EUROPEAN COMMISSION Brussels,7.3.2018 SWD(2018) 223 final COMMISSION STAFF WORKING DOCUMENT Country Report Slovakia 2018 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 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(2018) 120 final}





Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Reform priorities 3.1.Public finances and taxation 3.2.Financial sector 3.3.Labour market, education and social policies 3.4. Investment 3.5. Sectoral policies38 Annex A: Overview Table42 Annex B: MIP Scoreboard47 Annex C: Standard Tables48 References54 LIST OF Tables Table 1.1:Key economic and financial indicators10 Table 2.1:Summary table on 2017 CSR assessment Table 3.3.1:ALMP expenditure by type of actions (% of GDP, 2015)

Table B.1:MIP Scoreboard (AMR 2018) Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard Indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green Growth LIST OF Graphs Graph 1.1: Real GDP and its components Graph 1.2: GNI per person in purchasing power standards (PPS) as a share of EU-28 Graph 1.3: Investment Graph 1.4: Exports, REER and productivity Graph 1.5: Current account balance Graph 1.6: Unemployment and activity Graph 1.7: Labour shortages (% of respondents) Graph 1.8: Inflation (y-o-y in %) Graph 1.9: Loans to sectors (y-o-y in %) Graph 1.10: Nominal house prices Graph 2.1: Overall multiannual implementation of 2011-2017 CSRs to date

Graph 3.1.1: VAT compliance gap (2011-2015) Graph 3.2.1: House prices and mortgage lending Graph 3.2.2: Housing market overvaluation gap Graph 3.2.3: Housing investment indicators Graph 3.3.1: Unemployment duration (2016) Graph 3.3.2: Employment rate by age and education level (2016) Graph 3.3.3: Employment rate by gender and age (2016) Graph 3.3.4: At-risk-of-poverty gap (2016) Graph 3.3.5: PISA 2015 results by language spoken at home (in PISA score points) Graph 3.4.1: Perceived judicial independence (2016-17) Graph 3.5.1: RDI investment by sector LIST OF Boxes Box 2.1: Tangible results delivered through EU support to structural change in Slovakia Box 2.1: Policy Highlights: The 'Value for Money' Project Box 3.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 3.4.1: Investment challenges and reforms in Slovakia Executive summary

Slovakia's positive economic developments offer a chance to tackle remaining structural challenges and raise its growth potential. ( ) Addressing long-standing weaknesses in the areas of labour market inclusion, education, healthcare, public administration and corruption could prove a transformative step in utilising Slovakia's productive potential and public funds in the best possible way. Concerted policy efforts may also shield the economy from a potential slowdown and support the diversification of the economy, allowing it to move up the value chain. Slovakia's economic expansion continues at a swift pace. According to the latest Commission forecast, real GDP is projected to have increased by 3.4 % in 2017 due to solid household spending growth amidst a strong labour market recovery. Investment activity recovered slightly in 2017 from the low level of the previous year but failed to make a sizeable contribution to growth. Real GDP growth is expected to reach 4 % in 2018 and 4.2% in 2019. Accelerating private consumption is set to remain the strongest driver of growth for both years, buttressed by rising employment and robust wage growth. Both private and government fixed investment is likely to accelerate markedly in 2018 and 2019. External demand is also expected to act as an increasingly important source of economic growth, partly owing to expanding production and export facilities in the manufacturing sector. The labour market witnessed further positive developments. The employment rate rose to 71.2 % (third quarter of 2017) and the unemployment rate fell to 8.1 % in 2017. Further improvements in the labour market are expected in the medium term. However, long-term unemployment and limited job opportunities for disadvantaged groups, low internal mobility and large disparities between the western region around Bratislava and the east of the country continue to hamper economic development. The tightening of the labour market is accompanied by shortages of skilled labour in some sectors of the economy. Poor educational outcomes and inequalities based on socioeconomic background are major obstacles for inclusive growth. Developments in the wider economy are generally favourable. As economic growth is expected to remain well above the EU average, Slovakia's income convergence process is expected to resume. However, some regions have failed to attract major investment, which has exacerbated regional disparities in many economic and social areas. Although consumer price inflation is set to increase, sizeable wage increases are expected to ensure a rise in real wages and real disposable household incomes. Growth in house prices has picked up in the context of low interest rates and limited housing supply. However, there are no signs yet of the housing market being overvalued. Fiscal consolidation is set to continue, supported by a favourable economic environment. In 2018 the government deficit is projected to fall to around -1 % of GDP and the debt-to-GDP ratio is projected to decline to below 50% of GDP. Slovakia has made some progress in addressing the 2017 country-specific recommendations. Some progress has been made in a number of policy areas, including on improving the cost-effectiveness of the healthcare system, improving activation measures for disadvantaged groups, enhancing employment opportunities for women, and adopting and implementing a comprehensive plan to lower administrative and regulatory barriers for businesses. Only limited progress has been made in improving the quality of education, increasing the participation of Roma in education, improving competition and transparency in public procurement, and in improving the effectiveness of the justice system. No progress has been achieved in stepping up the fight against corruption. Regarding the national targets under the Europe 2020 strategy, Slovakia currently meets, or is on track towards meeting, the prospective targets for the employment rate, greenhouse gas emissions, renewable energy use, energy efficiency and reducing the number of people at risk of poverty and social exclusion. While a sufficient reduction in the early school leaving rate appears to be attainable by 2020, the indicator has deteriorated recently and continued action is needed to reach the targets. The distance to the targets for Research and Development (R&D) intensity and tertiary education remains significant, but while is progressively narrowing in the latter case, sustained effort is needed to attain the R&D target again. Slovakia faces challenges with regard to a number of indicators of the Social Scoreboard supporting the European Pillar of Social Rights. Whilst the high economic growth has translated into a significant improvement of employment outcomes, challenges in areas such as childcare, active labour market policies and social transfers are apparent. Large gender disparities in the labour market persist. Access to inclusive education and social housing is limited. On the positive side, income inequality remains very low and poverty rates are decreasing. Key structural issues analysed in this report, which point to particular challenges for Slovakia's economy, are the following: ·Fiscal revenues are increasing and tax compliance has improved but a large VAT gap persists. In light of persistent issues further anti-fraud measures are planned for 2018. While fiscal incentives promoting R&D were increased, property taxation remains a weak revenue source. The medium-term budgeting framework is weakened by a largely cash-based state budget management system. Public spending reviews are nevertheless proving powerful tools for raising spending efficiency and effectiveness. ·Long-term sustainability challenges stem from the pension and healthcare systems despite reforms. Automatic increases in the pension age will mitigate the impact of adverse demographic trends. The cost-effectiveness of the healthcare system is improving, but from a low level. A public e-health system has been introduced after long delays but limitations in terms of basic functionalities and user-friendliness may hinder its use. A pilot project for a diagnosis-linked funding system for healthcare providers was launched in 2017. While action to rationalise hospital care continues, plans to create streamlined, integrated care centres have not advanced. ·Structural labour market weaknesses persist. In light of consistently high long-term unemployment and increasing skill shortages, Slovakia has started implementing the action plan for the integration of the long-term unemployed focusing on personalised services. However, the rate of participation in active labour market policies is still low and their upskilling component remains limited. Low-skilled workers, the Roma community and young people continue to face high levels of unemployment, amplified by high regional disparities. The gender employment gap remains high, with women's employment opportunities conflicting with care responsibilities. Efforts are being made to improve access to childcare through investment from EU funds, but quality and affordable care, in particular for children under the age of 3, are still lacking. Labour market improvements contributed to the decrease in the risk of poverty or social exclusion but the intensity of poverty is relatively high and not addressed sufficiently by social inclusion measures. Social housing remains underdeveloped and eligibility criteria for receiving unemployment benefits are strict. ·Reforms are taking place in the education and training systems, but the quality and equity of educational outcomes remain of significant concern. Despite some improvements, low pay for teachers limits the attractiveness of the profession. Student performance in basic skills is weak and shows a high level of inequality, with low achievement strongly linked to socioeconomic background. Regional disparities are large, particularly affecting the Roma community. There is also insufficient inclusion of Roma children into mainstream education in light of their over-representation in special schools, with no recent progress visible. Education continues to be relatively underfunded at all levels and adult participation in life-long learning activities is still very low. ·The overall outlook for public and private investment is favourable but barriers to investment persist. Rising labour shortages in some of Slovakia's key sectors represent a large obstacle to raising investment and production levels. Corruption, complex administrative procedures, fast-changing regulations and the poor quality of regulatory bodies weigh on the business environment. Concerns over the ineffectiveness of the justice system also hold back investment. ·Slovakia's public administration shows a mix of progress and continued challenges. Steps have been taken to improve the insolvency framework and the use of regulatory impact assessments. The new Civil Service Act is showing its first results thanks to the modernisation of public human resource management. However, corruption perceptions remain high and prosecutions for such offences have fallen further. The lack of accountability in bodies tasked with fighting corruption and only moderately effective whistle-blower protection hinder the fight against corruption. Public procurement legislation is being modernised, but anti-competitive practices remain a problem. Courts are managing to deal better with their caseload, but concerns persist over the independence of the judiciary. ·Boosting innovation and resource efficiency can ease the transition to a knowledge-based, greener and more diversified economy. However, total R&D investment fell in 2016 and business R&D intensity remains very low. The governing framework for R&D policy is weak and measures to improve the cooperation between businesses and academia are advancing only slowly. The lack of skilled workers in the sizeable information and communications technology sector is being addressed via a 'digital coalition' initiative. Meanwhile, the roll-out of e-government services is proceeding slowly. The services sector is highly regulated and the framework does not appear to function effectively. Energy efficiency is low and the use of landfills is excessive. Recycling rates are very low and air quality remains relatively poor. 1. Economic situation and outlook Growth performance Economic growth in Slovakia has remained solid in recent years, showing substantial improvements in the labour market but a somewhat uneven pattern in investment. After picking up strongly in 2015, growth in real GDP softened modestly to 3.3 % in 2016 on the back of a sharp downturn in total investment (Graph 1.1). This cyclical investment pattern was closely linked to the transition between the programming periods of EU funds. At the same time, the high import intensity of fixed investment meant that declines in investment held back import growth in 2016. Coupled with a solid rise in exports, this resulted in net trade contributing strongly to overall growth. Continued improvements in labour market conditions strengthened private spending, with household budgets benefiting from faster nominal wage growth and subdued dynamics in consumer prices throughout 2016. Graph 1.1:Real GDP and its components Source: European Commission

Real GDP continued to grow at a robust pace of 3.4 % in 2017 and it is expected to strengthen further, led by private consumption. Growth in household spending is projected to have increased to 3.6 % in 2017, boosted by rising employment, solid increases in real wages, low credit costs and upbeat consumer sentiment. These factors will make private consumption a major contributor to overall growth in 2017 and beyond. Economic growth is also expected to benefit from a revival in fixed investment and increasingly positive contributions from net trade, bringing real GDP growth to 4 % in 2018 and 4.2 % in 2019. Strong economic growth is likely to feed through to all segments of the economy, including the buoyant housing market. However, a shrinking supply of skilled workers, coupled with rising demand for labour, is likely to become a potential bottleneck for the Slovak economy. Real economic convergence stalled in recent years despite robust growth. Real GDP per person based on purchasing power climbed to 77 % of the EU average in 2014, and has since remained broadly steady at this level. A similar picture emerges when looking at gross national income (GNI). Slovakia’s relative GNI per person has remained broadly stable since 2013 at around 76 % of the EU-28 average, as more favourable developments in nominal GNI per capita growth were offset by faster price level convergence in Slovakia (Graph 1.2) ( ). However, economic growth in Slovakia is expected to strengthen in the coming years and remain well above the EU average. This increases the chances of Slovakia’s income convergence resuming. Equally, potential growth rates are estimated to remain high at around 3 % per year over the medium term. This is mainly supported by total factor productivity growth, capital investment, and an increasing number of employees. Graph 1.2:GNI per person in purchasing power standards (PPS) as a share of EU-28 Source: European Commission Household consumption Private consumption is expected to remain the main driver of growth in the coming years, backed by a strong labour market and low credit costs. Continued improvements in labour market conditions, such as further job creation and a lower risk of lay-offs are set to secure household incomes. Given the progressive tightening of the labour market, nominal wage growth is expected to gradually increase over the forecast period. Although reviving consumer inflation will lower real disposable income, real wages are projected to rise by some 3 % per year, which will significantly strengthen household budgets. Historically low interest rates and a favourable economic climate are also set to boost private spending, which is projected to maintain robust annual growth of more than 3 % over the forecast period. Investment Investment is likely to peak in 2018 and maintain a solid pace thereafter, driven by both private and public investment spending. Fixed investment probably increased by 1 % in 2017, after contracting sharply at the beginning of the current programming period of EU funds in 2016 (Graph 1.3). The pronounced investment swings of 2015 and 2016 show that EU-funded projects are an important driving force for investment activities in Slovakia, while projects in the current funding period are in the early stages of implementation. Booming investment in the automotive industry and an expected increase in public investment spending, including major infrastructure projects such as the Bratislava ring road, invigorate the investment outlook. The completion of a new car factory is expected to result in annual investment growth peaking at around 6 % in 2018. At the same time, possible delays in large infrastructure projects due to litigation, along with a relatively slow drawdown of EU investment funds, could dampen the investment rebound in the near term. Graph 1.3:Investment Source: European Commission While foreign direct investment (FDI) inflows remain strong, overall investment activity is spread unevenly across the country. Slovakia’s economy has enjoyed steady net inflows of FDI, which have flowed especially into the automotive sector over the past 15 years. While typically such flows are somewhat volatile, gross inflows of FDI remained strong in 2016 and the first half of 2017 at above 5 % of GDP on an annual average. However, rising FDI outflows from Slovakia in recent years have reduced the country’s net FDI stock to around 48 % of GDP in 2016. At the same time, some regions have failed to attract major domestic or foreign investment in recent years, which has exacerbated the already high regional disparities present in many economic and social areas. Regional economic disparities are high. Real GDP per person was more than three times higher in the Bratislava region than in the eastern region in 2015, although this may be distorted by the large share of commuters and neglect the differing price levels between regions. Transport infrastructure that is inadequate or missing represents, besides weaker human capital, one of the main reasons why the central and eastern regions are neglected by foreign investors (see also 2017 Country Report, European Commission 2017a). The unemployment rate remained high in these parts of Slovakia, while businesses face acute labour shortages in the western region. Export performance Slovakia’s net trade is set to strengthen thanks to an increase in foreign demand and expanded production capacities in the automotive sector. Export growth is expected to rise gradually in the coming years, following a moderate slowdown in 2017. New car production facilities are about to launch production over the course of 2018, boosting Slovakia’s production and export capacities. This implies there will be a boost to export performance with robust foreign demand. Imports are likely to increase markedly over the forecast period due to buoyant exports and investment, both of which are relatively import-intensive. In 2019, exports are projected to outperform imports even more strongly, as the latter are somewhat restrained by the softening in investment growth. This would make net trade the second largest contributor to overall growth. At the same time, strong specialisation in the automotive sector leaves the Slovak economy exposed to the risk of global economic fluctuations. The boost to manufacturing technology and labour productivity is expected to more than offset the recent rise in the real effective exchange rate. The strengthening of the euro in 2017, coupled with the recovery in inflation and solid wage growth in Slovakia, slightly dampens the affordability of Slovak exports on international markets. However, strong private investment and the related upgrade of manufacturing technologies, particularly in the automotive sector, promote labour productivity, boost added value and support export performance. Slovakia’s export market shares rose by 5.1 % in 2016, still buttressed by the real effective exchange rate (REER) weakening in 2015, and are projected to have moderately increased also in 2017. Benefiting from strong foreign demand, annual export growth is expected to gradually increase to around 7 % in 2019, in line with the gradual start of production in new and upgraded car factories (Graph 1.5). Graph 1.4:Exports, REER and productivity Source: European Commission The current account balance is expected to remain negative in 2017, reflecting elevated imports for investment and a deteriorating income balance. The Slovak current account recorded a surplus between 2012 and 2015 but a shrinking trade surplus caused it to return to negative territory in 2015, as investment-related imports surged. The current large investments into the automotive industry are likely to keep imports high and the trade balance depressed in 2017 and 2018. The primary income balance has deteriorated since 2015, mainly on the back of elevated dividend outflows from foreign direct investment operations in Slovakia. Graph 1.5:Current account balance Source: European Commission Labour market and social situation The robust economic recovery is bolstering the labour market. Employment reached a record high of 2.5 million in Q3-2017 and is set to increase further. The unemployment rate has been declining continually since 2013. It dropped to a record low of 8.1 % in 2017 (Graph 1.6) and is expected to fall further to below 7 % in 2019. Also the activity rate is set to increase gradually as employment prospects for previously inactive people improve. The tightening of the labour market along with increasing labour shortages in some sectors and regions is bound to exert upward pressure on nominal wages, particularly in an environment of reviving consumer prices. Nominal wage growth is projected to increase to around 5 % but remains in line with strong fundamentals. In 2017, nominal wages are forecast to have risen by 4.0 %, outpacing productivity growth and causing nominal unit labour costs to accelerate from growth of below 1 % in 2016 to 2.3 % in 2017. Overall, in 2017 there is no big gap between actual nominal wage growth and the growth rate that could be predicted based on economic fundamentals, such as developments in prices, unemployment and productivity. As of 2018 the minimum wage was increased to EUR 480. Real wage growth is set to maintain a solid pace of around 3 % throughout the forecast period, thereby supporting households’ real disposable income and private spending.

Graph 1.6:Unemployment and activity Source: European Commission Rises in the activity rate and inflow of foreign workers are unlikely to fully meet the growing demand for skilled labour. The progressive tightening of the labour market is also reflected in greater inflows of foreign workers from EU and non-EU countries. Although the overall proportion of foreign labour in total employment remains low, it has increased significantly in some regions, especially in areas that are major centres of production. This phenomenon is relatively new in Slovakia and suggests that supportive policies to accommodate the change and promote social cohesion are needed. Reported labour shortages have surged across sectors in 2017, dwarfing their rise before the financial crisis (Graph 1.7). Insufficient supply of skilled workers is seen as one of the most pressing issues for businesses in Slovakia, as it forms a major barrier to further investment and economic expansion. At the same time, still-elevated long-term unemployment, as well as low employment rates for certain groups, remain both a social challenge and an untapped resource. Graph 1.7:Labour shortages (% of respondents) Source: European Commission The low labour market participation of disadvantaged groups hampers social cohesion. The Roma, low-skilled people, young people, persons with disabilities, women with care responsibilities and inhabitants in Slovakia's eastern region have difficulties in finding employment. The inadequate design of active labour market policies and insufficient provision of childcare services, reflected in the low share of children under three in formal childcare, as well as low movement of workers within the country and large regional economic disparities contribute to this problem. On the positive side, improving labour market outcomes have led to the continually decreasing at-risk-of-poverty and social exclusion rate (18.1 % in 2016), where Slovakia performs better than the EU average. Income and wealth are comparatively evenly distributed but inequality of opportunity remains high. For Slovakia, the S80/S20 indicator, which measures the ratio of incomes of the richest 20 % of households compared to the poorest, is among the lowest in the EU. This is due to low wage dispersion, rather than the effectiveness of the tax and benefit system. Gross disposable household income per person grew at only around half the rate of GDP per person between 2010 and 2017, indicating a low inclusiveness of growth. Wealth inequality is also among the lowest in the EU, partly due to a high rate of home ownership. Inequality of opportunity remains high, as shown by the high poverty risk faced by children of low-skilled parents (72 pps higher than that of children of high-skilled parents). Educational outcomes are strongly linked to socioeconomic status and the language spoken at home. Inflation Consumer price inflation is set to increase, backed by favourable demand conditions and renewed rises in energy prices. After three years of declining consumer prices, headline inflation firmly entered positive territory in 2017 at 1.4 %, with rising prices in food and services contributing most to the rebound. In contrast, energy prices continued to reduce overall inflation — and in turn bolstered household budgets — for the fifth consecutive year. Overall, consumer inflation is projected to increase to 2 % in 2019. Core inflation (excluding energy and unprocessed food) rose significantly to 1.8 % in 2017 and is projected to gradually increase, reflecting vibrant consumer spending and wage pressures. Graph 1.8:Inflation (y-o-y in %) Source: European Commission Credit growth Credit growth remained robust in the context of record-low interest rates and upbeat economic sentiment. Lending to non-financial corporations rose in 2017 to around 8 % year-on-year from the subdued rates of around 1 % observed between 2012 and 2016. Meanwhile, annual growth in mortgage lending appears to have peaked at close to 15 % year-on-year in early 2017. However, this is still growing swiftly in the context of a buoyant housing market (Graph 1.9). Over recent years, financial leverage indicators show only a moderate rise in the debt of non-financial corporations, which stood at 54 % of GDP in 2016. By contrast, sustained and rapid credit growth to households has caused their debt to rise from 18 % of GDP in 2007 to 38 % in 2016. The financial sector’s total liabilities increased only moderately in 2016, with the largely foreign-owned banking sector remaining well capitalised. Graph 1.9:Loans to sectors (y-o-y in %) Source: ECB, European Commission Housing market Growth in property prices is underpinned by low interest rates, a favourable outlook for household incomes and limited housing supply. The ability of households to borrow has been boosted by a falling risk of unemployment, accelerating earnings growth and record-low interest rates. Annual growth in house prices rose to 7 % in 2017 (Graph 1.10), with the average house price reaching 90 % of its 2008 peak. The strongest recovery was in the Bratislava region, where property prices climbed to 96 % of their pre-crisis value, reflecting in part tight planning restrictions that limit new construction. High rents in more prosperous regions also restrain internal labour mobility, especially from the central and eastern part of the country, where long-term unemployment is still a challenging economic issue. Graph 1.10:Nominal house prices Source: National Bank of Slovakia Public finances The government deficit has been declining since 2015, partly due to the favourable economic backdrop. The deficit fell to 2.2 % of GDP in 2016 and is projected to have declined to 1.6 % in 2017, supported mainly by strong VAT and labour tax revenues due to robust private consumption and improved labour market conditions. The favourable economic environment will also support the revenue consolidation planned for 2018. Most of the expected revenue increases will be used to finance policy-induced revenue shortfalls. The government will also finance an ad hoc increase of pensions for those who retired before the 2004 pension reform (see Section 3.1) and extra spending on public wages and social benefits. The budgetary outlook suggests a further improvement in the medium term. Overall, the government plans to further reduce the headline budget balance in 2018 and 2019. However, a part of the underlying consolidation effort comes at the expense of investment. The debt-to-GDP ratio is projected to decline to below 50 % of GDP in 2018. Buoyant GDP is the principal factor underlying this favourable development. Table 1.1:Key economic and financial indicators (1) NIIP excluding direct investment and portfolio equity shares (2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU foreign-controlled branches. Source: Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 for real GDP and HICP, Autumn forecast 2017 otherwise) 2. Progress with country-specific recommendations

Progress with the implementation of the country-specific recommendations (CSR's) addressed to Slovakia in 2017 ( ) has to be seen in a longer-term perspective since the introduction of the European Semester in 2011. Looking at the multi-annual assessment of the implementation of the CSRs since these were first adopted, 54% of all the CSRs addressed to Slovakia have recorded at least 'some progress'. By contrast, 46% of the CSRs recorded 'limited' or 'no progress' (see Graph 2.1). For instance, some progress has been achieved in the area of taxation and tax compliance, in reforming the pension system, increasing labour market participation and in reducing poverty. Graph 2.1:Overall multiannual implementation of 2011-2017 CSRs to date Source: European Commission Slovakia ensured a timely and durable correction of its excessive deficit. In December 2009 the Council addressed a Recommendation to Slovakia with a view to bringing the excessive deficit situation to an end by 2013 at the latest. Having peaked at 8 % of GDP in 2009, the general government deficit in Slovakia was been brought down to 2.7 % of GDP in 2013, resulting in an abrogation of Slovakia's excessive deficit procedure. The underlying deficit reduction was driven by fiscal consolidation on both the revenue and the expenditure side, including one-off measures. After stagnating between 2013 and 2015, the government deficit was reduced to -1.6 % of GDP in 2017. Slovakia's progress towards its medium-term budgetary objective (MTO), defined as a structural deficit of 0.5% of GDP, has been somewhat uneven since 2013, but in recent years the structural effort has been largely in line with the requirements of the Stability and Growth Pact (SGP). Supported by an improving labour market, labour market policies have become somewhat more focused on disadvantaged groups. Labour market challenges have persisted for many years, but the unemployment rate started to decline from 2014 onwards and has now reached historic lows. Better-targeted support for the long-term unemployed and other vulnerable groups has been on the government's agenda for a number of years. Improving the range and effectiveness of active labour market policies remains a challenge, but the policy emphasis has shifted towards providing better-targeted and individualised support for jobseekers, particularly the long-term unemployed. Very little progress has been made in tackling low Roma participation in the labour market. Some initiatives have been launched in education and childcare in recent years but will take time to feed through into better results. Progress has made towards increasing the capacity of and access to early childhood education and care, particularly for the over threes. For children below this age the legislative framework on childcare services was put in place but places remain limited and can be expensive. Some measures have been taken in order to raise the attractiveness of the teaching profession, including through substantial annual pay rises in 2016 and 2017. The planned raising of entry requirements for teaching and better training are likely to only become visible gradually. A reform to support socially and ethnically inclusive education, including of Roma pupils, entered into force in 2016, but effectively implementing the reform will require further efforts and political commitment. The speed of public administration reform has been uneven but reforms are beginning to pay off. Slovakia's inefficient and ineffective public administration and justice system have long been detracting from the quality of the business environment and have acted as an investment barrier. Government policies have, however, been able to ameliorate a number of challenges, including the weak human resource management and lacking analytical capacity in the civil service. There are clear signs of cumulative progress in the modernisation of public procurement, where a lack of competition and transparency remain key challenges and perceptions of corruption remain high. More generally, efforts to tackle corruption in the public sphere have been limited and are hampered by institutional limitations and an apparent lack of political will. Slovakia has made some progress ( ) in addressing the 2017 country-specific recommendations. Some progress has been made with respect to the fiscal-structural part of CSR 1 regarding improving the cost-effectiveness of the healthcare system. While several commitments of the "Value for Money" project have been fulfilled and appear to have generated some positive, tangible changes leading to savings, several key provisions are still in a pilot phase and may face further delays and implementation challenges in the short term. Some progress has been made on CSR 2, including in improving activation measures for the long-term unemployed via a more individualised approach to activation. Some progress has also been made in improving early childhood education and care thanks to the construction of facilities and strengthening the legislative framework. Limited progress has been made in improving the quality of education. Progress has also been limited in implementing the Roma Action Plan and the legislation to address school desegregation legislation measures that was adopted in 2016. Slovakia has made limited progress in addressing CSR 3, notably in improving competition and transparency in public procurement. While procedural improvements have been made and healthcare procurement is being centralised, best procurement practices are still not widely adopted. There has been no discernible progress in fighting corruption as corruption cases involving state enterprises and large public assets are not yet properly investigated and administrative resources in the special prosecutions service are being reduced. Some progress has been made in lowering administrative and regulatory barriers for businesses in light of the government's adoption of a package of measures to be implemented. Limited progress has been made in improving the effectiveness of the justice system, as case length statistics appear favourable when taken at face value but contrast with continued concerns about judicial independence. Table 2.1:Summary table on 2017 CSR assessment Source: European Commission European Structural and Investment Funds (ESI Funds) are pivotal in addressing key challenges to inclusive growth and convergence in Slovakia, notably by investing in public administration reform, improving links between R&D and industry and strengthening the integrated approach to healthcare. ESI Funds also help reduce youth unemployment and support women's participation in the labour market by developing childcare facilities. They strengthen the link between education and the labour market and increase the inclusiveness of mainstream education for marginalised Roma communities. Box 2.1: Tangible results delivered through EU support to structural change in Slovakia Slovakia receives significant European Structural and Investment Funds (ESI Funds) support of up to EUR 15 billion until 2020. This represents around 3 % of GDP annually over the period 2014-2018 and 60% of public investment ( I ). By 31 December 2017, an estimated EUR 7.7 billion (51 % of the total) was allocated to projects on the ground. This has paved the way for 45 000 people to gain employment, the capacity of kindergartens to be extended by an additional 4 780 places in 152 pre-school facilities, the modernisation of more than ⅓ of hospitals of the core network, the creation of 77 pre-school facilities, and for various forms of support for SMEs (innovation, starting-up, and consultancy/advisory services). ESI Funds help address structural policy challenges and implement country-specific recommendations. Actions financed cover, among others, support for public and private R&D; strategic and sustainable transport infrastructure; improving the effectiveness of the justice system; lowering unemployment; supporting women's participation in the labour market by fostering childcare facilities and flexible working arrangements; making education inclusive and relevant to the job market; promoting social inclusion of marginalised Roma communities; and improving analytical capacities and the effectiveness of public administration. The Youth Employment Initiative has provided a package of support measures to lower youth unemployment. The Prešov region volunteered to join the Catching-up Regions initiative targeting structural challenges by using ESIF investments in the region. Various reforms were undertaken already as a precondition for ESI Funds support ( II ). The Smart Specialisation Strategy for research and innovation was developed to focus efforts on product specialisation with strong market potential. The National Transport Plan has allowed the timely preparation of key projects. Public procurement reform is making public spending more efficient. A revised Civil Service Act was introduced to strengthen the civil service. New legislation has helped improve active labour market policies and public employment services, establish a dual vocational education system and formulate a national strategy for Roma inclusion. Slovakia is advancing the take up of the European Fund for Strategic Investments (EFSI). As of December 2017, the overall financing volume of operations approved under the EFSI amounted to EUR 475 million, which is expected to trigger total private and public investment of EUR 1.2 billion. European Investment Fund financing enabled by the EFSI amounts to EUR 25 million, which is expected to mobilise approximatively EUR 211 million in total investment. Close to 6 000 smaller companies or start-ups will benefit from this support. Transport is by far the highest ranking sector in terms of volume approved. Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By the end of 2017, Slovakia has signed agreements for EUR 704 million for projects under the Connecting Europe Facility. https://cohesiondata.ec.europa.eu/countries/SK Box 2.1: Policy Highlights: The 'Value for Money' Project In 2015 the groundwork was laid for a far-reaching government project entitled "The Best of All Possible Worlds – Value for Money in Slovak Public Policies" (Najlepší z možných svetov – Hodnota za peniaze v slovenskej verejnej politike). The result is a new comprehensive model for evaluating the efficiency and effectiveness of public spending. "Value for Money" is structured around three main principles: 1. Public policy must be "the best possible option", duly justified and quantified on the basis of real-world economic and social data. 2. Institutional reform should culminate in a new division of roles in various phases of the process. 3. Several cost analysis methods must be used. In addition to spending reviews, which will be both domain-specific (education, healthcare, etc.) and cross-cutting (information technologies), cost-benefit analyses will be carried out on investment projects and draft regulations, and benchmarking (against the best foreign practices) will be applied to operational expenses. A "Value for Money" unit was set up within the Ministry of Finance, tasked with coordinating the analytical work. The delivery of the measures is monitored and reported publicly by a designated implementation unit located with the vice-prime minister. The program was first implemented in three "problem" sectors that represent nearly 40% of government spending: healthcare, transport and information technology. Further series of thematic spending reviews followed in 2017, and first recommendations in the area of healthcare are beginning to show a positive impact on spending efficiency (see also chapter 3.1). The Value for Money project was supported by the European Commission, the OECD and the IMF, who have sent experts to provide joint technical assistance during the initial assessments. Member States can request from the Commission technical support to prepare, design, and implement growth-enhancing structural reforms. The Structural Reform Support Service (SRSS) provides, in cooperation with the relevant Commission services, tailor-made technical support, which does not require co-financing and is provided at a Member State's request. The support addresses priorities identified in the context of the EU economic governance process (i.e., implementation of country-specific recommendations), but the scope of the SRSS support is wider as it can also cover reforms linked to other Commission priorities, or reforms undertaken at the initiative of Member States. Slovakia has requested technical support from the SRSS to help implement reforms in various areas such as: growth and the business environment, healthcare, public financial management and taxation. In particular, the SRSS continues to provide technical support to the Value for Money project. It has also started to provide technical support for projects to improve the quality and cost-effectiveness of health care, develop a pipeline of bankable investment projects and to set up a strategy on voluntary tax compliance, amongst others. 3. Reform priorities 3.1. Public finances and taxation Taxation Slovakiaʼs fiscal deficit is falling but fiscal revenues remain low in relation to GDP. The general government deficit fell from 2.7 % of GDP in 2015 to a projected 1.6 % in 2017, and government debt is projected to have been reduced by 1.7 pps between 2015 and 2017. The tax revenue share in GDP remains well below the EU average. In 2016, the tax-to-GDP ratio in Slovakia stood at 32.2 % of GDP (EU average: 38.9 %). It is projected in the Commission 2017 autumn forecast to remain relatively stable and reach 32 % in 2019. Regarding the tax structure, revenues from labour taxes remains high while those from consumption and capital taxes are below the EU average.

The overall tax burden on labour is broadly in line with the EU average. Both when measured by the implicit tax rate on labour and the tax wedge, values for Slovakia are close to the EU average across the income scale. For example, the tax wedge ( ) for a single low-income earner at 67 % of the average wage stood at 34 % in 2016, compared to the EU average of 34.2 %. The tax wedge for second earners is only slightly higher than the EU average for all income categories. The difference in the tax wedge for families with and without children is also close to the EU average. Revenue from recurrent property taxes and environmental taxation are among the lowest in the EU. Both tax types are in principle considered less detrimental to growth. Total revenue from recurrent taxes on immovable property stood at 0.4 % of GDP in 2015, considerably lower than the EU average of 1.7 %. Real estate taxation is also not based on the value of the taxed property but on its surface area. Revenues from environmental taxes, at 1.8 % of GDP in 2015, are also significantly below the EU average of 2.4 %. Tax compliance has improved somewhat but remains a challenge. The value added tax (VAT) gap ( ) continued its downward trend in 2015 (see graph 3.1.1). However, at 29.4 %, it was among the highest in the EU and still considerably higher than the EU average of 12.8 %. Various measures, including the applying of the reverse charge mechanism ( ) in the construction sector and adjustments to the control statements, appear to have helped increase the efficiency of VAT collection. The Ministry of Finance estimates that the efficiency of collection continued to improve in 2016 (Ministry of Finance, 2018). ( ) Graph 3.1.1:VAT compliance gap (2011-2015) Source: Centre for Social & Economic Research/CASE (2017) Further anti-fraud measures are planned for 2018. In April 2017, the government approved a third Action plan to fight tax fraud for 2017-2018 containing 21 measures, some of which are discussed below. In addition, stronger obligations in the construction sector ( ) will be introduced and a tax guarantee required upon registration will be extended to natural persons. Audit activities and cross-checking are cornerstones of the compliance strategy. Although VAT audits still form a major part of all tax inspections, the proportion declined in 2016 and in the first half of 2017. At the same time, audits of income taxes have risen in importance. A global tax audit protocol containing transactions of taxpayers that were found to be in breach of tax rules is likely to strengthen the overall quality of audits. The introduction of an ʻanalytical information system of risksʼ, which allows for taxpayers at risk of non-compliance to be identified and assessed, can ensure audits are more targeted and auditing resources are better used. Such a tool is also important given the scrapping of the minimum corporate income tax as of 2018, which previously helped to limit tax evasion. ( ) Tax compliance monitoring will be strengthened. The criteria underpinning tax compliance index that assesses taxpayersʼ risk profiles is due to be published. The tax administration will also be able to make public every quarter a list of taxpayers, stating amounts of assessed corporate income tax or tax loss based on submitted tax returns. Furthermore, the tax administration will publish every quarter a list of taxpayers registered for VAT, stating the amount of recognized VAT and requested funds. The setting up of a United Analytical Centre has not yet been finalised; the plan is to ensure a more rapid exchange of information by bringing together analytical and law enforcement capacities to support the fight against tax fraud. Improved services for taxpayers may improve voluntary tax compliance. Call centres, introduced in 2014 to deal with tax queries, proved to be an important service for taxpayers. The limits on using ʻvirtual cash registersʼ ( ) have been removed in 2017 and their use is increasing. To deal with fraudulent electronic cash registers the authorities plan to connect these to the tax administration’s online IT system. As of 2018, the electronic communication between the tax administration and legal entities and self-employed individuals will become mandatory. A more advanced strategy for voluntary compliance is planned for the first half of 2018. In 2018, fees for issuing advanced tax rulings were halved and the deadline for a taxpayer to make an appeal will be extended from 15 to 30 days. Innovation incentives were introduced. To support R&D expenditure, the ʻsuper-deductionʼ of R&D expenditure was extended from 25 % to 100 % ( ) and a ʻpatent boxʼ regime was introduced that allows income derived from certain intangible assets created in Slovakia to be partially tax-exempted. Economic evidence, however, suggests that patent boxes may be used as tax competition tools and are an inefficient way to encourage R&D (European Commission/JRC, 2015). Fiscal framework and spending review The medium-term budgeting framework could be further strengthened. The government regularly prepares a detailed multi-annual budgetary plan. Parliament takes note of this document and approves the cash-based budget for the following year. However, this could hinder a medium-term orientation of fiscal planning, in the context of EU fiscal rules according to (accruals-based) ESA2010 standards. Binding expenditure ceilings were planned in the constitutional law of 2011, but have not been used, making the achievement of a balanced budget more difficult. However, Slovakia’s Finance Minister has announced the launch of simulated expenditure ceilings, the purpose and impact of which remain to be assessed in future. Regular spending reviews provide relevant assessments and enrich the public discussion. The 2017-2019 multiannual budget already contained in annexes three spending reviews prepared in the context of the ‘Value for Money’ (VfM) project, covering the areas of healthcare, IT and transport.( ) The 2018-2020 multiannual budget included an interim implementation report. This report provided an advanced progress assessment for the health spending review and also defined the most concrete and measurable targets in this area. The latest multi-annual budget also includes three new reviews, covering education, environment and labour market and social policies. While the reviews provide important information on relevant spending areas, they have not yet been fully integrated in the budgetary process and hence have a limited impact on government priorities and spending plans. In addition to the reviews, the VfM unit at the Ministry of Finance has prepared several analyses of large infrastructure and IT projects, which may result in considerable efficiency gains if supported at the political level. Sustainability of public finances Risks to Slovak public finances are primarily visible in a longer-term perspective. ( ) Calculations of the European Commission suggest that healthcare and pensions outlays are projected to remain the main drivers of Slovak long-term ageing costs (European Commission, 2018a). Both items are expected to increase by 1.2 pp of GDP by 2070 compared to 2016 (baseline scenario) despite a somewhat less unfavourable demographic outlook than in previous projections. The long-term sustainability gap indicator (S2) for Slovakia suggests that Slovakia remains at medium risk with regard to the long-term sustainability of its public finances. ( ) Pension system The 2012 pension reform will mitigate the impact of adverse demographic trends. The latest projections confirmed that Slovak population is set to start declining after 2030. The old-age dependency ratio, which shows the relationship between people over 65 and those between 15 and 64 years of age, is forecast to triple by 2060 from 20.6 in 2016. However, its negative impact on the pension system will be limited by an automatic pension increase that mirrors improvements in life expectancy. This will have a positive impact on the long-term sustainability gap indicator S2. The ratio between the time spent in retirement and that of contributing is expected to remain broadly stable. The effective retirement age in the country remains relatively low by EU standards. However, due to relatively low life expectancy the effective time spent in retirement is not exceptionally long. The latest changes to the pension system have increased its distributional fairness for pensioners and ensured greater pension adequacy by indexing state pensions by a minimum nominal sum. The government decided to reduce distributional inequalities in pensions arisen after the 2004 pension reform. ( ) In 2017, the government approved an ad hoc pension indexation of 2 %. While the pension indexation will be based on the concept of ‘pensioner’s inflation’ as of 2018, for the period 2018-2021 individual pensions will have to increase by a minimum amount equal to 2 % of an average pension of the same type. A similar ad-hoc increase of pension indexation to 2 % was adopted in 2017 already. These changes will increase the deficit of the system during the coming two decades. Healthcare People’s health is improving only gradually. Life expectancy at birth is significantly lower than the EU average ( ), largely due to higher mortality rates from cardiovascular diseases. Mortality rates from coronary artery disease and strokes are among the highest in the EU, although there has been some improvement over the past decade. Slovakia does not have a national cancer plan and cancer survival rates have not improved much over the past decade, partly due to low screening rates. The availability of pharmaceuticals has improved. Legislative changes have made companies accountable for access to medicines, helping with the problem of exporting and trade in the grey economy. As of January 2018, 147 medicines will be de-categorised and forced to pass a Health Technology Assessment. If medicines do not meet the associated standards but can nonetheless demonstrate their added value, they fall under special categories which will be monitored and for which spending will be managed over time.

The cost-effectiveness of healthcare in Slovakia is showing some improvement. The VfM spending review showed significant scope to increase cost-effectiveness in several healthcare areas. Its implementation appears to have led to savings and positive changes in hospital and personnel management. The implementation report suggests that a considerable number of commitments have been fulfilled and some EUR 60 million was saved during the first nine months of 2017 (Implementation Unit, 2017). Improved hospital management and procurement may limit growth of hospital debt. However, hospitals’ arrears reached EUR 728 million at the end of 2017. The government approved another hospital debt relief plan comprising measures totalling EUR 585 million, which was finally agreed in November 2017. The Ministry of Health has set up a special Office for Management of Subsidiary Organisations ( ). The Office’s main tasks include the central management of hospitals, benchmarking, central negotiation of deals and, if needed, changes to hospitals’ range of services. The potential to rationalise hospital care remains significant. The number of hospital beds and patients’ average length of stay have fallen over the last two decades. Nonetheless, the overall use of hospital services remains high, with hospital discharge rates above the EU average and rising in recent years, and the bed occupancy rate remains relatively low at less than 70% (OECD and European Observatory on Health Systems and Policies, 2016). After long delays the public e-health system has been finally launched. Following a trial period in December 2017, legal provisions to ensure the regular, gradual implementation of the e-health system have come into force on January 1st 2018. Due to the previous lack of a public e-health solution, a privately developed e-health system has gained popularity in the meantime, and now covers a third of the Slovak population. It remains to be seen whether overlaps and/or compatibility issues between these two e-health systems will arise, and if the National Health-Care Information Centre (NHIC) will succeed in providing adequate technical support to outpatient doctors before the end of the lawʼs grace period (i.e. end of 2018). The diagnosis-related groups system was implemented as a pilot project in 2017 with reasonable success. The roll-out of the system ( ), which allows for more transparency in care supply, pricing and funding, will continue in 2018. Budget neutrality will be gradually removed from 2019 onwards when the system will start operating in full. The first adjusted base rates were published in September 2017. However, the project is likely to face challenges when implemented due to a lack of users’ preparation. Slovakia has a general lack of General Practitioners (GPs) and staffing numbers are increasing only gradually. The lack of effective primary care is particularly severe in rural and deprived areas, especially those with a large Roma population. Care delivery across regions varies, mainly due to the uneven geographical distribution of health professionals. The very low number of new GPs raises concerns for the future GP supply given their current age composition. Moreover, the number of nurses is falling and is now one of the lowest in the EU. The ineffective gatekeeping role of GPs points to significant opportunities for quality and efficiency gains. Despite EU and international recommendations, the role of GPs has been expanded in law only partially, with little change in day-to-day healthcare provision, while specialists remain omnipresent. Because of the low number of GPs and their limited treatment powers, 80% of GP consultations end with a referral to a specialist. The ongoing development of a network of primary-level integrated health care centres (IHCC) to transition away from the hospital-centric model currently in place does not seem to tackle this inefficiency. A stronger role for primary care and GPs could raise efficiency, as suggested by Slovakia’s high rates of potentially avoidable (ʻambulatory care-sensitiveʼ) hospital admissions compared to the EU average. 3.2. Financial sector Banking sector Slovakia's banking sector is relatively small and stable and benefits from the booming economy. The Slovakian banking sector is concentrated within the hands of three major players and most of the Slovakia's 27 banks are controlled by foreign entities. Relative to its GDP, the Slovak banking sector is one of the smallest in the EU. Slovakia's banking sector is amongst Europe's most profitable and also has one of the lowest loan-to-deposit ratios, thus shielding it from potential shocks. Capital adequacy ratios are generally high and above the regulatory minimum. Consumer and mortgage loans have been growing fast, driven by an improving labour market, accelerating wage growth, high consumer confidence levels and low interest rates. Housing market Slovakia’s housing market is emerging from a slump that followed the global financial and economic crisis. Residential property prices rose sharply during the economically buoyant phase preceding the crisis, with real house prices rising by 72 % between Q1 2005 and Q2 2008 (Graph 3.2.1). Graph 3.2.1:House prices and mortgage lending Source: European Commission The pronounced recession that followed in 2009 took a toll on both unemployment and household income prospects, and was accompanied by a significant tightening in bank lending standards. Together these precipitated a property market correction. A recovery period began in around 2014, during the course of which house price inflation gradually increased to a rate of 5.3 % year-on-year in real terms (6.6 % in nominal terms) in Q2 2017. This price recovery was associated with — and also fuelled by — increased mortgage lending flows, which peaked at over 2.5 % of GDP in 2016. Signs of a possible slowdown in mortgage lending are evident in 2017, but remain to be corroborated by future data. Graph 3.2.2:Housing market overvaluation gap Source: European Commission Housing market developments in Slovakia do not yet point to significant risks. In the context of the major price correction since 2008, house prices still appear to be slightly undervalued as suggested by two of the three benchmark indicators shown in Graph 3.2.2. In particular, the price-to-income ratio and a model-based valuation suggest that property prices are still slightly undervalued, and only the price-to-rent ratio currently points to a small overvaluation. Slovakia’s thin and illiquid private rental market may also drive the rise in the price-to-rent ratio. This effectively prevents rented private accommodation from acting as a housing substitute that could bring property prices back towards equilibrium levels. Housing investment still remains subdued, even though new building permits have been rising. Compared to the investment flurry that occurred in the early 2000s, residential investment has decreased by around 1 % of GDP in the post-crisis period, with few signs of a significant recovery in the recent period (Graph 3.2.3). Given the strength of economic growth, as well as of overall investment and house price inflation in recent years, lacklustre housing investment growth implies potential housing supply constraints; anecdotal evidence suggests this is probably true for the Bratislava region. However, the significant increase in the number of building permits somewhat weakens the notion of housing supply being constrained and/or inelastic. The timelag between the issuing of housing permits and associated construction activity instead suggests that a pick-up in housing investment may occur in the medium term. Graph 3.2.3:Housing investment indicators Source: European Commission 3.3. Labour market, education and social policies Labour market

Labour market conditions have improved but structural challenges are visible in several areas. Stronger economic growth has led to decreasing unemployment, increasing wages and disposable household income. The employment rate is swiftly approaching the EU average (71.2 % vs 72.3 % (EU) in Q3-2017). Following improvements since 2013, labour market slack indicators are now all below the EU average (LMWD, 2017). The main challenges in the labour market are high long-term unemployment, coupled with high unemployment among vulnerable groups such as the low-skilled and Roma, as well as a relatively low employment rate for women. These issues are amplified by regional disparities, caused partly by an underdeveloped rental housing market that limits labour mobility. Falling unemployment, bolstered by faster job creation, has led to increasing reports of labour shortages in some sectors. Vacancy rates have reached a historical maximum, with the highest rates found in regions with the lowest unemployment (Value for Money Unit, 2017). About 44 % of employers reported difficulties in filling jobs in 2016 (Manpower Talent Survey 2016). This trend is particularly prevalent in the IT and manufacturing sectors. Some employers are reportedly turning to foreign workers to meet staffing needs. Work permit conditions for seasonal work were eased and the number of foreign workers in Slovakia grew by 40 % year-on-year in 2017. Nevertheless, foreign workers only account for 1.7 % of total employment. A multitude of factors seem to contribute to labour shortages. Notwithstanding an acceleration of wage growth, in 2016 the average compensation of employees per hour worked in Slovakia (EUR 9.5) was well below the EU average (EUR 22.8).( ) Higher wages abroad, better career prospects and opportunities in destination countries are the main factors contributing to the emigration of workers. Emigration is most prevalent among young people with tertiary education (IFP 2017a), recent data point to a decline in the number of workers abroad (150 000 in Q2-2017 vs. 160 000 in 2016).( ) Skill shortages among the unemployed exacerbate the lack of qualified new workers. The general level of skill mismatches has fallen since 2007 and there is a low overall level of underqualification (European Commission, 2017b). Long-term unemployment (LTU) is falling, supported by government policies. Long-term unemployment has declined to a rate of 4.9 % in Q3-2017, but remains among the highest in the EU. In addition, in 2016 the share of very long-term unemployment (i.e. more than two years) in total unemployment was still very high, at 44 % (Graph 3.3.1). Slovakia implemented various active and passive measures to combat LTU, including an ambitious Action Plan (see below), which likely contributed to the overall decline. However, the absorption of the large pool of long-term unemployed still poses a challenge. Graph 3.3.1:Unemployment duration (2016) Source: European Commission Box 3.3.1:Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights, proclaimed on 17 November 2017 by the European Parliament, the Council and the European Commission, sets out 20 principles and rights to benefit citizens in the EU. In light of the legacy of the crisis and changes in our societies driven by population ageing, digitalisation and new ways of working, the Pillar serves as a compass for a renewed process of convergence towards better working and living conditions. Slovakia faces challenges with regard to a number of indicators of the Social Scoreboard ( ) supporting the European Pillar of Social Rights. The number of children under the age of three enrolled in formal childcare is very low (0.9 %). This contributes to a high impact of motherhood on women's participation in the labour market, reflected by a relatively high gender employment gap. On the positive side, income inequality and poverty remain low while both employment and unemployment rates are improving at a fast pace. Inclusive education, particularly with regard to integrating Roma children into quality mainstream education from an early age, remains a challenge. Only about one-third of Roma children aged between 4 and the starting year of compulsory education participated in childcare. This is likely caused by a lack of financial resources coupled with a low level of information on application procedures and mistrust from the parents' side. Segregation of Roma children in schools is also of concern, with Slovakia being among the countries with the highest proportion of Roma children attending schools where all pupils are Roma. The legislative amendments made to the School Act in 2015 have a potential to increase the participation of Roma pupils in inclusive mainstream education, however, they are not being properly implemented and adequately supported by funding and additional measures. Slovakia consistently has relatively low levels of income inequality (measured by the income quintile ratio). This is mainly due to its low degree of wage dispersion, rather than to the effectiveness of the tax and benefit system. Wealth inequality is also among the lowest in the EU, related to a high rate of home ownership, which results in a comparatively even distribution of housing assets. Likewise, the risk of poverty and social exclusion has remained well below the EU average and continues to decline further.

Employment of the low-skilled is on the rise, but challenges remain. In 2016, 30 % of the low-skilled were unemployed for more than a year, compared with 8 % and 3 % for the medium and high skilled. The gap with the EU average is high (17.7 pps in 2016), and the difference is particularly high (higher than 45 pps) for some specific age groups (Graph 3.3.2). As a result of the tightening labour market, the employment rate of the low-skilled increased substantially (from 31.6 in 2014 to 35.9 % in 2016) but remains the lowest in the EU. Graph 3.3.2:Employment rate by age and education level (2016) Source: Eurostat Young people still represent a large share of the unemployed (17.2 % in 2016). Additionally, the share of young people neither in employment nor in education and training (NEET) remains slightly above the EU average (12.3 % vs EU 11.5 % in 2016, age 15-24). The unemployment rate of low-skilled youth continues to be very high (46.5 % vs EU 26.5 %; 2016). This is particularly alarming in light of an increasing early school leaving rate and shortages of qualified workers. In 2016, just under half of NEETs aged under 25 years were registered with the Youth Guarantee scheme. Nearly one in five (18.2 %) of young people registered had been so for more than 12 months. The employment rate of women (62.3 %) remained well below that of men (76.9 %) in 2016. The gender employment gap is persistently above the EU average. This also applies to the unadjusted gender pay gap (19.6 % in 2015). The employment gap is particularly large for women under 40 years (Graph 3.3.3), which is likely explained by a high impact of motherhood and care responsibilities on women's employment (see further below). Graph 3.3.3:Employment rate by gender and age (2016) Source: European Commission The situation of Roma in the labour market is particularly weak. The share of Roma in the population is estimated at 8 % of the total population, living predominantly in rural areas (UNDP, 2014). Almost 74 000 live in segregated settlements often with very dire living conditions. Unemployment among Roma reaches 48 %, while only around 25 % of Roma aged 20-64 are engaged in ‘paid work’ (FRA 2016).( ) Moreover, Roma youth are at a much greater risk of becoming NEETs (65 % in 2016). The key obstacles for their participation in the labour market are low skills attainment and barriers in the access to education, housing, and healthcare (see education section) (IFP, 2014). The ethnic segmentation of the labour market contributes to an adverse social situation, reflected by higher poverty. 30 % of Roma felt discriminated at least once in the past 12 months in their daily life, and 22 % when searching for work (FRA, 2016). Labour market policy Rights and obligations of jobseekers registered at the public employment service (PES) have been modified. To encourage social assistance beneficiaries to take up even low-paid jobs, a higher percentage of income (50 %, previously 25 %) is now excluded from the calculation of the special allowance under the minimum income scheme. This contributed to an increase of the total income in low-income households where at least one member found employment at the level of the minimum wage while other members receive the benefit. The increase in household income was most visible for households with one or more children. Following a tightening in the conditionality system, many jobseekers were removed from PES registers (in August 2017, 11 % out of all withdrawn jobseekers). The implementation of the European Social Fund (ESF) supported Action Plan for the Integration of the Long-Term Unemployed has started. Individual work integration agreements are being introduced and individualised counselling will follow. 21.3 % of all long-term unemployed have been supported thus far, of which 23.2 % (as of August 2017) have been successfully placed in the labour market. The client-to-specialised counsellor ratio has decreased (1:723 in 2017 compared to 1:1467 in 2016), but overloaded PES capacities remain a key obstacle to providing individualised services. Given the early stage of the implementation, the Action Plan's impact remains to be assessed, but progress is regularly reviewed at the ESF Monitoring Committee. The newly introduced profiling mechanism of the long-term unemployed remains rudimentary, as it is only based on age and the duration of registration and therefore does allow an in-depth assessment for subsequent referral. Cooperation with private employment services and NGOs is lacking, and the allocated ESF support has not yet been fully used. Access to personal bankruptcy has been facilitated; this may encourage formal employment. The risk of earnings becoming subject to seizure proceedings deters those in debt from the labour market, consequently further marginalising the homeless, long-term unemployed and Roma (IFP 2016). Following the revised Act on Bankruptcy and Restructuring, a 284 % increase in personal bankruptcies was recorded compared to 2016. However, the waiting time for assistance at any of the twelve Legal Aid Centres or consulting centres is very long (4 months). Spending on active labour market polices (ALMPs) is still one of the lowest in the EU. In 2016, spending on ALMPs was at 0.21 % of GDP, mostly geared towards direct job creation measures. Training and education programs, on the other hand, receive significantly less (7.7 % of all expenditure in 2015), which is at odds with the increasing labour shortages. Moreover, participation in ALMPs remains low (13.6 %). A recent study found that the design of ALMPs is poor and its effectiveness low, with subsidised jobs and activation works prevailing over education and training programmes (Value for Money Unit 2017). The success rate of activation works in placement to the labour market is low (14.7 %), also due to the lack of a training component. Table 3.3.1:ALMP expenditure by type of actions (% of GDP, 2015) Source: OECD In view of skills shortages, reskilling programmes have been reinforced. In 2017 17,317 jobseekers attended requalification courses. However, the relevance of training programmes for the labour market needs has been flagged as limited and participation in training depends on the initiative of the jobseeker, which can create a barrier for the low-skilled (Machlica et al. 2017). Adult participation in learning is still significantly below EU average (2.9 % vs. 10.8 % in 2016). The plans to introduce a National Qualifications Framework to validate non-formal and informal learning underpinned by quality assurance procedures, and reflected in a revised National Life-long Learning Strategy, are a step in the right direction. These initiatives are key in increasing the flexibility of the overall education and training system in a lifelong learning perspective. Likewise, the lack of second-chance education is expected to be addressed by ESF-supported national projects. These initiatives will support the implementation of the Upskilling Pathways Recommendation. Actions for Roma inclusion are slowly taking off, but results remain to be seen. Outreach support through social fieldwork and community centres has been launched and the Action Plans for the National Roma Integration Strategy for the years 2017-2020 have been adopted. In addition, following the adoption of the law on social economy, by 2020 around 3000 disadvantaged people are expected to find employment in 150 new social enterprises.

The implementation of the Youth Guarantee has aided youth employment. Individualised services are being introduced, and training programmes under the so-called 'RE-PAS' project were extended to young people under 29. However, the provision of offers is rarely timely and their monitoring and assessment is weak. In 2016, 18.2 % of those registered had been waiting for an offer for more than 12 months. Additional measures are being introduced to tackle high regional disparities. In 2016, 4,911 people benefited from a commuting allowance, while 816 received labour mobility support (770 more than in 2015). A revision of the Act on Employment Services has led to an increase in the amount of the commuting allowances by loosening the requirements and introduced a flat-rate to cover moving costs up to EUR 4000. The number of districts designated as 'least developed' has increased from 12 to 16 and dedicated action plans are being implemented. Training centres and regional vocational education centres are planned to provide practically-oriented training for the disadvantaged unemployed, and the education centres will address the specific needs of SMEs and people interested in self-employment. Social dialogue The involvement of social partners in policies and reforms is relatively well developed. Despite the general satisfaction with the consultation process, some concerns are raised by social partners over insufficient information and time allocation for commenting on reform proposals, which may results in a limited scope to contribute to discussions. The low membership may also have a negative impact on their capacity ( ). An ESF-supported project is in place to help improve social partners' capacity-building. Employment of women Slovakia is among the countries with the highest (discouraging) impact of motherhood and care responsibilities on employment. This is likely due to a long parental leave, rarely taken up by men (7%), as there is no simultaneous compensation for both parents, coupled with a low take-up of flexible work arrangements and missing childcare facilities. Measures have been put in place to improve access to childcare, but capacities are still insufficient. Only 0.9 % of children below 3 were enrolled in formal childcare in 2016, one of the lowest rates in the EU. Childcare costs in Slovakia are also among the highest in the EU, which has a negative impact on work incentives ( ) (Browne and Neumann, 2017). On the positive side, EU-funded construction of childcare facilities, including for marginalised Roma communities, has been slowly taking up. As of January 2018, the Social Services Act has expanded access to childcare to unemployed parents, on the condition that their child does not take the place of a child whose parents are employed or in education. The coverage rate is higher for children aged between 4 and 6 (78.4 %; 2016), but is still below the EU average (94.8 %). Furthermore, the number of rejected applications for kindergartens remains high, particularly in Bratislava (4,677 out of 12,486 in total in 2016). Following 2017 amendment of the Act on Financing of Schools financial support will be extended to all families receiving the benefit in material need with children above the age of 3 in kindergartens. The implementation of deinstitutionalisation is slow but additional measures are planned. Long-term care in Slovakia is still largely provided by long-term care institutions and family carers supported through the caretaker allowance which will gradually increase to the level of the net minimum wage in 2020. This increase may perpetuate high female inactivity rates due to caring responsibilities. Overall, the progress in transition from the institutional to community-based care is slow and partial, and support for independent living is still insufficient (United Nations, 2016). Newly introduced measures, such as the limitation of the number of persons in assisted living facilities to six per unit and the limitation of 40 places in specialised facilities for seniors, go in the right direction. Social inclusion and poverty reduction The poverty rate has further declined, but the intensity of poverty is still relatively high. In 2016, the number of people at risk of poverty or social exclusion fell to 18.1 % (significantly below the EU average of 23.5 %), and the number of people in severe material deprivation also dropped to 8.2 % (still slightly above the EU average of 7.5 %). Latest data ( ) on poverty indicates that no significant changes are expected in the at-risk-of poverty rate for income reference year 2016. However, the poverty gap, which measures the intensity of poverty (i.e. how poor the poor are), remains relatively high at 26.1 %, particularly for children (31.6 %) (Graph 3.3.4). The poverty rate for Roma is alarmingly high, at more than six times the rate for the general population (FRA 2016). In terms of in-work risk of poverty, the incidence is significantly higher among part-time workers ( ). Homelessness is relatively low (according to the census, in 2011 there were about 23,500 homeless people in Slovakia, i.e. around 0.4 % of the total population ( ) and a national strategy for preventing and tackling homelessness is being prepared. Graph 3.3.4:At-risk-of-poverty gap (2016) Source: Eurostat Weaknesses in social safety nets persist despite some positive initiatives. In 2016, the impact of social transfers (excluding pensions) on poverty reduction has fallen to 31 %, below the EU average of 33 %, and reached its lowest level during the last decade. The number of recipients of minimum income support (benefit in material need) has fallen to 83 000 by August 2017 (compared to 99 000 in December 2016). The minimum scheme is not sensitive to the number and age of children in a household. It lacks a connection to the national subsistence minimum and there is no obligation of annual indexation. The provision of the benefit is conditional on each adult member of a household to carry out small community work for 32 hours per month. The adequacy of the minimum income scheme is still low, around 50 % of the poverty threshold ( ) (European Commission, 2017). The housing allowance is not accessible to those who are most in need because its receipt is conditional on proof of legal residence. This affects mostly marginalised Roma who live in undocumented dwellings and homeless people. On the positive side, an increase in benefits in material need (5 %) as well as doubling the activation allowance to EUR 132.40 to promote employment and reduce poverty is planned for 2018. Conditions for receiving unemployment benefits are strict, and net replacements rates are among the lowest in the EU. Jobseekers are required to be insured for at least 2 years during the reference period to be eligible.( ) Legislative changes as of January 2018 have extended the reference period from 3 to 4 years and the coverage period to 6 months unifying the rules for permanent and fixed-term employees, who were previously limited to 4 months of support. Furthermore, less than 20 % of self-employed are covered by unemployment benefits.( ) Social housing is underdeveloped, and conditions for access are restrictive. The rental housing market is thin – only 10.7 % of inhabitants live in rental dwellings, far below the EU average of 30.7 %. Moreover, the number of finished flats owned by municipalities was at 2.2 % in 2015. The overcrowding rate has increased to 40.6 % and remains particularly pronounced among poor (56.2 % in 2016 vs. an EU average of 29.6 % in 2015). Furthermore, approximately 65,000 residents live in undocumented dwellings and makeshift shanties (Ministry of Interior, 2014). State Housing Development Fund loans were provided to 90 municipalities in 2017, aiming to create 1,524 housing units. However, the requirement of proof of the household’s solvency hinders access for the most deprived, while the accessibility for slightly better off households is restricted by an income threshold. The link to accompanying support services is not always available and monitoring of the use of the flats is weak. A pilot project is planned for transitional housing with social assistance for marginalized Roma communities, but a more systemic support could allow stronger development. Education and skills In Slovakia, half of all pupils in the bottom social quartile are low achievers. The proportion of low achievers in the PISA 2015 (OECD, 2016a) survey is significantly higher than the EU average in all areas tested (31 % in science, 32 % in reading and 28 % in mathematics). The gap in achievement between upper and lower socioeconomic quartiles is at more than 35 pps and 9 pps above the EU average of 26 pps. Slovakia also shows a very sizeable gender gap in reading, with boys lagging by 13.2 pps behind girls for low achievement (European Commission, 2016). To address declining educational outcomes, the national education strategy ‘Learning Slovakia’, developed through a comprehensive consultation process by experts and completed in September 2017, spells out a vision for regional and higher education reform. Progress on the reform has however been limited, as the document still needs to be translated into the official government National Education Strategy with concrete action plans announced only for 2018. Graph 3.3.5:PISA 2015 results by language spoken at home (in PISA score points) Source: OECD PISA School dropout rates are marked by large regional disparities. The rate of early school leaving (ESL) is low at 7.4 %, well below the EU average of 10.7%, but shows sizeable regional disparities. The highest and fastest-rising levels are in eastern Slovakia, where ESL exceeds 12 %; compared to 4 % in western regions. The EU Fundamental Rights Agency (FRA) estimates that 58 % of Roma children are early school leavers. Finally, participation in early childhood education and care for children above 4 was 78.4 % in 2016, considerably below the EU average of 94.8 %. Participation of Roma children, estimated at 34 %, is particularly low (FRA, 2016). Socioeconomic and educational exclusion of marginalised Roma communities is a key problem. The 2016 FRA survey indicates that 62 % of Roma children attend a school where all or most other children are also Roma and that the proportion of Roma pupils attending special education establishments is among the highest in the region (FRA 2016), suggesting discriminatory practices. The 2015 PISA survey shows a very wide gap between pupils who speak Slovak at home and those who do not — including Roma pupils (Graph 3.3.5). In science, this gap is equivalent to more than 3 years of schooling (OECD, 2016a). The legislative amendments made to the School Act in 2015 have a potential to increase the participation of Roma pupils in inclusive mainstream education. However, they are not delivering the expected results due to the absence of an integrated approach. There is no systematic methodological guidance to schools, which would include concrete measures leading towards inclusive mainstream education and a specification of funding available for that purpose. Systematic monitoring and evaluation of the effectiveness of measures is lacking.

Public expenditure on education has been low over the last decade. Slovakia's general government expenditure on education in 2015 was 4.2 % of GDP, below the EU average of 4.9 % but the gap has narrowed in recent years. Bearing in mind the significant rise in Slovak GDP in recent years, education spending levels have risen by 45% in real terms since 2005. Compared to the EU's best performers Slovakia shows a limited efficiency of public education spending, both in terms of educational outcomes and the degree to which young people are integrated into the education and training system (European Commission, 2017c). An additional EUR 500m in ESF support has been allocated to education, but the implementation of measures is lagging. Teachers' salaries are being increased gradually, but the profession is still not attractive. Salaries increased annually by 6% both in 2016 and 2017 and the government plans to make annual increases of 6 % until 2020. Incentive measures being implemented in accordance with the 2017 National reform programme include: enhancing teacher training, professional development and working conditions; lowering the administrative burden and increasing funding for study materials and classrooms. Slovakia has fast-increasing tertiary education attainment rates, but structural weaknesses in the higher education persist. In 2016, the tertiary attainment rate was 31.5 %, below the EU average of 39.1 %. Women (at 39.4 %) strongly outperformed men (at 24 %). Weak internationalisation is also an issue and the number of in-coming foreign students studying at Slovak universities is still small. Existing quality assurance and accreditation mechanisms are insufficient. Finally, Slovakia's tertiary sector lacks a professionally oriented bachelor programmes and does not meet the demands of the labour market. Implementation of measures to address weaknesses in higher education has been delayed. The overall strategy is to introduce greater flexibility for universities in response to current societal needs, while strengthening their responsibility for the quality of education. There is a general consensus on the need to follow European guidelines on accreditation through a fully independent quality assurance agency, but there is no agreement among stakeholders on the appropriate approach. Rationalisation of the higher education network and changing funding formulas to encourage more consolidation and specialisation is also being considered (Eurydice, 2017). Comprehensive information on the labour market outcomes of vocational education and training (VET) to increase its relevance is lacking. The proportion of upper secondary students in VET remained stable in 2015 at 69 %, well above the EU average of 47 %. The employment rate of recent VET graduates, at 77 % in 2016, was slightly higher than the EU average of 75 %. To improve the labour market relevance of education, the performance-based funding has been introduced. Highly relevant programmes ('white lists') benefit of a 10 % increase of funding per student, whereas, funding is reduced by 10 % for programmes preparing for skills not required in the labour market ('black lists'). Regional platforms have been created for stakeholders to discuss the data used to update lists of programmes required or not by the labour market and to inform on the allocation of secondary VET entrants by self-governing regions. The overall quality and responsiveness of the dual VET system is gradually improving. The enrolment in the dual VET scheme has increased by 27 % for the school year 2017/2018. However, teachers and trainers have little access to specialised continuous professional development. To further improve the communication on the benefits of dual VET, a new information portal has been set up by the employers' council and contact points are being set up with ESF support to assist the eight self-governing regions in targeting all stakeholders involved in dual VET: employers, schools, learners and the wide public. A new Act on VET seeks to tackle financial disincentives for schools to get involved in dual VET and to create conditions for effective career guidance. Regulation of study places in VET schools better reflecting labour market needs and cooperation of schools with employers is planned. The act is set to enter into force in September 2018. 3.4. Investment Business environment and barriers to investment The quality of the business environment is crucial to determining investment and other economic activities. Excessive and uncertain business regulation and a low quality of public administration can have a negative impact on economic performance by discouraging private sector activities and hampering investment (European Commission, 2017d). Slovakia’s business environment is losing ground in some cross-country comparisons. It dropped 6 places in the World Bank’s ‘Doing Business’ rankings in two years, currently taking 39th place (out of 190 economies) and ranking 18th among its EU peers. While the country holds first place globally in ‘trading across borders’ and scores very well in ‘registering property’ (7th), protecting minority investors and dealing with construction permits (91st) remain key obstacles to investment. Slovak firms identified corruption and inefficient government bureaucracy as the top obstacles to doing business (World Economic Forum, 2017).( ) An analysis of 10 business-related laws, conducted by Slovakia’s National Union of Employers, found an increase in the number of administrative obligations for companies from 1 514 in 2007 to 1 719 in 2016. Instability in the legislative environment also harms the business environment. For example, between 2007 and 2016 the Trading Act was amended 54 times and the law on income tax 53 times, while the labour code was amended on average between 2 and 3 times per year. In 2015 the Social Insurance Act was amended 9 times and the Trade Licensing Act 12 times, making it particularly difficult for businesses to comply. National surveys suggest worsening trends in a variety of governance-related areas. The Business Environment Index , compiled each quarter by the Business Alliance of Slovakia, declined further in Q2 2017 to its weakest value since 2001. The underlying responses from business leaders suggest a notable worsening in a range of justice-related categories (equality before the law, law enforceability, functioning of the judiciary), scores for the political system and in the level of corruption. The latest index scores also confirmed the widely reported shortage of skilled labour, as this category witnessed the biggest quarterly deterioration since the survey began in 2001. The government adopted a number of measures to improve the business environment and boost investment. The first package, agreed in June 2017, introduced 35 measures with 9 priority measures to be implemented by the end of 2017, with the remainder to be carried out by 2019. In 2018, the second package of measures based on the inputs from entrepreneurs will be unveiled. Among the priorities, some measures aim to streamline the process of getting a building permit. The measures were selected from a database of 400 proposals, which were reduced to 100 by the Ministry of Economy and then negotiated with the relevant ministries. Another set of measures to improve the business environment is also soon expected to be submitted for the government´s approval. Regulatory impact assessments (RIAs) can improve the business environment and their use has been extended in recent years. The Centre for Better Regulation established at the Slovak Business Agency conducts both prior and subsequent assessments of the regulatory impact of a policy measure A Commission under the government office checks RIAs in two phases, and it can issue either a positive opinion, a positive one with comments or a negative opinion in its final assessment (which in any case doesn't have the power to stop the legislative process). Since 2016 the RIA procedure includes an SME test that assesses the specific impact of a regulation on SMEs. Only 12 % of the final versions of RIAs, as submitted to the government, were deemed to be of poor quality in terms of complying with the RIA official guidelines. Business organisations recognise that RIA procedures have improved. Feedback from business associations suggests that their members value the official consultation at an early stage and with prior notice. A new strategy for better regulation - RIA 2020 - was approved by the government in January 2018. The objective is to improve public awareness of better regulation as well as the quality of ex-ante impact assessments; introduce systematic ex-post evaluations of existing regulations and alternative approaches to regulation as well as enable greater stakeholder engagement in better regulation activities, namely engagement of the members of parliament and representatives of municipalities. A national project under the Effective Public Administration operational programme will finance the strengthening of the analytical capacities of government ministries in RIA. Finally, a national project under the Integrated Infrastructure operational programme has been planned with the aim of creating a digital platform for better regulation processes. The government also took steps to improve the deficient insolvency framework. Slovakia has one of the longest periods in the EU for resolving an insolvency and is one of the costliest EU countries in terms of percentage of the insolvency estate. The Slovak Insolvency Register, listing companies and entrepreneurs that have been declared bankrupt or are currently going through the insolvency process, has been published online. A new legal concept of a ‘company in crisis’ — i.e. at risk of bankruptcy — was introduced into Slovak law to secure the claims made by unsecured creditors. A company in crisis is now required to settle claims made by ordinary creditors before meeting any new obligations to shareholders and members of statutory bodies. Furthermore, the self-employed can now choose between two options when managing insolvency: either full bankruptcy followed by debt acquittal based on a court's decision or a repayment plan mechanism allowing the debtor to retain part of his estate (European Commission, 2017e). Access to finance has improved but alternative sources of financing are rarely used by Slovak SMEs. Access to finance dropped from being the main concern for 18 % of SMEs in Slovakia in 2013 to 5 % in 2017 (against 7 % at EU level). However, 13 % of bank loan applications from SMEs were rejected (compared to 5 % at EU level). According to a 2015 survey on the use of external forms of funding (i.e. funds obtained from outside the firm) less than a quarter (24 %) of Slovak SMEs used alternative sources of financing. While 11 % of start-up projects in Slovakia are financed through crowdfunding, venture capital financing only accounts for 2 % of funding and was used by 15 % of Slovak start-ups. However, venture capital investments in 2015 rose by 41 %, mainly due to the launch of venture capital instruments within the EU-financed JEREMIE initiative, which ended in 2016.( ) Public administration The public administration is still burdened by long-standing inefficiencies. The reform of Slovakia’s public administration has been supported by EU funds. However, its implementation has been lagging behind. The main bottlenecks in public administration include a fairly rigid, silo-type working relationship between government ministries, a low degree of political neutrality in the civil service and non-transparent and decentralised recruitment procedures (European Commission, 2017f). The limited cooperation between ministries hampers strategic planning and risks creating inefficiencies through the duplication of work and disjointed policy design. Overall, the low quality and efficiency of Slovakia’s public institutions slow the adoption of required structural reforms and act as a drag on competitiveness and the business environment (National Bank of Slovakia, 2017). The new Civil Service Act aims to address administrative weaknesses and is showing the first signs of progress. The Act entered into force on 1 June 2017 and seeks to reduce political influence in public administration and increase staff transparency, quality and mobility. Although it remains too early to assess the law’s actual impact, some steps have been taken to implement it. Five members of the new, politically independent Civil Service Council were elected in October 2017 and are mandated to begin their term in January 2018. Overall, to evaluate the degree of progress, careful monitoring to ensure the Act is correctly implemented and an assessment of the impact of both the Act and the 2015 human resource management strategy would be required. With the support of EU funds, four new analytical units have bee