EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 524 final COMMISSION STAFF WORKING DOCUMENT Country Report Slovakia 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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(2020) 150 final}



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, reforms and investment 3.5.Environmental sustainability A.Overview table B.Commission debt sustainability analysis and fiscal risks C.Standard tables D.Investment guidance on Just Transition Fund 2021-2027 for Slovakia E.Progress towards the Sustainable Development Goals (SDGs) References LIST OF Tables 1.1.Key economic indicators Slovakia 2.1.Summary table on 2019 CSR assessment

C.1.Financial market indicators C.2.Headline Social Scoreboard indicators C.3.Labour market and education indicators C.4.Social inclusion and health indicators C.6.Green growth LIST OF Graphs 1.1.Real GDP growth and its components 1.2.GNI per person in purchasing power standards 1.3.Evolution of labour productivity and gaps (GVA per hour worked in PPS) 1.4.Decomposition of rate of change of ULC 1.5.Evolution of labour productivity by region 1.6.Unit Labour Costs by sector 1.7.Decomposition of Net International Investment Position 1.8.Employment by sector, year-on-year changes 1.9.Beveridge curve, 2000-2018 1.10.Regional disparities 1.11.Consumer inflation 1.12.Evolution of the House Price Index and MFI loans for house purchase 2.1.Overall multiannual implementation of 2011-2019 country-specific recommendations (CSR) to date

3.1.1.Changes in tax structure in Slovakia and the EU-28 between 2007 and 2017 (in pps) 3.1.2.Hospital admissions for ambulatory care-sensitive conditions, age-standardised rate per 100.000 population 3.2.1.Housing construction and decrease in number of dwellings 3.2.2.Household debt as % of GDP 3.3.1.Unemployment rates by district (September 2019) 3.3.2.Gender employment gap by age group, 2018 3.3.3.AROPE levels by age group 3.3.4.Early school leavers, aged 18-24 (%) 3.4.1.Labour productivity in manufacturing vs. market services 3.4.2.Evolution of gross fixed capital formation 3.4.3.Foreign direct investment inflows and repatriation of profits 3.4.4.RCI 2019 indicators: Comparison of the EU average, Bratislava region and Eastern Slovakia LIST OF Boxes 1.1.Automotive sector 2.1.EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in Slovakia 3.3.1.Monitoring performance in light of the European Pillar of Social Rights LIST OF Maps

Slovakia’s growth opportunities lie in a more sustainable and higher value added economy. Slovakia has seen significant economic growth in recent decades and has been catching up with the EU average, thanks to important reforms and structural changes that have taken place. As convergence with the EU weakens, population ageing, climate change and the digital transformation pose long-term challenges to the country’s economy and to fiscal sustainability. Maintaining productivity growth, the backbone of Slovakia’s economic convergence, will thus require sustained structural reforms and targeted investment into infrastructure and research and innovation. Improving the quality and inclusiveness of the education and training system, reducing regional disparities and improving the quality of public institutions can help Slovakia to safeguard its competitiveness, move up the value chain and become more sustainable. A smart and low-carbon transport and energy system can contribute to greening the economy. () The strong economic expansion of recent years is giving way to slower growth. After experiencing 4.0% growth in 2018, Slovakia’s economy is estimated to have grown at 2.3% in 2019 and is expected to grow at a similar rate in 2020 and 2021. Amid record-low unemployment and rising wages, household incomes and private consumption will continue to grow. Trade is likely to recover after its less dynamic performance of 2019, which was due to weaker demand and changes to production in the automotive industry, which is a key part of Slovakia’s economy. Slovakia’s progress in catching up with the EU average has slowed down. After a period of swift convergence after the country joined the EU, GDP per person in purchasing power standards has stood between 72% and 77% of the EU average since 2010. Slovakia’s progress in catching up is now lagging behind that of regional peers in Central and Eastern Europe. This is partly linked to the persisting labour productivity gap vis-à-vis the EU average. Slovakia’s suboptimal use of available EU funds may also have contributed. In addition, there is still a significant developmental gap between Slovakia’s capital and its other regions. Improving key infrastructure and public services and strengthening urban-rural linkages can help narrow this gap. Slovakia’s strategies and reforms are relatively clear and effective on paper, but their implementation often remains poor. The labour market continues to improve and wages are rising fast. Employment growth has brought the unemployment rate to a record low. The shortage of workers has fuelled large salary increases and labour costs are now growing faster than productivity. Although wage growth has helped improve living standards, in some sectors this can negatively affect competitiveness if it is not supported by investment, innovation and the development of better skills that match the labour market’s future needs. The positive general trends hide significant gender employment and pay gaps as well as regional disparities, particularly affecting the marginalised Roma communities. Long-term unemployment is generally decreasing, but it remains high for young people and in Slovakia’s eastern regions. Households are increasingly indebted, which constitutes a potential risk to financial stability. Household debt reached a record high of 42.8% of GDP in Q2-2019, due to rising property prices and the resulting higher mortgages. House prices are expected to continue to grow faster than disposable income, reducing affordability. Despite an increase in construction activity, supply constraints, in part due to lengthy permit processes, continue to fuel price growth. Further measures to increase housing supply and develop the rental market and public housing may reduce further house price inflation. Better public transport connections could reduce the demand for housing in the bigger cities. Investment is needed in many policy areas. Modernising the hospital network can further improve health outcomes. Expanding broadband coverage and speed will allow for equal and improved access to the internet. Renovating energy inefficient buildings and expanding public transport options can put the economy on a path that is more environmentally sustainable. More generally, fostering good governance and a quality business environment are also crucial for a more supportive investment climate. Slovakia has made limited () progress in addressing the 2019 country-specific recommendations. There has been some progress in the following areas: ·improving the effectiveness of the justice system; ·using quality-related and lifecycle cost criteria in public procurement; There has been limited progress in the following areas: ·safeguarding the long-term fiscal sustainability of the healthcare and pension systems ·improving the quality and inclusiveness of education; ·enhancing access to affordable and quality childcare and long-term care; ·promoting the integration of disadvantaged groups, in particular Roma people; ·focusing investment-related economic policy; ·detecting and prosecuting corruption. The Social Scoreboard supporting the European Pillar of Social Rights highlights some challenges in Slovakia. The gender employment gap is high and continues to increase, reflecting that women in childbearing age have lower activity rates. Slovakia is trying to address this issue by adjusting parental leave benefits. While close to average, the rate of early leavers from education and training has significantly increased in recent years, and it is very high among Roma population. The inclusiveness of education remains a challenge in particular for Roma children, and children with special educational needs. On the positive side, income inequality and the proportion of people at risk of poverty or social exclusion remain low.

Regarding progress towards its national targets under the Europe 2020 strategy, based on data available thus far, Slovakia currently meets, or is on track towards meeting, the targets for employment rate, greenhouse gas emissions and reducing the number of people at risk of poverty and social exclusion. Reaching the renewable energy target would necessitate swift improvements. As regards the energy efficiency targets, while the primary energy consumption target is within reach, Slovakia is likely to miss its final energy consumption target. The R&D intensity and tertiary education targets do not appear to have been met, but Slovakia is getting ever closer to meeting the latter. Although the rate of early leavers from education and training is still within the target range, it is on the rise, which shows Slovakia’s performance in this area continues to deteriorate. Slovakia has made progress towards achieving the Sustainable Development Goals (SDGs), but some challenges remain. It performs better than the EU average on a number of SDGs in the social domain, including reducing poverty (SDG1) and inequalities (SDG10). There has also been progress on good health and well-being (SDG3) and quality education (SDG4), although Slovakia is still lagging behind the EU average on indicators in these areas. However, environmental pressures and a changing climate weigh on Slovakia’s sustainable development, and low-emissions energy consumption and resource productivity have developed less favourably. Slovakia is still facing challenges related to reinforced climate action (SDG13), affordable and clean energy (SDG7) and more responsible consumption and production (SDG12). () Key structural issues analysed in this report, which point to particular challenges for Slovakia’s economy, are the following: ·Amid risks, public finances are improving only slowly as expenditure grows fast. Revenue has been boosted by solid employment growth and improved collection of value-added tax, even though the value-added tax gap remains high. Property, consumption and environmental taxes still play a limited role. Digital services are set to improve the efficiency of tax administration, and spending review assessments are gradually improving resource allocation. ·Population ageing, recent pension reforms and the healthcare system pose long-term sustainability risks to public finances. The population is projected to age rapidly due to increases in life expectancy and low fertility rates. Recent reforms capping the retirement age and raising minimum pensions translate in higher medium to long-term public expenditure. Excessive reliance on hospital care hinders system efficiency, but a comprehensive reform for modernising the hospital network has been put on hold. However, several measures have also improved the efficiency of the health care system. ·Overall, the banking sector remains sound and well capitalised, but rising housing prices and household debt pose challenges. Banks continue to be profitable, but lower interest rates have reduced their profit margins, and the recent doubling of the bank levy will further weigh on their profitability. House prices continue to grow, translating into a low but rising overvaluation, decreasing affordability, as well as rising household debt. Macro-prudential measures have contributed to reduce debt growth. Other measures in various areas can help balance housing supply and demand, lower household indebtedness and reduce financial risks. ·The effectiveness of the anti-money laundering framework needs to be improved. Despite ambitious plans to strengthen the prevention, investigation and prosecution of money laundering, the understanding of risk exposure remains low. Limited human resources and training hamper the effectiveness of supervision. Steps undertaken under the government action plan have not yet provided the tools necessary to effectively identify and prosecute money laundering offences and to confiscate assets. ·Slovakia has a strong labour market, but structural challenges and disparities persist. Slovakia’s employment rate reached a record high of 73.3%. The number of women who are in work or looking for a job is gradually increasing, but there are still significant gender gaps in both employment and wages. Long-term unemployment is dropping, but it remains high in particular in eastern regions, also due to lack of integrated employment and social services for the vulnerable groups that are the farthest away from the labour market. The proportion of people at risk of poverty or social exclusion is low, but some groups and regions are particularly vulnerable. ·The persisting cycle of poverty is difficult to break and people’s access to social and essential services is uneven. A large part of the Roma population lives in poverty or in poor housing conditions and their access to social and essential services is hampered by missing infrastructure. Child poverty, in particular among Roma communities, is a major reason for children being placed in the state foster care system. Formal long-term care continues to be dominated by residential facilities, and the process of deinstitutionalising care for persons with disabilities is proceeding slowly. There is a lack of financial resources and of a clear and integrated approach addressing the increasing demand for healthcare and social services in long-term care. Access to quality healthcare, in particular primary care, remains relatively poor and uneven. ·The low quality of Slovakia’s education and training system and the inequalities within it prevent the country from fulfilling its economic potential. Students’ performance in basic skills remains low and pronounced educational inequalities persist, with socioeconomic status having a significant impact on educational and employment outcomes. Investment in education and training remains insufficient, affecting educational outcomes across all levels, including vocational training and lifelong learning. Despite further pay rises for teachers, the teaching profession remains unattractive and there are teacher shortages. The low inclusiveness of education contributes to the poverty cycle seen in some parts of the country. This is especially challenging in relation to the Roma minority, in particular due to the persisting lack of systemic measures to improve the inclusion of Roma children. The obligatory pre-school entry age will be lowered as of 2021, which means that early childhood education and care will have to become more accessible, high-quality and inclusive. As the quality of higher education remains low, reform measures in the quality assurance system have been launched. ·The digital transformation could provide opportunities if the regulatory framework is made fit-for-purpose and R&D is improved. Future technological changes are likely to impact Slovakia’s economy more than the economies of other countries. Yet, both public and private R&D investment remain low. The low quality of public research and limited cooperation with businesses, partly explained by inefficiencies related to a fragmented governance system, constrain the development and sharing of knowledge and skills. ·The business environment is slowly losing ground both in international rankings and in the perception of local entrepreneurs. In addition to specific shortcomings such as lengthy processes to get construction permits and resolve insolvency, the high frequency and low predictability of changes in the regulatory framework hamper investment. On a more positive note, contracting authorities are becoming more interested in the use of quality criteria and life cycle costing in public procurement, though substantial practical improvements are yet to be seen. ·The overall effectiveness of Slovakia’s public institutions and administration remains low. Despite reform efforts, Slovakia’s public administration underperforms relative to other EU countries. There are shortcomings in particular in coordinating policy making, drafting regulations, and ensuring high performance of the civil service, human resource management and service delivery. The digitisation of public services is progressing but take-up remains low. Despite some progress, the justice system continues to face specific challenges regarding its overall integrity. Moreover, the prosecution of high-level corruption cases has become a pressing challenge and efforts to improve the corruption prevention framework and to carry out planned reforms appear to be insufficient. ·Environmental pressures and challenges weigh on Slovakia’s sustainable development. The climate transition requires scaled up efforts and targeted investment, which implies significant economic and social choices. Currently planned investment and funding for mitigation and adaptation may not be sufficient, with private finance and capital markets particularly underdeveloped. Investing into making buildings more energy efficient remains a priority. A more enabling environment could help increase the proportion of renewable energy sources in the energy supply. Air pollution caused by solid fuel burning and rising emissions caused by transport pose a serious health concern. Moreover, Slovakia needs to adapt to a changing climate by addressing and planning for increased risks. Moving to a more circular economy would also help make the use of natural resources more sustainable. The Commission’s proposal for a Just Transition Mechanism under the next multi-annual financial framework for 2021-2027 includes a Just Transition Fund, a dedicated just transition scheme under InvestEU, and a new public sector loan facility with the European Investment Bank. It is designed to ensure that the transition towards EU climate neutrality is fair by helping Slovakia’s most affected regions to address the social and economic consequences. Key priorities for support under the Just Transition Fund are identified in Annex D, building on the analysis of transition challenges outlined in this report. Growth performance The strong economic expansion seen in recent years is giving way to slower growth. Slovakia has witnessed impressive economic growth following the 2009 economic crisis. More recently, after expanding by 4.0% in 2018, economic growth measured by real GDP is estimated to have slowed down markedly to 2.3% in 2019 (Graph 1.1). This was mostly due to lower net exports, a result of both lower foreign demand and temporary domestic factors, such as changes and delays in production in the large, export-focused automotive sector. Yet, domestic demand has been robust, and record-low unemployment and strong wage increases have supported private consumption. Investment activity is estimated to have weakened in 2019 after strong growth in previous years. Graph 1.1:Real GDP growth and its components Source: Eurostat, European Commission 2020 Winter Forecast The economy is projected to grow at 2.2% in 2020 and 2.6% in 2021 as exports recover and domestic demand eases. According to the Commission’s winter forecast, private consumption growth is likely to ease slightly as the rate of job creation is slowing and real wage growth decelerates. Both exports and the trade balance are expected to slowly recover in 2020-21. New production capacities and a competitive export sector set Slovakia on course to regaining market share.

Convergence towards the EU average has slowed down in the past decade, despite an uptick in 2018. Based on purchasing power standards, GDP per person has stood between 72% and 77% of the EU average since 2010, similar to gross national income per person (Graph 1.2). Real GDP per person outpaced the EU average by more than 13.2 percentage points cumulatively between 2010 and 2018, considerably less than the 50.1 pps in 2000-2010. However, Slovakia’s relatively fast economic growth, coupled with moderating inflation, may revive convergence. Graph 1.2:GNI per person in purchasing power standards Source: AMECO Potential growth Economic growth is now below potential. Recent investment activity has stimulated potential growth in parallel with actual GDP. However, slower domestic and foreign demand have pushed the cyclical growth component into negative territory. Overall, economic growth stems from structural growth. As a result, the high wage growth seen so far is likely to decelerate. In the medium term, economic growth is expected to return to its potential. Potential growth is projected to sustain a solid pace close to 3% over the next few years. It is mostly driven by total factor productivity growth and capital accumulation. Further deepening the capital stock and investing in intangible capital and high value-added technologies can help diversify the economy, strengthen its resilience and sustain or even improve potential growth. In contrast, labour is likely to drag on potential growth in the long term: the demographic outlook implies a projected 12% decline in the working-age population by 2050, among the least favourable in the EU. Moreover, there is a trend towards fewer hours worked per person. Currently, these developments are still largely offset by an increasing employment rate, which reached 73.3% in Q3-2019 (1.2 pps year-on-year). Transformational changes such as automation and the green transition, as well as Slovakia’s ability to respond to them, will determine long-term potential growth. Productivity Graph 1.3:Evolution of labour productivity and gaps (GVA per hour worked in PPS) Source: Eurostat Maintaining productivity growth, the backbone of Slovakia’s swift economic convergence, will require sustained efforts. Total factor productivity grew by an annual average rate of 2.1% in Slovakia in 1996-2018, compared to 0.7% in the EU. Labour productivity growth (Graph 1.3) has been similarly impressive, and the productivity gap with the EU average has narrowed substantially since 2000, though less so since 2009. Economic growth has been based on industrial specialisation – achieved with the help of foreign direct investment – and attractive labour costs. Manufacturing accounted for 20% of GDP in 2018, compared to 14.6% in the EU. With some of these industries, such as the automotive sector, facing deep structural change at a global scale, and domestic unit labour costs increasing, further convergence will hinge on Slovakia’s ability to further raise competitiveness and productivity – for example, by deepening the capital stock, addressing skills mismatches and improving education (see Section 3.3). Unit labour costs are increasing as wage growth outpaces labour productivity growth. Nominal unit labour costs increased by 4.5% in 2017, 3.5% in 2018, and an estimated 5.2% in 2019 (Graph 1.4). Labour compensation growth drives these increases and is projected to have reached its highest value since the financial crisis, at 7.7% in 2019. While high wage increases in the public sector contributed strongly, the tight labour market and labour shortages in experienced in several sectors are at the heart of the developments. Wage growth can be expected to decelerate along with overall economic growth, so pressures could ease in the coming years. Graph 1.4:Decomposition of rate of change of ULC Source: AMECO Productivity is catching up with the EU average in all of Slovakia’s regions, but the gap between the capital and other parts of the country remains significant. In 2017, the real gross value added per worker in Bratislava amounted to €50,500, compared to the national average of €35,400. All of Slovakia’s regions show a similar growth trend, but Bratislava’s performance is always significantly above the national average. This is because Bratislava has better overall infrastructure, higher labour market efficiency, a better ability to attract more skilled workers and firms with higher value-added, and a more competitive innovation ecosystem (Graph 1.5). Graph 1.5:Evolution of labour productivity by region Source: Eurostat, European Commission calculations Household consumption Solid growth in household real disposable income supports robust private consumption. After years of strong employment growth, the rate of job creation slowed down in 2019 and is likely to moderate further in 2020-2021. Although the positive effect that job creation has on household disposable income is expected to fade, strong wage growth should continue to prop up earnings and incomes. Overall, household consumption is projected to grow well above 2% in real terms, which leaves the household saving rate stable at close to 10%. Investment Investment growth is expected to continue, with public investment gaining importance. Total investment has returned to and surpassed pre-crisis levels since 2015. Investment growth is estimated to have weakened in 2019, due to a more subdued economic outlook and following sizeable private investment in 2018 due to the construction of a new car factory. Investment is expected to grow at similar rates in the coming years. Public investment is projected to assume a more prominent role in the medium term thanks to some major public investment projects and due to the approaching end of the programming period for EU funding. Trade performance and competitiveness Foreign trade is likely to recover after its less dynamic performance of 2019. Slovakia is sensitive to the trade environment as it is a small and very open economy: In 2018, its exports were worth 93.6% of GDP (EU: 46.2%) and imports worth 92.9% of GDP (EU: 42.7%). Exports were affected by the impact of slowing foreign demand from key EU trading partners in 2019, most notably Germany, Slovakia’s largest trading partner accounting for 22% of exports in 2018. Temporary domestic production factors (see below) exacerbated the slowdown. As these factors fade, exports are likely to gradually pick up. As imports were less affected by the slowdown, the trade balance is projected to have dipped into negative territory in 2019, but should move back into surplus by 2021. The positive effect of new investment on Slovakia’s export capacities and trade performance is expected to be seen over 2020-2021. This should result in export market share gains after an expected dip and slight loss in 2019. Global trade uncertainty could dampen this outlook, however. The automotive industry drives Slovakia’s export performance. The sector accounts for around one quarter of total exports and almost one third when car accessories are included. In 2018, the automotive sector accounted for more than two thirds of export growth. In 2019, the sector was much less dynamic, dragging down export growth. In Q2-2019, exports decreased more sharply than foreign demand. Temporary domestic factors can explain this drop, but are expected to wear off. They include: a) changes made in production lines to respond to changing consumer preferences and to comply with new emission standards; and b) a longer time than expected for some production capacities to become operational. The car industry in general is at a critical juncture, and the transition to alternative propulsion vehicles can impact Slovakia’s future production and exports (Box 1.1). It is important that Slovakia prepares for this challenge. Exporting sectors have maintained their price competitiveness relatively well despite a worsening real effective exchange rate. The unit labour cost-based real effective exchange rate weakened mainly due to rising labour costs, with average nominal wages increasing in the context of record-low unemployment and elevated inflation. Labour costs are set to grow further, but the expected economic slowdown is likely to moderate their growth in the medium term. A similar picture emerges for the consumer price index-based real effective exchange rate. However, exports have been less affected as productivity gains in export-oriented industries have largely offset rising compensation (Graph 1.6). Effectively, Slovakia’s export performance has thus been relatively well insulated from the average rise in unit labour costs, which has been most pronounced in market services. Low productivity gains explain the rise of unit labour costs despite moderate wage growth in that sector (see below).

Graph 1.6:Unit Labour Costs by sector Source: Eurostat, European Commission calculations External position Steady inflows of inward foreign direct investment have built up a sizeable negative net international investment position. The net (inward) stock of foreign direct investment as a share of GDP is estimated to have remained broadly stable at -51.1% in 2019 (Graph 1.7). It thus forms the lion’s share of the country’s relatively large negative net international investment position estimated to have slightly improved to -65.7% in 2019(). As foreign direct investment is a safer and more stable form of investment instrument because it is non-defaultable, the net international investment position is therefore largely unproblematic. Excluding non-defaultable instruments, net external liabilities are estimated to have stood at only -15.6% of GDP in 2019, a modest deterioration over the past decade. Overall, the projected high nominal GDP growth is likely to allow for a modest improvement of the external position in coming years. Graph 1.7:Decomposition of Net International Investment Position Source: Eurostat The current account balance is expected to remain in deficit. In 2019, it is estimated to have stood at –2.4% and at -0.6% if cyclically adjusted, only slightly below the -0.2% explained by fundamentals. This is the result of dividend outflows stemming from the large stock of foreign direct investment. Sluggish exports in 2019 are expected to worsen the negative contribution of the income balance to the current account, though only temporarily. An improving trade balance – also due to expanding production facilities – is expected to mitigate the current account deficit in the medium term. Labour market and social situation Employment growth continued, driven by services and construction. In Q3-2019, the employment rate of people aged 20-64 reached 73.3% (0.8 pps year-on-year) and the unemployment rate dropped by 0.4 pps year-on-year to 5.7% in Q4-2019. The largest year-on-year increases in employment were recorded in information technology (5.3%), construction (5.1%) and professional and technical services (2.5%, see Graph 1.8). According to the Slovak Statistical Office, after five years of steady growth, employment in the automotive industry seems to have plateaued. Strong labour demand was met by an increasing activity rate (among people aged 20-64 by 0.4 pps year-on-year). Graph 1.8:Employment by sector, year-on-year changes Source: Eurostat As unemployment dropped, labour shortages remain pronounced, though the figures are stabilising. Vacancies registered at labour offices reached 92,300 in December 2019, highly concentrated in the western part of the country. In contrast, in several districts of South-East Slovakia, the number of vacancies was lower than the number of jobseekers (IFP, 2019). The labour shortage indicator, shown by the Beveridge curve (Graph 1.9), peaked in 2018, but fell by 10 pps in Q3-2019. A tight labour market has fuelled large salary increases. Driven by labour shortages, nominal compensation of employees increased by 5.3% in 2018 and are expected to have further grown by 6.8% in 2019. Public sector wages grew (6.6%) faster than private sector wages (5.1%) in 2018. In the private sector, wage growth was mostly driven by construction (7.7%) and industry (7.4%), while milder growth was recorded in services, notably in market services (3.5%). Overall, the impact of recent wage increases on competitiveness is expected remain limited (see productivity above). Graph 1.9:Beveridge curve, 2000-2018 Source: Eurostat, LFS and European Commission, EU Business and Consumer Surveys. Data seasonally adjusted. In spite of overall positive labour market outcomes, some groups face disadvantages and east-west disparities remain marked. The unemployment of low-skilled people is among the highest in the EU, at 29.8 % in 2018 (13.3 % in the EU). The situation is particularly serious for low-skilled youth (43.5 % v 21.1 % in the EU). Large regional disparities persist, with Eastern regions presenting a comparatively worse situation across all labour market and social indicators. The situation is especially critical for marginalised Roma communities (see Section 3.3). Poverty rates remain low but social exclusion remains a serious challenge in some regions. In 2018, the ‘at-risk-of poverty or social exclusion’ rate remained stable at 16.3%, significantly below the EU average of 21.9%. 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 that measures the ratio of the incomes of the richest 20% of households compared to the poorest 20%, is among the lowest in the EU (3.0 compared to the EU average of 5.2 in 2018). 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 2018, indicating that increases in income have reached households only to some extent, i.e. a low inclusiveness of growth. Wealth inequality is also among the lowest in the EU, partly due to a high rate of home ownership. However, inequality of opportunities remains high, as shown by the strong impact of socio-economic background on education outcomes, for example. Regional disparities Regional disparities remain significant. Infrastructure gaps and weak urban-rural linkages mark pronounced economic differences between regions (Section 3.4.2). In 2017, GDP per person (in purchasing power standards) ranged between 179% in the capital region and 54% of the EU average in the less developed region of Východné Slovensko. Regional disparities are less pronounced when comparing net disposable income, which ranged from 87% in Východné Slovensko to 153% in the Bratislava region in 2017. This reflects low registration rates of internal migration and the importance of commuters and government transfers, and it is arguably a more relevant measure of disparities. Moreover, purchasing power standards are set at national level, whereas differences in the cost of living across regions may further reduce this gap. At the same time, a more granular analysis could reveal further intra-regional disparities, e.g. between regional capitals and more urban areas. Despite overall convergence towards the EU average income, convergence within Slovakia itself has been weak. Thanks to strong economic growth, Slovakia’s convergence with the EU average since the country joined the EU has been impressive, with all eight NUTS 3 regions – similar in size in terms of population – growing faster than the EU average. The capital region of Bratislava has grown about as fast as the national average between 2007-2016, by roughly 31%. Prešov, the country’s poorest region, experienced the strongest growth, outperforming the national average by 13.9%. Overall, however, regional income dispersion is still at a similar level in 2017 as it was in 2007 (see Graph 1.10). Graph 1.10:Regional disparities Source: Eurostat, European Commission calculations Economic and social indicators depict sizeable regional disparities, even if labour market developments show some convergence. Territorial disparities in terms of labour market and social inclusion indicators remain significant, with Eastern and South-Eastern Slovakia lagging behind. With the exception of the capital region, population growth was below the EU average in all of Slovakia’s regions in the 2010-2016 period. The capital region also outperforms the remaining regions in a wider range of economic indicators, such as investment levels, labour productivity and salaries. However, in 2013-2018, all regions experienced stronger wage growth than the Bratislava region, albeit from a lower starting point. Although regional dispersion in employment rates remains substantial, regions with high unemployment rates are benefiting most from the recent strong growth in employment.

Inflation Consumer prices increased by 2.8% in 2019 and are expected to ease slightly. Services, food and energy all contribute substantially to overall inflation. The services sector is forecast to remain a key driver of price dynamics as swift wage growth is set to continue to spill over into services prices. Inflationary pressures stemming from energy and food prices are expected to moderate. In contrast, non-industrial energy goods are likely to contribute less to overall price increases. Overall, consumer price growth is expected to settle at 2.5% in 2020 and 2.2% in 2021. Graph 1.11:Consumer inflation Source: Eurostat Credit growth Household debt continues to grow and could pose a systemic risk in the future. It reached a record-high 42.8% of GDP in the first half of 2019, above the fundamental benchmark of 28%, but still below the prudential benchmark of 55% () (Section 3.2). After substantial expansion throughout 2016 and 2017, in part driven by rising housing prices, its growth has slowed significantly in the first half of 2019. However, it remains one of the highest in the EU. The deceleration was mainly due to a tightening of the macroprudential measures, a gradual saturation of the credit market and a stabilisation of the average interest rate, which nevertheless remains low. Housing market House prices continue to grow. Real house prices have been growing steadily on the back of supply constraints and strong demand, thus reducing affordability, although they are still below the pre-crisis peak. Construction activity has increased markedly, but is unlikely to fully meet demand in the near future. Meanwhile, the rental market is too small, limiting the mobility of especially temporary workers and students. Graph 1.12:Evolution of the House Price Index and MFI loans for house purchase Source: Eurostat, ECB and European Commission calculations Public finances The consolidation effort is expected to have been weak in 2019. The deficit is expected to have declined from 1.1% of GDP in 2018 to 0.9% in 2019. The strong labour market boosted revenues, especially social security contributions. Value added tax collection grew faster than household consumption, suggesting improved collection. However, current expenditure, including compensation of employees, social transfers, subsidies and other current transfers, grew at a fast pace. Public investment also increased due to a higher drawdown of EU funds. Consequently, the structural balance improved only marginally. Public finances face further risks. In 2020, the government deficit is projected to increase to 1.2% of GDP. Direct taxes are set to grow more slowly due to increased tax allowances, a reduced income tax rate for self-employed and small enterprises, higher deductions for R&D and faster depreciation of electric vehicles. The delayed implementation poses a risk to indirect tax revenues from online electronic cash-registers and fuel additives, and a reduced VAT rate for certain foodstuffs will negatively impact tax revenue. Risks for expenditure in 2020 include continued public wage growth, more social benefits and the drawdown rate of EU funds and related investment. The debt-to-GDP ratio is expected to decline to close to 47% and below in 2020-21. Sustainable Development Goals Slovakia has made progress towards achieving the Sustainable Development Goals (SDGs), but challenges remain. Over the past five years, there has been progress for almost all SDGs. Slovakia performs better than EU average in various social SDGs, including poverty (SDG1), reduced inequalities (SDG10) and zero hunger (SDG2). While still lagging behind EU average, progress is also visible in, good health and well-being (SDG3), and quality education (SDG4), though challenges remain (see Section 3.3). Yet, environmental pressures and a changing climate weigh on Slovakia’s sustainable development, and low-emission energy consumption and resource productivity have developed less favourably, with the latter below EU average. Challenges therefore remain for reinforced climate action (SDG13) and improving the status of ecosystems, in decelerating land degradation and in preserving biodiversity (SDG15), for affordable and clean energy (SDG7), and for more responsible consumption and production (SDG12). (Continued on the next page) Box (continued) Table 1.1:Key economic indicators Slovakia Source: Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for real GDP and HICP, Autumn forecast 2019 otherwise)

Since the start of the European Semester in 2011, 50% of all country-specific recommendations addressed to Slovakia have recorded at least ‘some progress’. 50% of these CSRs recorded 'limited' or 'no progress' (see Graph 2.1). For instance, some progress has been achieved in reforming the health care system, and in improving the quality and efficiency of the justice system. Graph 2.1:Overall multiannual implementation of 2011-2019 country-specific recommendations (CSR) to date Source: European Commission Despite progress in healthcare reforms, concerns over the sustainability of public finances remain. While the reform for modernising the hospital network has been put on hold in late December, the health authorities have carried out another spending review and some improvements have gradually been implemented. Yearly cost savings of about €130 million were achieved over the course of 2019. However, long-term fiscal sustainability was compromised due to: (i) a pension reform removing the automatic adjustment of the statutory retirement age to life expectancy and capping the retirement age at maximum 64, and (ii) the National Council increasing minimum pensions to 33% of the average wage of 2 years ago, abolishing the previous link to the subsistence minimum. Fiscal consolidation has been driven by buoyant revenue growth supported by swift and tax-rich economic growth, but was also facilitated by policy efforts to improve tax collection and reduce tax fraud. Further consolidation has been limited due to adjustments on the expenditure side. Measures aimed at improving the quality and inclusiveness of education have yielded limited progress, and further systemic efforts are needed. More kindergarten facilities are being made available, but enrolment rates remain low, in particular for Roma children. Educational outcomes at secondary level continue to be weak, and strongly affected by students' socio-economic background. Slovakia is implementing the 2018-27 reform programme in education. The key measures adopted or announced in 2019 included the lowering of the pre-school age to 5 as of 2021, the new law on pedagogical staff, setting up the center for inclusive education, and a new accreditation agency, and new legislation aimed at improving the higher education quality. The implementation and impact of these new measures will need to be monitored. Despite recent pay rises, teachers’ salaries remain low, both compared with other tertiary-educated workers and by international standards. Investment-related economic policy improved in some areas such as energy efficiency, and public procurement practices are being reformed. Various measures facilitate investment, such as higher amounts eligible for the R&D tax deduction. Investments in renovating multi-family apartment buildings are producing good results. The government formally agreed with operators to connect uncovered areas to broadband. However, governance and the regulatory climate continue to weigh on investment, and the poor management of the implementation of EU funds for R&D in Slovakia restrained R&D investment. Moreover, the interest of contracting authorities in increasing the use of quality criteria and life-cycle costing is rising. The Public Procurement Office and Central Coordination Authority continue to work towards providing methodology and training, even though results are yet to emerge, as learning and implementation take time. Table 2.1:Summary table on 2019 CSR assessment Source: European Commission For CSR 3 The regulatory framework underpinning the programming of the 2021-2027 EU cohesion policy funds has not yet been adopted by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF). The quality and efficiency of the justice system have improved, but efforts to detect and prosecute corruption are still insufficient. Increased reform activities are having a positive impact on the quality of the justice system, e.g. with improving online accessibility of judgments. As regards efficiency, there have been improvements regarding the length of proceedings and the clearance rate for litigious civil and commercial cases and administrative justice is performing well. As regards strengthening judicial independence, including judicial appointments, one positive development is that on 10 October 2019, the president appointed the remaining six judges to the Constitutional Court, successfully bringing to a positive end an impasse that had existed since February 2019. The Constitutional Court is now composed of 13 judges as envisaged by the Constitution and is finally fully operational again. However, longstanding concerns over the overall integrity of Slovakia’s judicial system continued to mount in the second half of 2019 due to increasing evidence of close links between white-collar criminals and the political level and individual judges and prosecutors, including a former General Prosecutor. The low perception of judicial independence thus continues to be Slovakia’s most serious challenge, and the country’s performance in this area remains at the bottom of EU Member States. Moreover, progress in fighting corruption remains limited. Criminal statistics show fluctuations but no explicit improvement. Improved efforts to sanction legal persons are reported. Slovakia has made some progress in addressing the 2019 country-specific recommendations. () Limited progress has been made with respect to the fiscal-structural part of the first country-specific recommendation, with relevant advances in improving the cost-effectiveness of the healthcare system. Limited progress is also visible in the second country-specific recommendation, as various measures and programmes supported by the European Social Fund are being introduced. Only limited progress has been made in addressing the third recommendation as some measures helped focus investment-related economic policy. Some progress has been made on the authorities paying more attention to the use of quality criteria and life cycle costing in public procurement. Only limited progress has been made in combating corruption. Some progress has been made towards improving the quality and efficiency of the justice system. Upon request from a Member State, the Commission can provide tailor-made expertise via the Structural Reform Support Programme to help design and implement growth-enhancing reforms. Since 2016, such support has been provided to Slovakia for 26 support projects. Several projects have been delivered in 2019. For example, the Commission helped Slovakia to prepare an action plan for Upper Nitra region’s transition from coal, which was adopted by the government on 3 July 2019. It also helped Slovakia design a strategy and a detailed implementation plan to foster voluntary tax compliance. Furthermore, the Commission helped Slovakia develop an IT architecture strategy and transition plan for the Ministry of Justice. In 2019, work started on the implementation of recommendations for the judicial sector, improving good governance at the local level and on the design of a labour mobility scheme. 3.1.Public finances and taxation 3.1.1.Taxation Both Slovakia's structural deficit and fiscal revenues are slowly decreasing in relation to GDP. The general government deficit fell from 2.5% of GDP in 2016 to 1.1% in 2018, and government debt has been reduced by 2.6 pps to 49.4% of GDP over the same period. In 2018, the tax revenues-to-GDP ratio stood at 34.1% of GDP, below the EU average of 39.2%. This ratio is projected to remain relatively stable in 2019 and 2020 (Commission 2019 autumn forecast). Revenue from labour taxes continues to be the biggest source of tax revenues. It accounted for 53.4% of tax revenues in 2018 (EU: 49.9%). () This is mainly due to a significantly higher proportion of social contributions in total taxation (43.3%) than in the EU (31.1%). Also, the share of consumption taxes in total tax revenues is above the EU average, though their share of GDP was almost the same. In contrast, the proportion of revenues from capital taxes in total taxation is notably below the EU average (13.4% v 21.6%). Between 2008 and 2018, the proportion of labour taxes in total taxes increased by 5.8 pps, while the proportion of capital taxes remained stable and the proportion of consumption taxes fell by 5.2 pps (Graph 3.1.1). Property, consumption and environmental taxes play a limited role. They account for a lower share of GDP in Slovakia than overall in the EU (14.2% v 16.1% in 2018). The relatively low implicit tax rate () suggests a potential scope to shift from taxes on labour to property and environmental taxes, which are deemed less distortionary to economic growth. Inequality issues and redistribution effects of such reforms would need to be taken into account in that context. () Bringing the tax base of recurrent property tax in line with market values can increase revenue without increasing tax rates. Failure to regularly update the tax base erodes it over time, while also fuelling property prices and creating potentially inequitable effects. Graph 3.1.1:Changes in tax structure in Slovakia and the EU between 2008 and 2018 (in pps) Source: 2019 Taxation trend reports, European Commission Environmental taxes as a whole stood at 2.5% of GDP in 2018. The implicit tax rate on energy stood at 164.3 (), among the lowest in the EU in 2017. While energy taxation was above the EU average (2.2% of GDP; EU 1.9%), there is still space to increase taxation in transport (0.3% in 2018; EU 0.5%) and pollution resources (0.03% in 2018; EU 0.08%). Importantly, differentiating tax rates according to the carbon content of the energy source and indexing the rates to inflation could also encourage a more environmentally conscious behaviour in consumers. Excise duty rates on diesel are significantly lower than those on unleaded petrol, despite diesel having a higher carbon and energy content than unleaded petrol. The tax system also favours the private use of company cars, which counteracts the incentives provided by energy and vehicle taxation to reduce fuel consumption. A reform of environmental taxation is under discussion in 2020 ().

Reducing the tax wedge on labour can improve social inclusion through employment. () The tax burden on low-income earners is at 36.5%, significantly above the weighted EU average of 32.5%. This suggests that labour taxation may have an impact on employment of people from the most vulnerable groups. At 36.4% in 2018, the employment rate of low-skilled workers is among the lowest in the EU. Labour taxation is designed in a way that can discourage second earners from taking up work. () Moreover, the features of family-based taxation can also lead to an unequal tax treatment of individuals within a household. () A relatively low difference between the tax wedge at 50% and 167% of average wage also suggests that tax progressivity is below the EU average. The ratio of tax expenditure to GDP is expected to increase from 1.4% in 2018 to 1.7% in 2021. This increase compared to 2018 is mainly due to the introduction of holiday vouchers, non-cash accommodation income and a reduced VAT rate for accommodation. The main impact in 2020 will come from: the introduction of a reduced VAT rate for selected foodstuffs; reduced tax rates for entrepreneurs with turnover up to € 100,000 (); tax exemptions on benefits-in-kind for employees; increases in extra deductions of the eligible R&D costs from 100% to 150% by the end of 2019 and to 200% in 2020, and; free tax deductions on assets during the depreciation period for micro taxpayers (starting in 2021) (). Tax expenditures may not necessarily constitute a more effective policy than targeted expenditure measures, such as incentives to boost investment or targeted benefits for low-income households. However, in-work tax expenditures are likely to provide financial incentives to take up jobs, to remain in work, to increase work effort and to invest in training (Barrios, S. et al, 2015). The collection of VAT has improved significantly but the VAT gap remains very high. The VAT gap () is more than twice the EU average (23.0% v 10.9% in 2017, Centre for Social and Economic Research, 2018). The rise in VAT compliance suggests that policy measures put in place in recent years have started to take effect. For instance, one measure able to increase VAT collection and to combat tax fraud is the mandatory use of electronic cash registers for all taxable persons, with an online connection to the financial administration (‘eKasa’) from 2020. This measure was supposed to already be in place in 2019 (Ministry of Finance, 2019a), but it was postponed due to a lack of available cash registers. () The implementation of nano-markers could potentially decrease the tax gap in the excises on mineral oils, which remains high. () Recent use of digital services is addressing the need to increase the efficiency of the tax administration. Call centre services, a chatbot available to clients (‘Taxana’), and pre-filled forms for tax records to be submitted via the ‘eDane’ application are gradually being offered to taxpayers. Administrative and court fees can be paid through the new payment system (‘eKolok’), both in Slovakia and from abroad. A new policy approved in February 2019 focuses on streamlining business start-up processes. A draft amendment to the Income Tax Act was adopted to make it easier for small and medium-sized companies to comply with tax obligations (Ministry of Finance, 2019a). Audit activities and cross-checking are still a challenge for tax compliance. While the Joint Analytical Centre is currently being tested as an analytical tool for a risk assessment in the field of customs and the tax reliability index score is being tested for a differentiated approach towards taxpayers. A specialised tax office will offer tailor-made services to top-ranked business taxpayers. Measurable positive consequences can be expected from these measures. 3.1.2.Fiscal framework Spending review assessments are only gradually being integrated in the budgetary process. () In 2019, final reports on agriculture, on healthcare and an interim report on marginalised groups were published. The final report on the second review of health expenditure was discussed as part of the general government budget for 2020-2022. Although initially envisaged as of 2020, it now looks like public health insurance budget expenditure will be organised in a more detailed programme structure with measurable indicators for selected areas of the health system only from 2021. Carrying out spending reviews that link to the budgeting process remains a challenge. Multiannual expenditure ceilings would support better budget planning and execution and improve fiscal discipline in the medium term. Binding expenditure ceilings, including on tax expenditure, would make it possible for fiscal policy to work counter-cyclically and would protect investments during an economic downturn. The Constitutional Act on Budget Responsibility, adopted in 2011, covers the setting of general government expenditure ceilings. The government approved a 2020 spending cap roughly at the level of the approved budget. This is the first time an expenditure ceiling was introduced. The forecast committees and the Slovak fiscal council strengthened the fiscal framework but some challenges remain. More than ten years of committees operation improved the plausibility of budget assumptions. Nevertheless, some shortcomings remain, e.g. incomplete coverage of tax categories with ESA2010 (), access to statistical data for the CBR () and comprehensiveness (e.g. there is no assessment of non-tax revenues). 3.1.3.Debt sustainability analysis and fiscal risks Population ageing poses long-term sustainability risks to public finances. The fiscal sustainability gap indicator S2 points to a medium long-term risk (European Commission 2020a), while the S1 indicator shows low medium-term risk in debt projections. A cumulative improvement of 3.8 pps of GDP in the structural primary balance would be required to stabilise the debt-to-GDP ratio over the long term. Pensions and healthcare are the main drivers of ageing costs, with a joint contribution of 2 pps of GDP. The old-age dependency ratio is projected to triple by 2060 due to increases in life expectancy and low fertility rates. While in 2016 there were only about two inactive people above 65 for every 10 employed people, population projections suggest that by 2060 there will be around six inactive people for every 10 employed, one of the highest ratios in the EU. Several trends contribute to this. Life expectancy at birth is projected to increase further from 73.7 to 82.6 years for men and from 80.7 to 87.8 years for women by 2060, thus increasing the proportion of those aged 65+ and 80+ in the population. The fertility rate will remain below the natural replacement rate of 2.1, projected to rise from 1.40 children per woman in 2016 to 1.79 in 2060. The overall population is thus projected to decline to 5.1 million in 2060, from 5.45 million in 2019 and the proportion of the working age population is projected to decrease by 16.1 pps by 2060 (European Commission, 2018a, Eurostat 2019a). Pensions Recent reforms cap the retirement age and raise minimum pensions. The 2019 legislation removed the automatic adjustment of the statutory retirement age to life expectancy and capped the retirement age at 64, while also granting women the possibility to retire half a year earlier for each child raised, up to a maximum of three children. As a consequence, the statutory retirement age will continue to increase, albeit at a slower pace, until around 2030 when reaching 64, and will stabilise then. Official estimates of the impact of the reform are not available yet. Furthermore, in October 2019, Parliament set the minimum pension at 33% of the average wage of the two preceding years for those having paid into the system for at least 30 qualified years, weakening the previous link to the subsistence minimum. This change was adopted without expert discussion. The reforms increase the risks to long-term fiscal sustainability. Preliminary Commission/Aging Working Group estimates point to an expenditure increase of 5.2 pps of GDP over the long-term (from 8.6% in 2016 to 13.8% in 2070, instead of 9.8% in 2070 in the 2018 Ageing Report). Counterbalancing measures have not been put forward yet. The capping of the retirement age and the increasing of minimum pensions may affect the risk-of-poverty-or-social-exclusion for the elderly (currently among the lowest in the EU) and the aggregate replacement ratio (currently 62% and above the EU average (European Commission, 2018b) (). Health care Several measures have contributed to improving the efficiency of the health care system. In the context of the multi-year spending review linked to the implementation of the Value for Money (VfM) project, Slovak authorities have implemented several measures to optimise the pricing and procurement of pharmaceuticals and medical goods, as well as to curb their excessive consumption. By mid-2019, about € 116 million of cost savings were achieved. In the area of diagnostics and laboratory tests, the rollout of an electronic control system can reap immediate savings of € 10 million. Excessive reliance on hospital care hinders the efficiency of the health system. Despite continued efforts to move towards a leaner hospital sector, the number of acute care beds (5.8 v 5.0 per 1,000 people in the EU) and hospital discharge rates (195.7 v 179.3 per 1,000 people in the EU in 2017) in hospitals remain high. Together with one of the lowest bed occupancy rates in the EU (67.8% v 77% in the EU in 2017), this shows an excessive reliance of the Slovak health system on hospital care, which hinders efficiency. The VfM project found scope for potential additional savings of at least € 0.5 billion per year (i.e. 10% of health expenditure), and identified measures which could reduce wasteful spending by € 148 million already in 2020 (Ministry of Finance, 2019b). A comprehensive reform for modernising the hospital network has been put on hold. In 2018, the Slovak health authorities developed a reform proposal that aims to rationalise the supply of hospital care services by concentrating acute care capacity territorially and functionally. The reform was supposed to set up a network of hospitals to be located across the country according to the scope and complexity of care services provided (Ministry of Health, 2018). If accompanied by a commensurate expansion of primary, emergency and long-term care services, such a reform has the potential to improve quality of care and increase the efficiency of the Slovak health system. At present, it is uncertain when the reform will be adopted, given that the government withdrew the legislative proposal from Parliament, after it was delayed and was unlikely to be finalised under the current Parliament configuration. State-owned hospitals continue to accumulate debt despite recurring government bailouts. Recurrent debt accumulation by state-owned hospitals is a longstanding issue in the Slovak health sector. The last round of the three-step debt settlement programme initiated by the government at the end of 2017 was launched in October 2019. Although the programme required recipients to comply with a recovery plan (with sanctions associated with non-compliance), debt accumulation by the 13 state-owned faculty and university hospitals continued over this period. While this can be partially explained by a sub-optimal use of resources, a scenario analysis by the Health Ministry estimates that, even after having implemented all measures envisaged by the VfM project, payments from health insurance companies would still fail to cover hospital costs by around € 70 million of hospital costs (Ministry of Finance, 2019b). This pattern signals the inadequacy of government regulatory tools in relation to the contracting practices of health insurance companies, and of the hospital payment mechanism, which provides weak incentives to pursue cost-effectiveness. The gradual introduction of a hospital payment system for hospitals based on diagnosis-related groups (DRGs), which should become fully operational by 2022, is expected to increase the transparency of hospital spending, incentivise cost-management and better align hospital resource allocation with their actual service costs (European Commission, 2019a).

Despite government action, current weaknesses in primary care limit Slovakia’s potential to improve health care quality and efficiency. Against the backdrop of a rising prevalence of chronic diseases among the Slovak population and a higher rate of outpatient consultations than the EU average, high rates of hospital admissions for ambulatory care-sensitive conditions (see Graph 3.1.2) indicate inefficiencies in primary and outpatient specialist care. These can be partially explained by the low number and uneven geographic distribution of general practitioners (GPs). Moreover, the narrow set of GP competencies, coupled with a payment mechanism that offers weak incentives to provide definitive care and other technical limitations leave GPs unable to act as effective gatekeepers to specialists (World Bank, 2018). In response, authorities devised a modest set of measures in recent years, to expand GPs’ prescription authority and to offer incentives to GPs who fill a vacancy in remote areas. As regards infrastructure, integrated care centres are being developed in underserved areas with support from EU funds to modernise the provision of primary care. Significant preventable mortality rates reflect the high prevalence of risk factors and low spending on prevention. The high prevalence of risk factors such as smoking and poor nutritional habits among the population is a major public health concern. The negative impact of these risk factors on population health is reflected in Slovakia’s above-average number of deaths due to preventable causes () (2.44 v 1.61 per 1,000 people in the EU). This shows that there is significant room for public health interventions to contribute to reducing premature deaths. Current deficits in health promotion and disease prevention are partly attributable to the low level of health spending allocated to prevention in Slovakia, which, at 1% of current expenditure on health in 2017, was one of the lowest in the EU (3%). Graph 3.1.2:Hospital admissions for ambulatory care-sensitive conditions, age-standardised rate per 100.000 population Source: Eurostat, 2017 Current and expected health workforce shortages are significant, especially for GPs and nurses. Assuming no policy changes, Slovakia is projected to endure a shortfall of more than 3,000 doctors (20% of active doctors) and 9,900 nurses (33% of active nurses) by 2030 (Ministry of Health, 2018b). Although the number of practising doctors in 2017 is comparable to the EU average (3.4 v 3.6 per 1,000 people in the EU), the GP-to-specialist ratio is significantly lower. This, combined with an increasingly high average age of practising GPs (57 years in 2016, Ministry of Finance, 2019b) and a low number of medical graduates that specialise in general practice (9% v 17% in the EU, World Bank, 2018), heightens concerns for the future supply of GPs. In addition to this, the number of nurses in Slovakia is significantly lower than the EU average (5.7 v 8.5 per 1,000 people, OECD/European Observatory on Health Systems and Policies, 2019). In light of these risks, the government has stepped up efforts to tackle health workforce shortages and improve retention. On top of salary increases for non-doctor personnel, the government increased the capacity of universities to train medical students, extended the GP residency programme set up in 2013 and set up a scholarship for nursing students conditional upon accepting to practise in Slovakia for five years (Ministry of Finance, 2019b). Banking sector Overall, Slovakia’s banking sector remains sound and well capitalised. Foreign owned banks account for more than 90% of market share. Total banking sector capitalisation fell slightly in 2018 but overall has remained stable in recent years. This is thanks to profit retention, which stabilised the total capital ratio at 18.2% in June 2019, equalling the euro area average. The common equity Tier 1 (CET1) decreased slightly in 2018 but recovered in 2019 and stood at 16.0% in the first half of 2019, i.e. above the euro area average. The counter-cyclical buffer, introduced in 2015 and raised several times since, will be increased to 2% as of 1 August 2020. Like in many Member States, Basel 3 might increase capital requirements. Macroprudential measures have contributed to attenuate mortgage growth. The central bank also introduced borrower-based limits in 2014 and has since tightened them repeatedly (). Consequently, the loan-to-value ratio at origination has fallen significantly and indebtedness has decelerated. Most mortgagees opt for rather longer fixed interest rate periods to limit their vulnerability in case of rising interest rates. These macroprudential measures have decelerated aggregated mortgage attribution (see Section on housing below). Further gains in effectiveness of tackling overheating and the attractiveness of debt-financing house purchases could come from increasing property taxation (see Section 3.1). Banks continue to be profitable, but lower interest rates reduced their profit margins. Return on equity (ROE) has been rather stable at around 10% until the end of 2018, but has since fallen to 8.5% due to lower interest rates and, in turn, lower intermediation margins. Even though net interest income remains the main source of profit, banks have maintained their profit ratios by widening lending activity (mostly via housing loans). This translated into an increase of the loan-to-deposit ratio from around 90% at the end of 2016 to 101.5% in the first half of 2019, still significantly lower than the euro area average. Mortgage competition increased: in December 2018, 61% of new mortgages had been intermediated via mortgage brokers, compressing the lending margin. Despite this compression, intermediation income has somewhat held up thanks to volume effects. Private sector loan growth decelerated from 10.6% in June 2018 to 7.1% in July 2019. In a system where banks depend pre-dominantly on intermediation income, smaller banks with weaker asset quality have seen their profitability fall disproportionally, whereas the systemic banks’ profitability has held up rather well. The recent doubling of the bank levy will further weigh on profitability. As the tax was set to be abolished by 2020, banks set long-term loan interest rates on different assumptions. The doubling of the tax does not have a time limit. As the tax is levied independent of profits, it might result in decreased macro-financial stability, as it will push more banks into the loss-making zone. It might also strengthen pro-cyclicality, as the levy’s base is independent from the inherent riskiness of bank assets (European Central Bank, 2019). The non-performing loans (NPL) ratio remains below average. It has decreased significantly in recent years, from around 5% in 2016 to 3.1% in June 2019, below the euro area average of 3.6%. Similarly, the coverage ratio has increased steadily in the last three years, standing at 69.4% in June 2019. However, the macroeconomic slowdown and current financial conditions could pose risks. Albeit less strong, the spiral between property prices and mortgage loans, fuelled by current lending conditions and the need of banks to widen their client portfolio, could contribute negatively to the medium term outlook. Sensitivity analysis for an extended low interest environment points to potential sharp declines in banking sector profits by 2021. Analysis carried out by the central bank indicates that, under the baseline – i.e. with interest rates staying at their 2018 level – profits would fall from €594 million at the end of 2018 (corresponding to a return on equity of 9.3%) to €485 million by the end of 2021, or an average decline of 18% for the banking system as a whole. A second scenario examines what would happen if interest rates for housing loans fell gradually from 1.6% to 1.0%. Under this scenario, profits would decrease by 32% by 2021. The most severe scenario adds a worsening of asset quality with an increase in the NPL ratio from 3.2% to 5.2%. In this case, there would be a differentiated impact with profits of large banks receding by 18%, while smaller banks making a slight loss. Anti-money laundering Limited understanding of money laundering risks and insufficient supervision results in underreporting by professionals involved in company formation. Despite the extensive use of companies in laundering schemes, professionals involved in company formation report very few suspicious transactions(): in 2018, they submitted only four out of the 2,509 reports received by the financial intelligence unit (Ministry of Interior, 2019a). While effective supervision of these professionals might improve reporting, only five staff members are allocated to this task, with limited training. Failure to detect crime early and an inadequate legal framework constrain prosecutors of money laundering cases. Despite the high conviction rates, until recently money laundering cases were linked to minor crimes. Ongoing cases are more prominent, but require significant effort to carry out swift financial and criminal investigations, as limited understanding of new trends in activities by international organised crime (mostly economic crime) hampers early detection and targeted investigations(). The lack of a strong framework for sanctions and confiscation also limits law enforcement capacity to recover proceeds from money laundering. The government announced its intention to strengthen its preventive and sanctioning system, but so far, progress has been limited. Based on the weaknesses identified in the national risk assessment, in early 2019 the government drew up an action plan to combat money laundering and terrorist financing. The timeline for delivering on the action plan is ambitious and aims to get the anti-money laundering framework fit by June 2020. Progress has been limited and efforts to strengthen the sanctioning system have been rejected by Parliament twice. To date, the financial intelligence unit has received no additional staff to deal with supervisory tasks. No new training has been provided to help investigators better target the activities of international organised crime. Delayed transposition of the 5th anti-money laundering directive also deprives competent authorities of key tools such as the central register of bank accounts. Housing House prices continue to grow. In real terms, house prices grew by 8.6% year-on-year in the third quarter of 2019, the second highest growth rate since the crisis. House prices are set to grow by 5.7% in real terms in 2019, slightly faster than in 2018 (+5.0%) and 2017 (+4.4%). This growth has been present in most regions and types of dwellings, placing price levels around pre-crisis peaks. Growth rates have been rather homogenous across the different regions, except in Košice, where prices have decreased year-on-year by 3.3% on average since 2018. Bratislava has a much higher price level compared to the rest of the country at €2,148 / m2 in 2018, i.e. €1,100 / m2 above the national average. Slovakia has a low but increasing and positive valuation gap. According to internal calculations made by the Commission, the Slovak housing market was overvalued by 4.8% in 2018, which represents an increase of 3.8 percentage points compared to 2017. Despite the increase, the valuation gap is still around the long-run average, and the increase mainly stems from the price-to-rent ratio, which increased by 7.8 percentage points in 2018. This entails that house prices have increased at a faster rate than rents, although this indicator should be treated with caution as the rental market is small and mostly limited to the Bratislava region. Meanwhile, estimates from the central bank point to an overvaluation of around 12.5% in the second half of 2019 (NBS, 2019). The sustained price increase has had an impact on affordability, even in a context of decreasing interest rates. Year-on-year growth in deflated house prices has outpaced real wage growth by five percentage points on average since 2014, worsening affordability despite low financing costs. On average, it takes 8.1 years to buy a 100m2 apartment at the current income level, which is low compared to the EU average. Affordability problems are most acute in the Bratislava region, where it takes 39% more years of income to buy a house considering the regional income level compared to the country average ().

Despite an increase in construction, supply constraints continue to fuel price growth. In 2018, the number of completed dwellings grew markedly by 10.6% year-on-year, reaching more than 22,000 dwellings, the highest level since the crisis. The number of started dwellings has outpaced that of completed dwellings since 2015, thus increasing the number of dwellings under construction. Yet, a substantial proportion of dwellings under construction have already been sold, suggesting that construction levels might still not be enough to match the strong demand (NBS, 2019b). Graph 3.2.1:Housing construction and decrease in number of dwellings Source: Slovak Statistical Office The lengthy construction permit process slows down supply side responses. The number of building permits issued fell during 2019, after a moderate increase between 2017 and 2018. In the second quarter of 2019, some 4,335 building permits were issued, which is substantially lower compared to pre-crisis peaks (7,143 in Q3-2018). Slovakia continues to rank highest in the OECD in terms of the number of days it takes to acquire a building permit: 300 days on average, i.e. almost twice the EU average (174.6 days) (World Bank, 2019). This limits the ability of supply to quickly adapt to shifts in demand. The building permit process is expected to become more efficient with the implementation of the three packages of measures to reduce the administrative and regulatory burden (see Section 3.4.4), but the impact will take time to unfold. An underdeveloped rental market fuels demand in the real estate sector and hampers labour mobility. About 90.1% of people in Slovakia live in an owned house, more than 24 percentage points higher than the EU average (Eurostat data). This is the combined result of: a) a lack of public rental housing; b) a legal framework that favours ownership over renting; and c) the large sell-off of apartments into private ownership after the fall of the communist regime. Such a thin rental market reduces the mobility of students and temporary workers. For instance, 84.2% of people between 18 and 29 years old live with their parents, compared to 68.2% in the EU (Eurostat data). Moreover, as homeowners are more attached to their homes and regions due to high transaction costs, the high rate of homeownership can also make job matching across regions more inefficient, and lead to larger regional disparities in unemployment in the event of adverse economic shocks (see Section 3.3). The lack of alternative housing options has also shifted demand to the real-estate sector, putting an upward pressure on prices. Investing in public housing and adjusting the legal framework could help develop the rental market. According to the Slovak Statistical Office, the number of public housing dwellings built has been decreasing steadily, from 1,545 completed dwellings in 2012 to just 195 in 2018. Investing in public housing could ease supply shortages and help serve temporary workers, as well as those with lower incomes insofar as it provides housing at a lower cost than on a pure market basis. Simplifying administrative procedures for municipalities and regions to obtain dedicated funding may also help. Measures taken to address these challenges relate to the procurement of boarding houses for employees and tax exemptions of non-monetary income to partially compensate the employer for the cost of accommodation. Effective as of January 2020, loan conditions to procure rental apartments were improved for both businesses and local governments, including by raising the thresholds for credits and costs. A better public transport infrastructure (see Section 3.4.2) that can support suburban commuting could reduce the demand and price pressures in the main cities and reduce private indebtedness, by effectively increasing land supply. Both landlord and tenant rights could be strengthened by protecting landlords’ property rights while ensuring stability and predictability for tenants (European Commission, 2015). Private indebtedness Household credit continues to grow, but at a more moderate pace. Household credit has been increasing steadily since Slovakia’s accession to the EU in 2004, particularly compared to peer countries (see Graph 3.2.2.). In the third quarter of 2019, household debt reached its highest level on record at 43.4% of GDP, still below the Commission’s prudential benchmark of 55% but above the fundamental-based one (28%). This growth has been the result of a low interest rate environment, strong labour market performance and rising incomes, which encouraged households to take on credit. Low credit margins in the banking sector also created incentives to increase banks’ lending activity. However, growth has slowed in 2019, with year-on-year growth of household debt-to-GDP growing at an average rate of 2.7%, much lower than the long-term average of 11.3%. Macroprudential rules have contributed to the slower growth in household debt. The deceleration of household debt is mainly attributable to a moderation in the growth of loans for house purchase, which saw its growth drop to 10% in 2019, compared to 12% in 2018. The macroprudential measures put forward by the central bank contributed to this deceleration, particularly by raising the bar for lending to the riskiest borrowers through the debt service to income ceiling (NBS, 2019b). The loan-to-value ratio limits also helped mitigate the increase in the loan value at origination and the risk of defaults in the event of a deterioration in economic activity (NBS, 2019). Beyond these measures, a more stable average interest rate, coupled with a gradual saturation of the credit market – as loan penetration increased markedly and housing loans are concentrated in younger age cohorts – have contributed the growth moderation in housing loans, too. In addition, consumer credit growth decreased to 1.2% in 2019 (vs. 13.4% in 2018), as a result of quick loan repayment. Graph 3.2.2:Household debt as % of GDP Source: Eurostat Although growth in household debt has decelerated, a number of risks to financial stability remain. Firstly, a low interest rate environment continues to contribute to the elevated demand for loans. Rising property prices, which have surged in the second half of 2019, will likely continue to increase the value of loans taken by households. This should be particularly monitored, since households that take loans with high debt-to-income (DTI) and loan-to-value (LTV) ratios also feature other risky characteristics, such as relatively low income and longer maturities (NBS, 2019b). Moreover, a non-negligible proportion of loans with simultaneously high DTI and LTV ratio limits also points to underlying risks in the market. The rising average age of borrowers at the loan maturity date could also represent a challenge, as it reduces the scope for extending the loan term as a means of reducing the instalments of a distressed borrower. All these factors, coupled with a low net financial assets to GDP ratio, could lead to financial instability if there are negative economic shocks. The NBS thus reduced the limit on the debt-service-to-income ratio from 80% to 60% in January 2020. Labour market performance Labour market performance continued to improve amid continuous employment growth. Employment levels increased further by about 30,000 people between Q3-2018 and Q3-2019, corresponding to an average growth of 2.3%. The employment rate (for people aged 20-64) peaked at 73.3%, which is 0.8 pps more than one year before and above the Europe 2020 target of 72%. This improvement in the employment rate can be partially explained by the continuous decline in working age population, which started in 2012 and amounted to 4.1% in the past six years. In Q3-2019, unemployment levels stood at 157,000, which is around 40% of the levels reached in 2013 at the start of the recovery, and the unemployment rate fell further to 5.7% (0.4 pp less than one year before). Graph 3.3.1:Unemployment rates by district (September 2019) Source: Slovak Central Office of Labour, Social Affairs and Family The positive trends hide significant regional disparities. In 2018, the gap between employment rates in the best and worst performing regions was more than 10 pps. Bratislava performed best (79.9%), followed by Western Slovakia (73.9%), Central Slovakia (71.9%) and Eastern Slovakia (68.1%). Similarly, the unemployment rate in Bratislava (2.9%) was more than 7 pps below that in Eastern Slovakia (10.1%). Note that, in some districts, the unemployment rate reaches 20% (see Graph 3.3.1). These disparities are in part explained by the location of top automotive producers which – including the supply chain – account for an estimated 8.5% of total employment (Box 1.1). Disadvantaged persons on the labour market In 2018, the share of young people neither in employment nor in education and training (NEET) continued to approach the EU average. In the age group 15-29, the share of NEETs was 14.6% compared to the EU average of 12.9%. The Youth Guarantee could help these groups, but its delivery is largely project-based and implemented through the traditional active labour market policies system, therefore without systemic coordination with social policy measures. For instance, jobseekers classified as uncooperative by the public employment system are subject to deregistration, which hampers further follow-up and complicates the outreach towards NEETs. Long-term unemployment is dropping, but it remains high in particular for young people and in Eastern regions. As a proportion of the active population, the number of long-term unemployed decreased by 0.9 pps year-on-year to 3 % in Q3-2019, which is still above the EU average of 2.5 %. Long-term unemployment remains a challenge for young people: this rate is still well above the EU average (6.6% compared to 3.3%), accentuating regional disparities (2.1% in West Slovakia as opposed to 10% in East Slovakia). The incidence of unemployment and long-term unemployment continues to be particularly high among the Roma population. Social entrepreneurship is gaining importance as a tool to combat the long-term unemployment of marginalised groups. The number of social enterprises () and their staffing have increased progressively, with 38 registered enterprises compared to 7 in 2018. Out of these 38 social enterprises, 32 employ a total of 452 marginalised Roma (Ministry of Interior, 2019b). However, the EU funds earmarked for support to social enterprises remain largely unused. Spending on active labour market policies is low and, despite progress, service provision to vulnerable groups has room for improvement. Spending (LMP categories 2-7) amounted to 0.185% of GDP in 2017, which is less than half of the EU average. At the same time, with unemployment dropping and increased European Social Fund support to staff at public employment services, caseload per staff was reduced significantly (from 550-620 applicants in 2014 to 220 applicants in 2018). However, the use of individualised counselling remains limited. Cooperation between public employment services and social services for the groups furthest away from the labour market is weak and the involvement of non-governmental providers and external institutions (e.g. sheltered employment providers, centres for homeless persons and drug-addicts) remains poorly developed (Kešelová et al., 2018). Employment incentives are still Slovakia’s dominant active labour market policy tool. Re-training courses are offered to eligible job-seekers under the REPAS+ and KOMPAS+ programmes, but the offer of training tailored to low-skilled people is limited, with a lack of systemic support for second chance education (Kešelová et al., 2018). This is an issue because of the high unemployment rate among low-skilled people, who are enrolled in activation works with no upskilling component (Ministry of Finance, 2019c).

Graph 3.3.2:Gender employment gap by age group, 2018 Source: Eurostat The labour market situation of women is gradually improving, but the employment and wage gender gaps remain significant. Although the overall gender employment gap is close to the EU average, this figures masks significant age-related differences: the gap is rather small in the over-40 age group (1 to 7.8 pps depending on cohort), but substantial in the 20-39 age group (18.3 to 27.9 pps, see Graph 3.3.2). The labour market participation of younger women continues to be low, constrained by the take-up of family obligations (encouraged by long paid maternity leaves ()), lack of childcare facilities, in particular for children under 3 years of age, and low uptake of flexible work arrangements. Participation in early childhood education and care is one of lowest in the EU and the provision of childcare facilities for children under 3 is unsatisfactory across the whole country. At 38.1% in 2018, the proportion of women who are inactive due to caring responsibilities is significantly higher than the EU average (31.8%). Similarly, as in most Eastern European countries, the proportion of women working part-time remains below 10%. Sectoral segregation contributes to the high gender pay gap. At 19.8% in 2018, the unadjusted gender pay gap is higher than the EU average (16%) and has increased over the last year. Women are overrepresented in the public sector (72%), including in relatively low paying jobs such as education, healthcare, social services and public administration. In the private sector, women occupy only 42% of positions. Last year's salary increases, introduced in sectors predominantly occupied by women, are helping to close the gender pay gap. The gender pension gap is below 10% and among the lowest in the EU. Social dialogue Collective bargaining has a sound institutional structure. However, an increasing number of issues are being addressed with legislation, bypassing social partners. Both unions and employers increasingly pursue their objectives through mechanisms other than collective bargaining, such as political lobbying, public protests and media campaigns, as legislative amendments are seen to prove to be a more effective means to the desired end (Müller, T. et al., 2019). The capacity of social partners is largely dependent on EU financial support, leaving social partners vulnerable to potential disruptions in this stream of financing. Poverty and social exclusion The proportion of people at risk of poverty or social exclusion is comparatively low, but it is not decreasing and some groups and regions are in a particularly vulnerable position. Despite robust economic growth, the risk of poverty or social exclusion remained at 16.3% in 2018 (compared to a 21.9% EU average). Regional disparities are substantial: the proportion of people at risk of poverty or social exclusion ranges from 7.9% in Bratislava to 21.7% in East Slovakia. Certain groups are in a particularly vulnerable position, including children from socially disadvantaged families, Roma, single-parent families (45.7%), and persons with disabilities (Ministry of Finance, 2019c). Every fourth child (aged 0-17; 23.8%) faces a risk-of-poverty or social exclusion (AROPE). The AROPE rate for families with three or more children was 37.7% in 2017 vs. 29.2% in the EU. Graph 3.3.3:AROPE levels by age group Source: Eurostat A large proportion of the Roma population lives in poverty and/or in poor housing conditions. The updated Atlas of Roma communities published in 2019 estimates that 416,000 Roma people live in 1043 concentrated communities (Ministry of Interior, 2019b). Of these, 46,500 live in rough conditions (), more than when the previous data were collected in 2013. Among 230,000 of marginalized Roma, 84.7% live below the poverty threshold (corresponding to EUR 3.80 per day) and 56% are subject to severe material deprivation (compared to 7% for overall population in Slovakia; Ministry of Interior 2020). () While microfinance schemes for own construction through financial instruments show some very good practices, these have not reached a large enough scale. Land ownership is often fragmented or unknown, impeding construction works and necessary building approval processes. Slovakia lacks a vision on the future of marginalized settlements. Individual policies in education, labour market policies, health care, housing and financial inclusion lack effective coordination (OECD 2019). Access to social and essential services is hampered by missing infrastructure. The communities often lack drinking water infrastructure, access to electricity and heating systems, road infrastructure and paved roads. Despite the available EU funds, municipalities’ take-up of investment opportunities to address these issues remains limited. According to the new Atlas report, there are no childcare places available in 183 municipalities with Roma population. Also, only 163 municipalities run a community centre, and in 153 community activities are organised by church organisations; both of these help expand secondary social networks in marginalised communities (Ministry of Interior, 2019b; Hrustič, T and Podolinská, T., 2010). () Poverty is persistent in particular groups indicating low social mobility. Some 80.4% of children of parents with a low education level are at risk of poverty or social exclusion, which is significantly higher than the EU average of 51.3% (2018). In turn, children from socially disadvantaged families face significant barriers in education (see below). The probability of disadvantages being passed on through generations is very high for the Roma population, especially for Roma people living in segregated settlements (OECD, 2019). For Roma children living in concentrated residential areas, the probability of becoming unemployed or earning less than the minimum wage in irregular work is almost 70%. This is much higher than that of the general population (25%) and even higher than the poorest non-Roma population (45%; OECD, 2019). Moreover, Slovakia lacks a systematic early support for children in poverty and children with a disability (Ministry of Finance, 2019c). Only 8.2% out of estimated 14,000 children with a disability (0-7 years old) have access to early support services (APPVI, 2019). Child poverty, in particular among Roma communities, is the main circumstance in which the state provides foster care. The Slovak legal system does not allow for the placement of children into institutional foster care on the grounds of poverty or deprivation, but research suggests that poor housing conditions are one of the most frequent reasons for putting Roma children into institutional custody (Kríglerová, E.G. et al., 2015). In 2018, 13,863 children lived in substitute care, of whom 37% in institutional care, with the average length of stay being slightly over four years. Access to social services The division of responsibilities for social services between municipalities and regions is often unclear. This leads to uneven access to social services across the country. Municipalities are obliged to adopt community plans for the development of social services, and these are often formalistic. There is a lack of cooperation among neighbouring localities and no systematic aggregated mapping and forecasting of services is carried out at national and regional level. In addition, the financial support to social services under the European Social Fund is currently fragmented between the Implementation Agency of the Ministry of Labour and the Office of the Roma Plenipotentiary under the Ministry of Interior, duplicating administrative structures. Although EU funded services related to field social work, crisis intervention, community centres and healthcare assistance are generally well perceived (Ministry of Finance, 2019c), they are limited in coverage and lack coordination, often depending on active stakeholders applying for EU funded projects. Even there, the administration of cash-flow is often delayed, resulting in interruptions in the provision of services. Moreover, providers are often concerned about long-term sustainability of financial support in case EU funding is phased out (Škobla, D. et al., 2018). Despite newly launched ESF-funded projects, professions related to social work remain financially unattractive (European Commission, 2019b). Since 2009, all social service providers are subject to regulatory quality assessment. However, such assessment has been limited and existing research has so far shown a subsequent increase in quality (Repková, K., 2019). An EU-funded project, “Quality of social services”, launched in June 2019 contributes to the methodological support and guidance to public and non-public providers of social services as well as quality evaluators. Financial resources and a systematic vision of how to meet the increasing demand for long-term care are lacking. Responsibility for delivering long-term care is shared between the Ministry of Labour, Social Affairs and Family, the Ministry of Health, regional governments, municipalities and non-public providers, without a clear division of responsibilities and no coordination between social security and healthcare systems. Public expenditure on long-term care reached 0.9% as a share of GDP, way below the EU average of 1.6%. Consequently, also the number of long-term care workers is among the lowest in the EU (OECD 2019e). Long-term care heavily relies on informal care by family members. Up to 71% of people with a family member who requires long-term care organised this on their own, which keeps a sizeable part of the population outside the labour market. Only the persons diagnosed with severe disabilities (estimated at 20% of those in need of LTC) receive financial support () (Ministry of Finance, 2019b). Since July 2019, the nursing benefit to care for a family member increased to match the net minimum wage. However, respite services for Slovakia’s 53,000 informal carers (78% of whom are women) of persons with severe disabilities are practically non-existent (Filipová 2018), with impacts on their families e.g. as regards the labour market participation, as well as society (Ministry of Finance, 2019b). Formal long-term care continues to be dominated by residential facilities and lacks sufficient home care and community-based care services. In 2017, there were 47,125 places in social services facilities, with approximately 40% serving pensioners and the other 60% serving people with various types of disabilities or special needs (AOPP, 2018). However, this type of care remains under-resourced, with up to 20% of applicants waiting for a placement for more than one year. Nursing services, which are the competence of municipalities, are currently dependent on EU funds and deployed in an unsustainable and unsystematic way, depending on successful project applications. Therefore, the percentage of elderly people (65+) who use home c