EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 7.5.2008 
SEC(2008) 572 final 
  
Recommendation for a  
COUNCIL DECISION 
abrogating Decision 2005/182/EC on the existence of an excessive deficit in Slovakia 
(presented by the Commission) 
 
EN 2   EN EXPLANATORY MEMORANDUM  
1. B ACKGROUND  
Article 104 of the Treaty estab lishes that Member States shoul d avoid excessive deficits and 
lays down a procedure for their identification an d correction. The excessive deficit procedure 
(EDP) is further specified in Council Re gulation (EC) No 1467/97 on “speeding up and 
clarifying the implementation of the excessive deficit procedure”1, which is part of the 
Stability and Growth Pact. Acco rding to Article 104(2) of the Treaty, the Commission has to 
monitor compliance with budgetar y discipline on the basis of  two criteria, namely: (a) 
whether the planned or actual government defi cit exceeds the reference value of 3% of GDP 
(unless either the deficit ratio has declined substantially and continuously and reached a level 
that comes close to the reference value; or, a lternatively, the excess over the reference value is 
only exceptional and temporary an d the ratio remains close to the reference value); and (b) 
whether government debt exceeds the reference va lue of 60% of GDP (unl ess the debt ratio is 
sufficiently diminishing and approaching the reference value at a satisfactory pace). 
In accordance with the Protocol on the excessive  deficit procedure annexed to the Treaty, the 
Commission provides the data for the implementati on of the EDP. As part  of the application 
of this Protocol, Member States have to notif y data on government deficits and debt and other 
associated variables twice a year, namely before  1 April and before 1 October, in accordance 
with Article 4 of Council Regulation (EC) No 3605/932,3,4. 
On 12 May 2004, the Commission initiated the EDP for Slovakia with the adoption of a report 
under Article 104(3), based on a general gove rnment deficit of 3.6% of GDP in 20035. On 5 
July 2004, the Council decided, on a recommen dation from the Commission, that Slovakia 
was in excessive deficit according to Article 104(6)6. At the same time, and also based on a 
Commission recommendation, the Council addre ssed recommendations under Article 104(7) 
to Slovakia with a view to bringing the situati on of an excessive government deficit to an end, 
by 2007 at the latest7. 
                                                 
1 OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 
7.7.2005, p. 5). 
2 OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 
3 The most recent notification of Slovakia can be found at: 
 http://epp.eurostat.ec.europa.eu/portal/page?_p ageid=2373,58110711&_dad=portal&_schema=portal. 
4 Slovakia benefited from a transition period for implementing the Eurostat decision of 2 March 2004 on 
the classification of funded pension schemes and as a result notified deficit and debt figures without the 
net cost of its 2005 pension reform until April 2006 (Eurostat News Release No 117/2004 of 23 September 2004 on the transition period to implement the decision in Eurostat News Release No 
30/2004 of 2 March 2004). As the different documents under the EDP, including in particular the 
Council recommendation under Article 104(7), took the implications of the March 2004 Eurostat decisions fully into account, all deficit and debt figures quoted in this document include the pension 
reform cost and are thus fully comparable. 
5 SEC(2002) 131. 
6 OJ L 62, 9.3.2005, p. 16. 
7 All EDP-related documents for Slovakia can be found at the following website:  
http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/excessive_deficit9109_en.htm. 
 
EN 3   EN In its recommendation under Article 104(7), th e Council recommended th e Slovak authorities 
to "take action in a medium-term framework in or der to achieve their ob jective of bringing the 
deficit below 3% of GDP in a credible a nd sustainable manner by 2007 at the latest, in 
accordance with the path for deficit reduction as specified in the Council Opinion of 5 July 2004 on the convergence programme submitted in Ma y 2004"; to "implement with vigour the 
measures envisaged in the May 2004 convergence programme, in particul ar those related to 
the proposed further health care reforms and further public sector  rationalisation"; to 
"accelerate the fiscal adjustment if the implem ented structural reforms result in higher growth 
than expected in the converg ence programme of May 2004, in particular by dedicating any 
higher-than-budgeted revenues primarily to faster  deficit reduction"; an d to "take effective 
action by 5 November 2004 regarding the measur es envisaged to achieve the 2005 deficit 
target". 
In addition, the Council invited the Slovak author ities to "strengthen the binding character of 
the three-year budgetary framework by intr oducing detailed medi um-term expenditure 
ceilings to be adopted by parliament". 
Table 1: Adjustment endorsed by the Council on 5 July 2004 
% of GDP, unless indicated otherwise  2003 2004 2005 2006 2007 
General government balance 
p.m.: Real GDP growth (%) -3.6 
4.2 -4.0 
4.1 -3.9 
4.3 -3.9 
5.0 -3.0 
4.7 
Source : Council recommendation under Article 104(7) and Council opinion on the May 2004 convergence 
programme, both adopted on 5 July 2004 
On 22 December 2004, i.e. after the expiry of the deadline for taking action set in the Council 
recommendation, the Commission adopted a comm unication to the Council, which concluded 
that action taken until then by Slovakia was consistent with the Council recommendation and 
that no further steps under the EDP were necessary at that stage8. In its meeting of 18 January 
2005, the Council concurred with this assessment. 
According to Article 104(12), a Council decision on the existence of an excessive deficit is to 
be abrogated, on the basis of a Commission re commendation, when the ex cessive deficit in 
the Member State concerned has, in the view of the Council, been corrected.  
2. R ECENT DEFICIT DEVELOPMENTS  
The data available in May 2004, when the Co mmission initiated the EDP for Slovakia, 
indicated that the 2003 deficit was at 3.6% of GDP and the deficit was expected to remain 
above the reference value in subsequent year s. According to the data provided by the 
Commission (Eurostat) following the reporting by Slovakia before April 20089 the general 
government deficit remained below 3% of GDP  in the years 2003-2005 due to a subsequent 
data revision (in the April 2007 notification) ma inly resulting from a change in the 
accrualization method for tax revenue. The headline  deficit increased to 3.6% of GDP in 2006 
(mostly due to a substantial increase in government consump tion of 1% of GDP, the 2005 
                                                 
8 SEC(2004) 1630. 
9 Eurostat News Release No 54 of 18 April 2008. 
 
EN 4   EN pre-stocking with cigarettes in view of an imminent excise tax hike and increased pension 
reform costs) before falling to 2.2% of GDP in 200710. 
A pension reform was launched in 2005, affecting social contri butions by redirecting 9% of 
gross wages to a funded (second) pension pillar. Due to widespread public interest in this 
pillar and a gradual transition, these revenue transfers are estim ated to have increased from 
0.8% of GDP in 2005 to 1.2% and 1.3% of GDP in 2006 and 2007 respectively. 
Slovakia committed itself to gradually increase taxes on cigarettes up to the minimum levels 
required by the EU. As a result, taxes were increased in May 2004, January 2006 and January 
2008 and are planned to be raised again in De cember 2008. All increases so far were preceded 
by a sizeable pre-stocking with cigarettes at vari ous stages of the distribution chain. This has 
led to shifts in tax revenue resulting in ex tra tax revenue of some  0.1%, 0.3% and 0.5% of 
GDP in 2003, 2005 and 2007 respectively followed by equivalent revenue shortfalls in the 
subsequent years. Moreover, Sl ovakia has claims on several fo reign countries. In 2003, 2005 
and 2007 cancellations of some of these claims had a deficit-increasing effect of 0.4%, 0.9% 
and 0.1% of GDP respectively.  
Given the better-than-originally-estimated 2003 deficit, headline deficit developments were 
consistent with the deadline fo r correction of the excessive de ficit set by the Council in its 
104(7) recommendation although the consolidation pa th was quite different. In particular, in 
2007 the headline deficit fell by almost 1½% of GDP to 2.2% of GDP. The fiscal 
consolidation has benefited from buoyant GDP , employment and revenue growth, allowing 
the expenditure-to-GDP ratio to fall faster than  the revenue-to-GDP ratio. The fall in the 
expenditure-to-GDP ratio from 40.2% of GDP in 2003 to 36.9% of GDP in 2007 was also 
induced by expenditure restrain t and expenditure reforms. Th ese included restrictions on 
social and unemployment benefi ts, tightening of conditions for early retirement and a gradual 
increase in the pension retirement age. The creation of the National Motorway Company in 
2005 has enabled the government to partly fi nance motorway construction through private 
sector borrowing. On the revenue side, a comp rehensive tax reform was introduced in 2004, 
shifting the weight from income to consump tion taxation. Together with the 2005 pension 
reform it has contributed to a fall in the revenue-to-GDP ra tio from 37.4% of GDP in 2003 to 
34.7% of GDP in 2007. 
                                                 
10 Deficit ratios are usually revised - upwards or downw ards - after the publication of the first outcome in 
the spring notification. For the EU Member States as a whole, the re visions are usually relatively small 
and on average insignificantly different from zero. For Slovakia, in view of the distance between the 
currently reported deficit for 2007 and the deficit reference value, there is a low probability that 
potential future revisions in govern ment accounts would raise the 2007 de ficit ratio in excess of 3% of 
GDP. The fact that there are pending issues on the sectoral delimitation of general government in 
Slovakia (notably on the appropriate s ectoral classification of health-care related units, such as hospitals 
and health-insurance companies in general governme nt or the corporate sector) has not a significant 
impact on the upward and downard risks of deficit revisions in future. Though detailed data are not 
available, there are indications that the financial balance of the units that need to be re-classified inside 
government or outside government, to be in line with  ESA95 rules, is very small. (See Eurostat findings 
of the dialogue visit to Slovakia on 10 and 11 March 2008:  
http://epp.eurostat.ec.europa.eu/portal/page?_p ageid=2373,47631456&_dad=portal&_schema=PORTA
L, available soon.) 
 
EN 5   EN The 2007 deficit outcome was below the official target of 2.9% of GDP set in the December 
2006 update of the convergence programme. Th e over-performance was mainly induced by 
higher-than-foreseen GDP and employment grow th, lower-than-budgeted co-financing for the 
EU funds and a larger-than-expect ed pre-stocking with cigarettes  at the end of 2007, triggered 
by a hike in the excise tax on tobacco in Janua ry 2008 and resulting in additional revenue of 
½% of GDP compared to ¼% of GDP expected by the programme.  
Nevertheless, the cyclical upswing and growth dividends from structural reforms were not 
fully exploited for fiscal consol idation. As a result, the structur al deficit (i.e. the cyclically-
adjusted deficit net of one-off and other tempor ary measures) deteriorated from some 1½% of 
GDP in 2003 to around 3% of GDP in 2006 before improving to around 2½% of GDP by 
2007. However, the creation of the second funded pension pillar in 2005 has contributed to the structural deterioration
11.  
3. D EFICIT PROJECTIONS FOR 2008  AND BEYOND  
According to the Commission services’ spring 2 008 forecast the headline deficit is expected 
to narrow further to 2.0% of GDP in 2008 befo re increasing to 2.3% of GDP in 2009 (under 
the customary "no-policy-change" assumption) against the background of  markedly slowing 
but still robust GDP and decelerating employ ment growth. Revenue-increasing measures 
included in the 2008 budget such as a broadening of the corporate and personal income tax 
base and an increase in the maximum ceiling on social contributions are foreseen to generate 
additional revenue of around ¼% of GDP in 200 8. The revenue shortfall induced by the 2007 
pre-stocking with cigarettes is likely to be br oadly offset by a further hoarding of cigarettes 
motivated by a lower excise tax hike plan ned for the end of 2008. Moreover, a temporary 
opening up of the second pensio n pillar in the first half of 2008, allowing all current 
participants to leave and new participants to  join, should result in  an one-off revenue of 
around 0.1% of GDP as savings accumulated in pr evious years in the second pillar will be 
transferred to the pay-as-you-go pi llar if participants decide to leave. On the expenditure side, 
farming subsidies are set to continue increas ing substantially. The main reason for the 2009 
deterioration projected in the spring forecast is a likely revenue shortfall of some ½% of GDP 
due to aforementioned expected further substa ntial pre-stocking with cigarettes in 2008. 
While the forecast for 2008 is in line with the late st official target of 2% of GDP (set by the 
Ministry of Finance in Februa ry 2008 as a reaction to the February 2008 Council opinion on 
the November 2007 update of the convergence programme) the forecast for 2009 is significantly above the latest national target of  1.7% of GDP (set in April 2008 in the outline 
for the new budget proposal), which is not  yet underpinned by explicit measures.  
                                                
 
11 In accordance with Article 2(7) of Regulation (EC) No 1467/97, a decision to abrogate a decision on the 
existence of an excessive deficit should take into account the net cost of a pension reform introducing a 
multi-pillar system that includes a mandatory, fully funded pillar if the deficit has declined substantially and continuously and has reached a level that comes close to the reference value. Since the 2007 general 
government deficit was below the 3%-reference value ther e is no need to consider the application of this 
Article.  
 
EN 6   EN The structural deficit is expected to dete riorate from around 2½% to some 2¾% of GDP 
between 2007 and 2008 which is not in line w ith the Stability and Growth Pact, which 
specifies that, for euro-area and ERM II Memb er States, the annual improvement in the 
structural balance should be 0.5% of GDP as a benchmark and that the adjustment should be 
higher in good economic times. In 2009, under th e customary no-policy-change assumption 
the structural deficit is foreseen to deteriorate further to some 3% of GDP mainly due to the cigarette pre-stocking rela ted revenue shortfall. 
According to the February 2008 Council opinion
12 on the November 2007 update of the 
convergence programme the budgetary stance in th e programme seems insufficient to ensure 
that the medium-term objective (MTO) for Slovakia , set as a structural deficit of just below 
1% of GDP, is achieved by the end of the pr ogramme period (2010), as envisaged in the 
programme. Moreover, the Council concluded that  the envisaged change in the structural 
balance for 2008 is not in line with th e Pact and should be more ambitious. 
4. D EBT DEVELOPMENTS AND PROJECTIONS  
The debt ratio decreased gra dually from 42.4% of GDP in 2003 to 29.4% of GDP in 2007, i.e. 
well below the 60% of GDP reference value, mainly thanks to privatisation revenue. 
According to the Commission services’ spring 2008 forecast, gross public debt is expected to 
remain broadly stable over the foreca st horizon (on a no-policy change basis). 
5. C ONCLUSIONS  
The data available in May 2004 indicated that  the 2003 deficit was at 3.6% of GDP and the 
deficit was expected to remain above the refere nce value in subsequent years. According to 
the latest data, the general government defic it remained below 3% of GDP in the years 2003-
2005 before increasing to 3.6% of GDP in 2006 mainly due to a subs tantial increase in 
government consumption. The headline defic it then fell to 2.2% of GDP in 2007. The 
structural balance, i.e. the cyclically-adjus ted balance net of one-off and other temporary 
measures, deteriorated in 2006 by some 2% of GDP but improved again by around ½% of 
GDP in 2007. According to the Commission services’ spring 2008 forecast, the headline deficit is expected to narro w to 2.0% of GDP in 2008 and, on a no-policy change basis, to 
increase to 2.3% in 2009. This indicates that the deficit has been brought below the 3% of 
GDP ceiling in a credible and sustainable manner. 
General government gross debt declined from 42.4% of GDP in 2003 to 29.4% in 2007, well 
below the 60% of GDP reference value. Acco rding to the Commission services’ spring 2008 
forecast, the debt ratio is expected to remain br oadly stable over the fo recast horizon (on a no-
policy change basis). 
From an overall assessment, it follows that the excessive deficit situation in Slovakia has been 
corrected. Accordingly, the Commission recommends  to the Council to abrogate its decision 
on the existence of an excessive deficit in Slovakia. 
                                                
 
12 OJ C 49, 22.2.2008, p. 44. 
 
EN 7   EN Table 2: Budgetary developments, 2003-2009 
2008 2009 
% of GDP, unless indicated otherwise 2003 2004
 2005 2006 2007
COM CP(2) COM(3)CP(2) 
General government balance -2.7 -2.4 -2.8 -3.6 -2.2 -2.0 -2.3 
(-2.0) -2.3 -1.8 
(-1.7) 
- Total revenues 37.4 35.4 35.3 33.5 34.7 34.3 33.0 33.8 31.8 
- Total expenditure 40.2 37.8 38.1 37.2 36.9 36.3 35.3 36.1 33.7 
Of which : - interest expenditure 2.5 2.2 1.7 1.5 1.4 1.4 1.4 1.4 1.5 
 - gross fixed capital formation 2.6 2.4 2.1 2.2 1.9 1.9 1.8 1.9 1.4 
Pension reform costs 0.0 0.0 0.8 1.2 1.3 1.3 1.3 1.3 1.3 
Pre-stocking with cigarettes (net impact) 0.1 -0.1 0.3 -0.3 0.5 -0.1 n.a. -0.4 n.a. 
Primary balance -0.2 -0.2 -1.1 -2.2 -0.8 -0.6 -0.9 -1.0 -0.3 
One-off and temporary measures -0.4 0.0 -0.9 0.0 -0.1 0.1 0.1 0.0 0.0 
Structural balance(1) -1.4 -1.4 -1.0 -3.1 -2.6 -2.8 -3.1 -3.1 -2.4 
Structural primary balance(1) 1.1 0.8 0.8 -1.7 -1.2 -1.5 -1.7 -1.7 -0.9 
Government gross debt  42.4 41.4 34.2 30.4 29.4 29.2 30.8 29.7 30.5 
Pm Real GDP growth (%) 4.8 5.2 6.6 8.5 10.4 7.0 6.8 6.2 5.8 
Pm Output gap -3.2 -3.4 -3.2 -1.6 1.9 2.7 2.3 2.5 2.1 
(1) Cyclically-adjusted (primary) balance excluding one-off and temporary measures. 
(2) Cyclically-adjusted and structural balances and outp ut gaps according to the programme as calculated by 
Commission services on the basis of the information in the programme. 
(3) No-policy change assumption. 
Sources: Commission services’ spring 2008 forecast (COM) and November 2007 update of the convergence 
programme (CP) (In brackets the latest national targets set in February and April 2008)  
 
EN 8   EN Recommendation for a  
COUNCIL DECISION 
abrogating Decision 2005/182/EC on the existence of an excessive deficit in Slovakia 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Treaty establishing th e European Community, and in particular 
Article 104(12) thereof, 
Having regard to the recomm endation from the Commission, 
Whereas: (1) By Council Decision 2005/182/EC
13, following a recommendation from the 
Commission in accordance with Article 104(6) of the Treaty, it was decided that an 
excessive deficit existed in  Slovakia. The Council noted that the general government 
deficit was 3.6% of GDP in 2003, above th e 3% of GDP Treaty reference value.  
(2) On 5 July 2004, in accord ance with Article 104(7) of th e Treaty and Article 3(4) of 
Council Regulation (EC) No 1467/97 of 7 Ju ly 1997 on speeding up and clarifying the 
implementation of the excessive deficit procedure14, the Council made, based on a 
recommendation from the Commission, a reco mmendation addressed to Slovakia with 
a view to bringing the excessive deficit situation to an end by 2007 at the latest. The 
recommendation was made public. 
(3) In accordance with Article 104(12) of the Treaty, a Council Decision on the existence 
of an excessive deficit is to be abrogate d when the excessive deficit in the Member 
State concerned has, in the view of the Council, been corrected.  
(4) In accordance with the Protocol on the excessive deficit pro cedure annexed to the 
Treaty, the Commission provides the data for the implementa tion of the procedure. As 
part of the application of this Protocol , Member States are to notify data on 
government deficits and debt and other a ssociated variables tw ice a year, namely 
before 1 April and before 1 October, in  accordance with Article 4 of Council 
Regulation (EC) No 3605/93 of 22 November  1993 on the application of the Protocol 
on the excessive deficit procedure annexed to the Treaty establishing the European 
Community15. 
                                                 
13 OJ L 62, 9.3.2005, p. 16. 
14 OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 
7.7.2005, p. 5). 
15 OJ L 332, 31.12.1993, p. 7. Regulation as last amended by Regulation (EC) No 2103/2005 (OJ L 337, 
22.12.2005, p. 1). 
 
EN 9   EN (5) Based on data provided by the Commission (Eurostat) in accordance with Article 
8g(1) of Regulation (EC) No 3605/93 follo wing the notification by Slovakia before 1 
April 2008 and on the Commission services ’ spring 2008 forecast, the following 
conclusions are warranted:  
– due to data revisions after the 2004 Council decision on the existence of an 
excessive deficit, the general government  deficit remained below 3% of GDP 
in the years 2003-2005. After increasing to 3.6% of GDP in 2006 it was 
reduced to 2.2% of GDP in 2007, which is below the 3% of GDP deficit 
reference value. This compares with a target of 2.9% of GDP set in the 
December 2006 update of the convergence programme,  
– the fiscal consolidation has benefite d from buoyant GDP, employment and 
revenue growth, allowing the expenditure-to-GDP ratio to fall faster than the revenue-to-GDP ratio. The falling expend iture-to-GDP ratio was also induced 
by expenditure restraint and expenditu re reforms such as substantial 
restrictions on social benefits. Neverthe less, the cyclical upswing and growth 
dividends from structural reforms we re not fully exploited for fiscal 
consolidation. As a result, the structural deficit (i.e. the cyclically-adjusted 
balance net of one-off and other temporary measures) is estimated to have 
deteriorated from some  1½% of GDP in 2003 to around 3% of GDP in 2006 
before improving to around 2½% of GDP by 2007. However, part of the 
structural deterioration can be attributed to th e introduction of the second 
funded pension pillar in 2005 with transfer s to this pillar estimated to have 
increased from 0.8% of GDP in 2005 to  1.2% and 1.3% of GDP in 2006 and 
2007 respectively. In addition, increases in taxes on cigarettes preceded by sizeable pre-stocking with cigarettes at va rious stages of the distribution chain 
led to sizeable shifts in tax revenue resulting in extra tax revenue in 2003, 2005 
and 2007 followed by equivalent revenue s hortfalls in the subsequent years, 
– for 2008, the Commission services’ spring 2008 forecast projects the headline 
deficit to be reduced further, to 2. 0% of GDP, driven mainly by continued 
strong growth prospects and some reve nue-increasing measures such as a 
broadening of the corporate and personal income tax base and an increase in 
the maximum ceiling on social contributions. This is in line with the official deficit target of 2.0% of GDP set in February 2008. For 2009, the spring 
forecast projects, on a no-policy change basi s, an increase in the deficit to 2.3% 
of GDP. This indicates that the defic it has been brought below the 3% of GDP 
ceiling in a credible and sustainable manner. The structural balance is projected to deteriorate by some ¼ percentage point of GDP in 2008 and, on a no-policy 
change basis, by around ¼ percentage points in 2009. This has to be seen against the need to make progress to wards the medium-term objective (MTO) 
for the budgetary position, which for Slova kia is a structural  deficit of just 
below 1% of GDP, 
– government debt remains well below th e 60% of GDP reference value. It 
declined from 42.4% of GDP in 2003 to 29.4% in 2007. A ccording to the 
spring 2008 forecast, the debt ratio is pr ojected to remain broadly stable over 
the forecast horizon (on a no-policy change basis). 
 
EN 10   EN (6) In the view of the Council,  the excessive deficit in Sl ovakia has been corrected and 
Decision 2005/182/EC should therefore be abrogated. 
HAS ADOPTED THIS DECISION: 
Article 1 
From an overall assessment it follows that the ex cessive deficit situati on in Slovakia has been 
corrected. 
Article 2 
Decision 2005/182/EC is hereby abrogated. 
Article 3 
This Decision is addressed to the Slovak Republic. 
Done at Brussels,  
 For the Council 
 The President