well, implying accessibility challenges and corresponding investment needs. Graph 3.1.3:Medical personnel by NUTS 2 Source: Eurostat, 2016 for medical doctors, 2014 for nurses Public health is gradually improving but sizeable socio-economic health disparities exist. Over the last five years, the gap with the EU average life expectancy at birth has narrowed by almost five months. However, in 2016 life expectancy for Slovak men and women remained lower than the EU average by 4.4 and 2.9 years, respectively. Differences based on socio-economic status are significant: the life expectancy gap between citizens with tertiary education and those with less than lower secondary education was 10.4 years in 2016. Quality of care is improving, albeit from a relatively low level. Despite some reduction achieved over the last five years, the rate of premature deaths ( ) remains high almost double the EU average. Deaths due to cardiovascular diseases and cancer remain the main causes of mortality, accounting for 45 % and 26 % of all deaths in 2015. While quality of acute care for cardiovascular diseases has registered some developments over the past years, cancer survival and screening rates have improved only marginally and remain below the EU average. ( ) Disease prevention and public health show some weaknesses. Estimates show that 37% of the total burden of disease in Slovakia in 2017 was attributable to lifestyle-related risk factors (IHME, 2017). The lack of effective coordination between care sectors, as well as a significant decrease in prevention spending in the past years, negatively affected the impact of existing health promotion programmes. 3.2. Financial sector Banking sector Slovakia’s small banking sector performs well but fast-growing private indebtedness may threaten future prospects. There are 25 banks operating in the country and together they control close to 70 % of the total financial assets. Half of these are controlled by 3 major players. Retail loans (consumer and housing) continue to dominate the credit market, and have been growing faster than corporate loans in the first half of 2018 (11.2 % year-on-year vs 5.4 % year-on-year). In the same period, Slovakia recorded one of the fastest credit growth rates in the non-financial private sector in the EU. The rapid growth of household indebtedness in particular was also identified by the National Bank of Slovakia as a potential risk to the stability of the financial sector. Financial indicators remain sound while bank profitability has dropped to around EU average levels. The overall banking sector’s return on equity stood at 5.9 % in 2017. Having historically stood above EU and euro area averages, it has trended downwards in the recent period towards these levels (of 5.8 % and 5.7 %, respectively). Rising wages in the banking sector, low interest rates and the special bank levy have resulted in higher operational costs and reduced revenues. This translated into a cost-to-income ratio very close to EU and euro area averages. Interest rates play a particularly important role in shaping profits. According to data produced by the National Bank of Slovakia, a drop of 0.1 % in net interest margin implies a decline of around 10 % in banks’ net profits. Profits are also squeezed through Slovakia’s maturing and increasingly saturated credit market, as lending expansion and rate-cutting are no longer viable options. Banks may therefore have to find new ways to maintain margins, e.g. by investing in new technologies. Aggregate credit quality appears to be good as the non-performing loans ratio has been steadily declining. Amidst a low credit cost environment, supported by a well-performing labour market, the ratio of non-performing loans fell to 3.8 % in Q2 2018, one of the lowest in the EU (3.6 % in EU). The ratio of performing to non-performing forborne loans improved slightly in the recent period, which could be an indication that banks are offering more accommodating conditions when renegotiating terms. Looking ahead, the swift expansion of banks’ balance sheets increases the absolute level of financial risk, even in the absence of deterioration in credit quality. This could pose a particular challenge for the banks which saw a reduction of their highest-quality (equity) components in their capital structures. Graph 3.2.1:SK Banks return on equity Source: Eurostat, ECFIN calculations Graph 3.2.2:NPL and performing forborne loans Source: Eurostat, ECFIN calculations The National Bank of Slovakia took steps to slow the growth in the debt of household and non-financial corporations. Starting in July 2018, an amendment to the National Bank of Slovakia decree 10/2016 entered into force, limiting the new mortgage loans loan-to-value ratio to 90 %, down from 100 % previously. Further restrictions were also introduced to limit the proportion of new loans with a ratio> 80 % to under 30 % of total new loans (down from 40 % and > 90 % previously) as well as to the maximum indicative debt-to-income levels. These thresholds will be further tightened in 2019 and are likely to have contributed to the moderation in house price growth in the second half of 2018. Additional measures were taken by the National Bank of Slovakia in relation to the minimum mandatory capital buffers for the five largest banks operating in Slovakia, effective from January 2018. As Slovakia’s banks are well-capitalised, fulfilling the minimum requirements for own funds (capital) and eligible liabilities is generally considered unproblematic in current, liquid market conditions.

Housing market Similar to other Central and East European countries, housing prices continue to rise. In Q3 2018, residential property prices (on average EUR 1433/ m2) surpassed their previous peak of Q2 2008. In 2018 house price inflation moderated from 4.8 % year-on-year in Q1 to just 4.0 % in Q3, a virtually unchanged level from the previous quarter. Prices are heavily skewed towards the Bratislava area where the average price / m2 is EUR 2000, almost double compared to the next most expensive regions, Trnava and Košice. Graph 3.2.3:House price to income ratio Source: Eurostat, ECFIN calculations The estimated valuation gap for housing prices in Slovakia is close to zero. According to Commission calculations, the alternative valuation metrics suggest no significant overvaluation imbalances and the growth rates recorded in the past years appear sustainable. In particular, price-to-income measures do not point to an overheating housing market. Affordability remained stretched in 2017, with an average of 9.5 years of income needed for the acquisition of 100 m2, which is broadly in line with the long-term average. Graph 3.2.4:Valuation Gap Source: Eurostat, ECFIN calculations Demand for housing is fuelled by a positive economic climate, but also a lack of alternative housing options. Slovakia ranks very high in EU in the share of young people (aged 25-34) still living with their parents (57 % v the EU average of 28 %; Eurostat, 2019) and in the high number of persons sharing rooms. Slovaks also leave their parents’ house at the age of 31 on average, putting them among the latest in the EU. The thin rental market means that young people often struggle to move to rented accommodation as an intermediate step towards home ownership (see chapter 3.3). Less than 9 % of the population rents at market prices, usually in Bratislava and a few other cities. The lack of property for rent keeps the cost of renting high (in some cases even higher than the cost of ownership), while also limiting labour mobility. Lower income groups are particularly hard-hit, being priced out of the rental and ownership market, while also suffering from a shortage of social housing in major cities. Housing infrastructure available for social housing is a prerequisite for effective roll-out of social policies. Household debt Household debt continues to rise and poses a potential risk to the stability of the banking sector. A favourable economic outlook, historically low interest rates, high employment and rising wages have encouraged households to take on increasing amounts of debt. However, households’ disposable income did not rise as fast as GDP or wages over the past 10 years (2008-2017 average GDP growth 2.5 %, wages 3.1 %, disposable income 1.6 %). Slovakia recorded the highest growth in terms of household debt to GDP in 2017 and the first half of 2018 in the EU. This debt mostly consists of mortgage loans, associated with a culture of home ownership. Slovakia ranks very high in the EU in terms of people living in owned dwellings (90.1 % versus 70 % and 66 % and euro area averages). All these were major contributing factors to the accumulation of debt. Intermediaries such as mortgage brokers play a major part in keeping the flow of new mortgages high. Around 60 % of new mortgages are arranged via brokers, whose earnings consist of commissions earned upon the signing of a new borrowing agreement. While brokerage activities have helped to create more liquid mortgage markets, they have also contributed to households regularly re-financing their mortgages at lower rates while leaving debt service costs typically unchanged. This in turn has eroded financial buffers for households in the event of interest rate increases, and the reliance of banks on brokers has driven down banks’ lending margins. Higher household savings can create financial buffers to cope with rising debt service costs. Looking ahead, potential rising interest rates will pose a double risk to households. First, the debt service effort will increase and squeeze household finances. Second, some households may no longer qualify for mortgage loans on the basis of the macro-prudential rules in force, which may cause them to substitute mortgage financing with more expensive consumer loans. The impact of rising interest rates is enhanced by the generally long terms of existing mortgage and consumer loans (more than 26 years on average for housing and seven years for consumer loans). Households appear to have responded to rising house prices by extending mortgage maturities, as during 2017 63 % of mortgages were issued at 30-year maturities (the permitted maximum), up from 54 % in 2016. Graph 3.2.5:Debt / GDP, Households Source: Eurostat / ECFIN calculations 3.3. Labour market, education and social policies Labour market Strong economic growth has led to significant labour market improvements but structural challenges persist. The unemployment rate reached a new historical low of 6.1 % in Q4-2018 (seasonally adjusted). Supported by the creation of around 50 000 new jobs compared to Q3-2017, the employment rate (20-64) increased to 72.5 % in Q3-2018 and wages continued to grow at a fast pace. Despite these improvements, important regional and gender disparities in terms of employment levels and job vacancies persist. The unemployment rate remains relatively higher in three regions of southern and eastern Slovakia. Graph 3.3.1:Unemployment rate by regions December 2018 Source: Central Office of Labour, Social Affairs and Family Demographic trends and new production processes will have an important impact on the labour market. While the population is set to decline across the country in the long term (2035), it is forecasted to decrease the most in the regions that are already facing labour shortages (except for Bratislava). It is also estimated that 33 % of all jobs in Slovakia are highly automatable and another 31 % are at risk of a substantial change in how they are carried out (OECD, 2018a). Cumulatively, these estimates indicate that close to two thirds of jobs are at risk, the highest rate among Organisation for Economic Co-operation and Development countries. Automation can also contribute to the creation of new jobs. This requires sizeable investment in adapting to new labour market demands requiring new and more advanced types of skills and competences (European Commission, 2018g). Currently, only 33% of Slovaks have above basic digital skills. The number of vacancies is increasing. Employers report increasing difficulties in finding workers with the required qualifications. Vacancies registered at the public employment services confirm this increasing trend. Over the past two years the number of vacancies doubled and reached 84 000 in September 2018. In 2017, the bulk of vacancies are concentrated in the public administration (22.6 %), manufacturing (16.3 %), trade (8.9 %) and transports (8.7 %). Job vacancy ratios differ significantly among regions, with a clear negative correlation with the unemployment rate (Graph 3.3.1). The ratio ranged from 1.25 in Bratislava to only 0.13, on average, in the regions of Banská Bystrica, Prešov and Košice in December 2017. Growing labour demand attracted significant numbers of migrant workers. In September 2018, there were 65 000 foreigners working in Slovakia, a 40 % increase from 2017. Since 2016, immigration has been dominated by non-EU nationals, notably from Serbia and Ukraine, who now constitute approximately half of all foreign workers (Ministry of Finance, 2018g). As of May 2018, Slovakia has relaxed requirements for employing migrants from third countries, introducing a simplified procedure for filling designated scarce jobs in districts with unemployment levels below 5% (up to a maximum of 30 % of employees per enterprise). The inflow of foreign workers is unlikely to fully meet the growing demand for labour, which signifies the importance of addressing domestic barriers to higher labour market participation. Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence towards better working and living conditions in the European Union. I It sets out twenty essential principles and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social protection and inclusion. Slovakia faces some challenges on the indicators of the Social Scoreboard supporting the European Pillar of Social Rights. The long-term unemployment rate remains high despite improvements. The impact of social transfers on poverty reduction deteriorated and the early school leaving is on the rise. On the positive side, income inequality and the share of people at risk of poverty or social exclusion remain low, while both employment and unemployment rates are improving at a fast pace. Access to public services, including healthcare, is difficult in particular in some regions, thereby negatively affecting social inclusion of disadvantaged groups. The enrolment in early childhood education and care remains very low. Less than 2 % of children under the age of 3 are in formal childcare, compared to the EU average of 33 % as highlighted by the Social Scoreboard. This is mostly driven by generous maternity leave conditions and also the insufficient availability of childcare services. In the school year 2017/2018, there was a significant surplus in demand for places in kindergartens, with 7.7 rejected applications per 100 enrolments. The situation was particularly critical in the two biggest cities Bratislava and Košice, where the refusal rate was 27 % and 12 % respectively (IFP 2018). A dual vocational education and training scheme was introduced in 2015. It aimed at making vocational education and training more relevant to the needs of companies and more attractive to learners. However, while the scheme attracted a significant attention of employers, the interest of young learners remained moderate. An additional 2018 amendment lifted remuneration ceiling for learners’ productive work, while recognising only remuneration up to 100 % of minimum wage as tax deductible. It abolished the disincentives for schools to enter dual vocational education and training by ensuring full per capita funding for participating institutions. Finally, it harmonised curricula for dual learners and non-dual learners receiving the same qualification. These changes have led to a quadruple increase in new enrolments of apprentices, from 422 in the school year 2015/2016 to 1 615 in the school year 2018/2019.

Long-term unemployment remains a serious challenge. The long-term unemployment rate (as a share of the active population) decreased by 1 pp (y-o-y) to 4.0 % (109 000 people) in Q3-2018, well above the EU average of 2.9%. The average duration of unemployment was among the highest in the EU. A 60 % share of long-term unemployed among all unemployed signals structural challenges related in particular to educational attainment, low intra-country mobility and regional differences in job opportunities. In 2017, 23.1 % of the low-skilled were without a job for more than a year, compared to 4.6 % of the medium-skilled and 1.7 % of the high-skilled. Almost 60 % of the low-skilled long-term unemployed are under 29 years of age, reflecting increasing school drop-out rates. Three quarters of the long-term unemployed are concentrated in three regions: Prešov, Košice and Banská Bystrica. The share of young people neither in employment nor in education and training is decreasing albeit from a high level. In 2017, the rate (age group 15-29) was 16 %, above the EU average of 13.4%. The rate for the age group 15-24 decreased to 11 % in Q2-2018, slightly above the EU average of 10.5 %. Youth unemployment (age 15-24) decreased at a faster pace (by 4 pps year-on-year) and was 14.2 % in Q4-2018, now below the EU average. The Youth Employment Initiative contributed to the positive trend. By end of October 2018, it provided activities for more than 48 000 young people, with two thirds thereof then continuing in other educational, training or employment activities. Therefore, continued investment in this area remains important. The situation of Roma people in the labour market is particularly weak. The Roma, living predominantly in rural areas, are estimated to make up close to 8 % of the total population (UNDP, 2014), with about half living in marginalised Roma communities. There is a correlation at a district level between the share of Roma in the total population and the unemployment rate (Graph 3.3.2). In 2016, the unemployment rate among Roma was estimated at 48 %, with only around 25 % of Roma aged 20-64 being engaged in ‘paid work’ (FRA, 2016). The situation is more challenging among the inhabitants of marginalised Roma communities, for whom the employment rate was 20.7 % (16 % for women and 26 % for men). Employment levels are volatile, with a dominance of temporary contracts and seasonal works (Ministry of Finance, 2018b). An insufficiently inclusive education system and discrimination in the labour market (FRA, 2016) contribute to the ethnic segmentation of the labour market and the adverse employment outcomes of the Roma population. Graph 3.3.2:Link between unemployment rate (% x axis, Q1-2017) and share of Roma population (%, y axis) Source: Institute for Economic and Social reforms based on data by the Central Office of Labour, Social Affairs and Family, and the Atlas of Roma Communities 2013 and the The gender employment gap is decreasing but the employment rate of women of childbearing age is not improving. The gender employment gap decreased by 1.4 pps. to 12.8 % in 2017, above the EU average of 11.5 %. This improvement was mainly driven by the higher employment rate of women aged 45+. By contrast, the employment rate of women aged 25-34 years decreased, contributing to widening the gap for this age group which is above 20 pps (Graph 3.3.3). The overall gender pay gap of 19 % is above the EU average (16.2 %). The very low enrolment rate of young children in childcare, the low uptake of flexible working arrangements and limited measures supporting female entrepreneurs are contributing factors. Graph 3.3.3:Employment rates by age group and sex, 2017 Source: Eurostat New measures have been adopted to support female labour market participation. A new legislative framework for childcare entered into force in January 2018. It has extended access to childcare to unemployed parents, on the condition that their child does not take the place of a child whose parents are employed or in education. Slovakia has committed to use EU funds in 2014-2020 to build or renovate 500 childcare facilities, with a focus on access to childcare for the marginalised Roma.() The construction of these facilities is on-going but more investment is necessary to address the unmet demand. Labour market policy Spending on active labour market policies is among the lowest in the EU. Public expenditure on active labour market policies stood at 0.2 % of GDP in 2017. Their implementation reflects existing regional disparities, with 62% of the budget and 66% of all corresponding job placements targeted at the three regions with the highest unemployment rate. Employment incentives, mostly through job subsidies, were the dominant active labour market policy measure (84% of the budget). A quarter of the budget targeted people with disabilities. In addition, significant financial resources were spent on activation works (public work schemes), which do not include an upskilling component. By contrast, training and learning measures remain marginally used, requiring further investment. The targeting of active labour market policies to the disadvantaged groups remains a challenge. Research, such as the Value for Money analysis of the public employment system in 2016 or the ex-post evaluation (KPMG, 2018), point out several weaknesses. These include the lack of a targeted approach to the low-skilled, in particular the marginalised Roma communities, who are instead typically included in public works schemes with low transition rates to the primary labour market. There is also a lack of early intervention systems and profiling remains basic. Few non-governmental providers are involved in active labour market policy provision. The implementation of the Action Plan for the Integration of the Long-Term Unemployed is progressing. Single points of contact were strengthened at all Labour Offices. Job integration agreements were introduced, covering, among others, professional reorientation, education activities and social counselling. By September 2018, 61 500 long-term unemployed had signed the agreement. The Action Plan was adopted in November 2016 for a period of two years, but investment in this group remains a priority. Adult learning is below the EU average. In 2017, only 3.4 % of adults received formal or non-formal education and training, one of the lowest rates in the EU (EU average of 10.9 %). ( ) Adult learning was mainly supported within the framework of active labour market policies and relied heavily on EU funding (70 % of its total funding in 2015). The social economy sector remains underdeveloped but measures have been taken to stimulate its growth. In 2017, only 2.1 % of the working population was employed in the social economy sector, well below the EU average of 6.8 %. Important persisting barriers include: a) lack of financial capital and of entrepreneurial skills in the population; b) weak coordination of the policy with the public employment service; c) insufficient inclusion of social aspects in public procurement procedures; and d) limited access to decent housing. In the disadvantaged regions, social enterprises also struggle with the low purchasing power of the local population (Škobla, D. et al.2018). The March 2018 Social Economy and Social Entrepreneurship Act laid down a new legal framework, which should allow for more investment in this sector. Facilitated access to personal bankruptcy is bringing positive results. The risk of earnings becoming subject to seizure proceedings deters those in debt from the labour market, consequently further marginalising the homeless, long-term unemployed and Roma. The revision of the Act on Bankruptcy and Restructuring implemented in the course of 2017 and 2018 facilitated personal bankruptcy proceedings. During the first eight months of 2018, there were 71 % more debt relief actions than during the whole of 2017. Applicants are assisted by the Centres for legal assistance, under the Ministry of Justice. Addressing indebtedness is also relevant for tackling undeclared work, which is estimated to be higher than the EU average: 13.4 % of total labour input is in the undeclared economy. The responsibility for addressing undeclared work is fragmented, spread across several Ministries (Platform for undeclared work 2018). The minimum wage has been increased to EUR 520 (up from EUR 480) as of January 2019 which may stimulate the transition towards declared work. Social dialogue Tripartite social dialogue performs relatively well, but the limited capacity of social partners is of concern. Social partners continue to be relatively well involved in the design of labour market measures and policies. However, the membership of Slovak social partners’ organisations continues to be among the lowest in the EU (OECD; J. Visser, 2016). Analytical capacity may be limited and capacity building is not a formal government commitment. Instead, it depends entirely on project-based support from the European Social Fund. There were also some structural changes concerning social partners’ organisations. In August 2018, the Association of Industrial Unions became a new member of the tripartite Economic and Social Council. A new Joint Slovak Trade Union was established in October 2018, representing employees from among others, the healthcare, education and police sectors. Social inclusion and poverty reduction On the back of strong economic growth, poverty has further declined but strong regional disparities persist. In 2017, the share of people at risk of poverty or social exclusion fell further to 16.3 % (856 200 inhabitants), significantly below the EU average of 22.4 %. A relatively higher rate is reported for children aged below 16 years (22.2 %). Despite the strong economic growth, the in-work poverty rate remains unchanged (at 6.3% of the total working population compared to 6.2% in 2012). Poverty is considerably higher in a number of districts in Southern and Eastern Slovakia, most notably those with a large number of people living in marginalised Roma communities, with a high proportion of small municipalities with prevailingly elderly population, with a high proportion of poor youth or with high levels of in-work poverty (see Graph 3.3.4). This suggests the need for dedicated investment, including in food and basic material assistance. In addition, the poverty risk of those who live in quasi-jobless households continued to increase, reaching 79.9 %, in 2017, significantly above the EU average. Weaknesses in social safety nets and social protection persist. The adequacy of the minimum income benefits is below the EU average. ( ) The overall improvement of the labour market has also contributed to a decline in the number of minimum income support recipients. In 2017, the number of recipients of minimum income support further decreased to a monthly average of 87 727 (by 16.9 % compared to 2016) of which 57 725 were registered with the Labour Office, receiving an average monthly benefit of EUR 134.62. Around 70 % of people at risk of poverty did not have access to the minimum income benefit in 2017 (Ministry of Finance et al. 2018f). Housing support benefit is particularly low (EUR 89 for two or more family members), and covers only marginal part of real housing costs in the tight Slovak housing market.. In addition, the eligibility criteria for receiving unemployment benefits remain strict, despite some loosening in 2018. ( ) This translates into relatively low coverage of the short-term unemployed by unemployment benefits. Graph 3.3.4:Regions of poverty Source: Michálek, Madajová, Veselovská 2016

In spite of the increase, the remuneration of social workers remains low, reducing the attractiveness of the profession. The average monthly gross wage of social workers requiring a master’s degree in Q2-2018 amounted to EUR 920, 14 % more than in 2016 (Trexima, 2018). By contrast, a graduate with a master’s degree earned in Q4-2017 on average EUR 1800 in the private sector and EUR 1194 in the public sector (Trexima, 2017). Earnings of field social and health workers, who often serve as front-line officers, are even lower. Their average wage was EUR 726 in Q2-2018, below the average of EUR 1001 for high school graduates (Q4-2017). In addition, social work has low societal recognition and attractiveness. These factors negatively impact on willingness to apply for vacancies in this sector and result in high shortage of social workers (Škobla et al., 2015). In EU terms, the elderly face a low risk of poverty or social exclusion. The at-risk-of-poverty and social exclusion rate for persons aged 65+ was 12.1 % in 2017, significantly lower than the EU average of 18.2 %. However, older people tend to spend a larger part of their income on heating bills and are more often in homes with inadequate heating (European Commission, 2018). A minimum pension was introduced in 2015 but only for those with at least 30 qualified years of insurance. More than 70 % of those self-employed pay old-age contributions from the so-called minimum assessment base. This can have a negative impact on the adequacy of their pensions. While demand for long-term care is growing, service provision remains limited. Public expenditure on long-term care in 2016 was 0.9 % of GDP, considerably lower than the EU average of 1.6 %. Responsibility is fragmented between the social and healthcare systems, leading to different organisations and sources of funding, which pose a barrier to effective coordination. Waiting lists for places in institutions are long and the quality of services is seen as low, while costs of private facilities are generally very high (Giorno, C. and K. Londáková, 2017c). Transition from institutional to community-based care and independent living is slow. As the very old-age dependency ratio is projected to increase significantly between now and 2070 (21.7 pps vs. the 13.6 pps EU average increase), significant investment will be needed to meet the rising demand for quality long-term care. Progress in moving from institutional care to community-based support for persons with disabilities is limited. The implementation of the Convention on Rights of Persons with Disabilities is hampered by the unclear division of responsibilities and lack of cooperation between national, regional and local administration levels. It lacks a national strategic approach, resulting in limited guidance at national level and lack of exchanges of good practice, low public awareness and insufficient buy-in by the employees of existing institutions (FRA, 2018). The use of EU funds, essential for steering an efficient transformation of the existing institutions, is currently insufficiently coordinated (Cangár, M. and M. Machajdíková, 2018). In July 2018, a number of experts and non-governmental organisations addressed an open letter to the Prime Minister, pointing out the lack of progress in the implementation of the Convention. Deinstitutionalisation of substitute care for children shows some weaknesses and is being reformed. At the end of 2017, there were around 14 000 children in substitute care, 37 % thereof placed in institutional care with an average length of stay in a children's home slightly above 4 years. The most common reason for intervention is the lack of housing security. Existing institutional care remains under-resourced in terms of sufficiently trained and remunerated staff. This is a barrier to the efficient provision of an individual approach to children and their families (Fico, 2017). The amendment of the Act on Social and Legal Protection of Children and Social Curatorship, in force as of April 2018, is an important reform step to improve prevention measures to avoid placing children in substitute care. However, there is still a lack of a monitoring and evaluation system to assess the efficiency of interventions. The prevention of long-term placement of children with disabilities in institutional care will require dedicated follow-up investment. Social housing remains underdeveloped. The low availability of rental/social housing negatively affects the effectiveness of social policies aimed at socially disadvantaged or excluded persons and persons with disabilities, and will require significant investment. For certain groups, the provision of social housing support would bring economies to public budgets. This is in particular the case of families or single mothers with children in institutional care, where re-unification of the family by providing adequate social housing would be less costly than keeping children in care (G. Csomor, 2017). In addition to the lack of infrastructure, there is no strategy at the government level to reduce and prevent homelessness, and the responsibilities stay mostly with the municipalities. The lack of a coordinated approach even leads to cases of facilities allowing 24-hour stay being turned into night shelters, just because the latter have more stable access to finance through the Ministry of Labour. The concepts of homelessness or inadequate housing situation are also very vaguely defined in the legislation. The living conditions in marginalised Roma communities are often hampered by the lack of access to services. There remains a need for investment and support for Roma marginalised communities( ) to ensure access to essential services, including water, sanitation, energy, transport and other facilities. The Atlas of Roma Communities (UNDP, 2014) is under revision, mapping the existing infrastructure and facilities and developing a statistical survey of living conditions, with data expected in 2019. Large-scale systematic progress is hampered by the lack of social housing. While some improvement is expected in response to the non-governmental sector projects based on micro-credits and self-construction, and to a newly launched EU-funded call, further investment in non-segregated social housing is crucial. The health status of marginalised Roma communities is worse than that of the majority population. This reflects the lower accessibility of healthcare services (UNDP, 2014). The life expectancy for Roma is 70, six years lower than the majority population. The infant mortality rate is almost three times higher for Roma than in the majority population (12.3 compared to 4.2 per 1000 infants, Ministry of Finance, 2018a). While positive spillovers have been observed under the EU-funded ‘Healthy regions’ initiative, introducing health mediators, often recruited from Roma communities, continuous investment is necessary to ensure lasting improvements. Experiencing an increasing inflow of immigrants since 2011, Slovakia faces challenges to integrate them well. Foreigners concentrate mostly in the regions with the highest level of labour shortages. Approximately three-fourth of immigrants reside in Slovakia for more than three years (Ministry of Finance 2018c), accentuating the need for effective investment in long-term integration measures. Challenges persist regarding effective access to social and healthcare services, discrimination in the housing market, availability of affordable Slovak language classes and lack of coordination among central and local levels (Plavnická, J. and D. Šlosár, 2017). Education and skills Educational outcomes are weak and worsening and reveal significant regional and socio-economic disparities. According to the Programme for International Student Assessment (PISA) survey, the proportion of underachievers is significantly higher than the EU average in all tested sectors – reading, mathematics and science (OECD, 2016). National tests in primary schools indicated large differences in outcomes within the country; the worst results were recorded in the regions of Košice, Prešov and Banská Bystrica, while students from Bratislava scored the highest (NUCEM, 2017). The scores of students from disadvantaged groups were half as high compared to their peers (Ministry of Education, 2018). Spending on education remains low and is reflected in low teachers’ salaries and poor learning equipment — including for digital skills. As a share of GDP, spending on education decreased from 4.1% in 2014 to 3.8% in 2016 because public expenditure failed to keep pace with brisk growth in the wider economy. Spending on education measured against the total public budget amounted to 9.3 % compared to the EU average of 10.2 % in 2016. A new ‘national reform programme for education and upbringing’ was adopted. The much-awaited reform programme and related action plan for 2018-2019, adopted in June 2018, proposed changes related to the inclusion of disadvantaged students and strengthening educational outcomes. The strategy is based on a policy framework with an estimated EUR 15 billion budget until 2027, whereby EU funds are expected to play an important role. For the next two years priority is to be given to teachers’ salaries, in particular for young teachers, and increasing kindergarten places. Measures are planned to increase the number of professional staff in schools, reduce the administrative burden and promote the use of digital technologies. It remains to be seen and closely monitored if the planned measures produce the expected results, however additional further reform measures are still needed, including teacher training and continuing professional development. The teaching profession faces increasing shortages as prestige, salaries and opportunities for professional development remain low. Despite gradual salary increases, the teaching profession remains unattractive. Average teachers’ salaries lag far behind the average wages for a full-time tertiary-educated worker in Slovakia. Upper secondary teachers working in public institutions earn only 64% of the average salary of a full-time full-wage worker with tertiary education (OECD, 2018b). The government has decided to increase teacher salaries by 10 % as of January 2019 and another 10 % in 2020. Initial teacher education is not sufficiently focused on preparing for practical teaching, and continuing professional development is not sufficiently relevant to teachers’ needs. Improvements in career paths and continuing professional development are under discussion. Investment in teachers’ training and better equipment for schools remains important. There are still many gaps in the provision of early childhood education and care. Slovakia ranks amongst the lowest performing Member States in this area. In 2016, the corresponding participation rate for children aged 4 to 6 was 76.5 %, well below the EU average of 95.3%, and it had decreased compared to 2013, contrary to the increasing trend in the EU. National enrolment data also reveal a gap between the west and the east of Slovakia, with the lowest enrolment rates in districts with the highest share of socially disadvantaged people. The participation of Roma aged 3 to 5 is estimated at only 32% compared to 81% for the remainder of this age group (Ministry of Finance et al. 2018f). The 2016 government manifesto outlined a target of 95 % enrolment for children above the age of 4 by 2020. Early childhood education and care is being reformed to increase enrolment in particular of children from less well-off families. The number of free kindergarten places increased to cover all children from socio-economically deprived families from September 2018. The government has announced it will lower the age of compulsory education to five years-olds as of September 2020. This is likely to have a positive impact on disadvantaged children. Ensuring the necessary investment and actual attendance and genuinely inclusive early childhood education and care would maximise the outcomes. Current measures to foster equity and inclusion have so far fallen short of expectations. It is estimated that 62 % of Roma children attend a school where all or most other children are also Roma (FRA, 2016) and no real progress on the desegregation was observed over the recent past (Amnesty International, 2016). In addition, 22.6% of Roma children are in special elementary school for pupils with special needs (Slovak National Centre for Human Rights, 2017), which is a major overrepresentation; 94% of them are in a class where all or most children are Roma (FRA, 2016). In spite of an amendment prohibiting placing children in special schools for problems such as dyslexia or coming from a socially disadvantaged background, the decrease of children in such schools has been small. ( ) There are ongoing projects supporting inclusive education, including extra-curricular activities and competences of staff in kindergartens and primary schools (Eurydice, 2018). Implementation will be key and these projects need to be thoroughly evaluated to guide further actions as investment gaps concerning inclusive education persist. The increasing rate of early school leaving is a major concern. Contrary to most EU countries, the early school leaving rate is increasing: it was 9.1 % in 2017 versus 4.7 % in 2010. Regional disparities are high, ranging from 4.7 % in western Slovakia to 14.7 % in eastern Slovakia. It is estimated that 58 % of Roma leave school early (FRA, 2016). Low education attainment has a critical impact on employment and contributes to group differences in employment. Skills mismatches are a barrier to growth and education and training are not well aligned with labour market needs. In 2016, up to 60 % of secondary and tertiary graduates were, five years after graduation, working in jobs not fully in line with their fields of study. By contrast, only 20 % of secondary and 25 % of tertiary graduates were working in jobs fully compatible with their fields of study (Trexima, 2017). Graph 3.3.5:Early Leavers (age 18-24) from education and training by NUTS 2 regions Source: European Commission

Tertiary educational attainment is improving, but its quality and efficiency show r