COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for SLOVAKIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Slovakia’s 2014 national reform programme and delivering a Council opinion on Slovakia’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Slovakia, economic growth, economic reform, economic stabilisation, financial control, job creation, macroeconomics, social situation, stability programme, structural adjustment













EUR-Lex - 52014SC0426 - EN











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52014SC0426

COMMISSION STAFF WORKING DOCUMENT Assessment of the 2014 national reform programme and stability programme for SLOVAKIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Slovakia’s 2014 national reform programme and delivering a Council opinion on Slovakia’s 2014 stability programme /* SWD/2014/0426 final */









Contents
Executive summary. 3
1....... Introduction. 5
2....... Economic situation and outlook. 5
3....... Challenges and assessment of policy agenda. 6
3.1......... Fiscal policy and taxation. 6
3.2......... Financial sector 16
3.3......... Labour market, education and social
policies. 16
3.4......... Structural measures promoting sustainable
growth and competitiveness. 21
3.5......... Modernisation of public administration. 27
4....... Conclusions. 30
Overview table. 32
Annex. 37

Executive
summary

The Slovak economy, which saw one of
the speediest recoveries from the financial crisis, faces the challenge of
strengthening its domestic production base and diversifying its sources of
growth, whilst consolidating progress made so far in terms of structural
reforms and public finances. After a slowdown in
2013, economic activity in Slovakia is set to pick up in 2014. Real GDP is expected to increase by 2.2%
in 2014 and by 3.1% in 2015. The composition of growth is projected to become
more balanced as domestic demand becomes the main driver. Private consumption
is set to recover gradually after several years of decline. Nevertheless,
labour market conditions are expected to improve only modestly and the
unemployment rate will remain close to 13%. On current policies the headline
general government deficit and the structural balance will deteriorate slightly
in 2014 before improving in 2015. The ratio of public debt to GDP will continue
to rise in 2014 and 2015. 
Overall, Slovakia has made limited progress on addressing the 2013 country-specific recommendations. According to the projections in the Commission 2014 spring forecast
the general government deficit has been brought below 3% of GDP in 2013 in a
sustainable manner. Nevertheless, there is a risk of deviation from the
adjustment path towards the medium-term objective in 2014 whereas an
appropriate correction is expected in 2015. Measures aimed at combating tax
fraud have been implemented and the effectiveness of VAT collection has
improved. Efforts have been made to reduce the tax wedge for the low-paid long-term
unemployed. A plan for a Youth Guarantee scheme has been submitted and some
steps have been taken to reform vocational education and training. There has
been no progress, however, on reducing the financing gap in the public pensions
system. There is still ample scope to broaden the tax base. Improvements in the
capacity of public employment services remain limited and the links between
activation measures and social assistance continue to be weak. Progress on
improving the availability of childcare services has also been limited.
Marginalised communities continue to face a lack of inclusive access to
education. No significant steps have been taken to improve the functioning of
the energy market. Limited progress has been made on strengthening the
analytical capacities of key ministries and on improving the efficiency of the
judicial system. 
Further
measures are needed in order to improve Slovakia's growth potential, achieve
budgetary objectives, and ensure the sustainability of its public finances. More
progress is needed in the areas of public finances, employment, education,
business environment and innovation, energy and public administration. The
national reform programme and the stability programme acknowledge that further
efforts are needed in these areas and they put forward measures that have the
potential to enhance economic growth, productivity and employment. More
specifically, key challenges facing Slovakia are:
·        
Public finances: The
general government deficit reached 2.8% of GDP in 2013 and is expected to
remain below 3% of GDP also in the coming years but subject to risks. While
both the stability programme and the national reform programme adhere to
growth-friendly spending, provided data does not fully support this aim. The
public debt is expected to remain below 60% of GDP. Further measures will be
required to achieve the budgetary targets. In particular, achieving the
adjustment towards the medium-term budgetary objective implies reducing the
reliance on one-off and other temporary measures shown in recent years. Tax
collection has improved, but there appears to be scope to further broaden the
base – including for recurrent taxes on real estate and income taxes – and
enhance tax compliance. In the long term, the sustainability of public finances
remains an important challenge given the projected growth in health-related
expenditure. 
·        
Labour market: The
high unemployment rate remains the most important labour market challenge.
Long-term unemployment is a particularly serious issue, accounting for around
70% of total unemployment. The youth unemployment rate is also among the
highest in the EU. Female employment continues to be held back by the
insufficient availability of childcare services. The integration of Roma people
into the labour market remains limited.
·        
Education: The
relevance of education and training to the labour market is low and the
transition from education to employment is slow. Furthermore, the education
sector is not sufficiently attractive to talented young professionals. Coupled with insufficient capacities of pre-primary
education, this has a negative impact on the outcomes for pupils in primary
education. 
·        
Business environment and innovation: The ease of doing business in Slovakia has decreased recently, but
partly due to higher tax compliance costs for start-ups. The point of single
contact system is under-used and there is scope to conduct impact assessments
of regulatory initiatives more systematically. In addition, a lack of
cooperation between academia and business hinders the effectiveness of
knowledge transfer.  
·        
Energy: The lack
of transparency in regulatory policy including the method of setting tariffs
and the weak accountability of the energy regulator impede the smooth
functioning of the energy market. High network charges are reflected in high
electricity prices, which harm the competitiveness of the Slovak industry. By
completing the cross-border north-south gas interconnection, the gas dependence
on a single supplier would be alleviated.
·        
Public administration: Public administration in Slovakia suffers from poor human resource
management and high staff turnover, which also affects the slow implementation
of EU funds. Weak analytical capacity hampers evidence-based policy making.
Public procurement and transparency in judicial proceedings also remain serious
challenges. Perceived corruption prevents faster progress in building a
high-quality and client-oriented public administration and improving the
efficient allocation of public resources.

1.        
Introduction

In May 2013, the
Commission proposed a set of country-specific recommendations for economic and
structural reform policies for Slovakia. On the basis of these recommendations,
the Council of the European Union adopted six CSRs in July 2013. These CSRs
concerned public finances, taxation, the labour market, education, energy, and
public administration. This staff working document (SWD) assesses the state of
implementation of these recommendations in Slovakia.
The SWD assesses policy
measures in light of the findings of the Commission's Annual Growth Survey 2014
(AGS)[1]
and the third annual Alert Mechanism Report (AMR)[2], which
were published in November 2013. The AGS sets out the Commission's proposals
for building the necessary common understanding about the priorities for action
at national and EU level in 2014. It identifies five priorities to guide Member
States to renewed growth: pursuing differentiated, growth friendly fiscal
consolidation; restoring normal lending to the economy; promoting growth and
competitiveness for today and tomorrow; tackling unemployment and the social
consequences of the crisis; and modernising public administration. The AMR
serves as an initial screening device to determine whether macroeconomic
imbalances exist or risk emerging in Member States. The AMR found positive
signs that macroeconomic imbalances in Europe are being corrected. To ensure
that a complete and durable rebalancing is achieved, 16 Member States were
selected for a review of developments in the accumulation and unwinding of
imbalances. These in-depth reviews were published on 5 March 2014 along with a
Commission communication.[3]

Against the background
of the 2013 Council Recommendations, the AGS and the AMR, Slovakia presented updates of its national reform programme and stability programme on 23
April 2014. These programmes provide detailed information on progress made
since July 2013 and on the plans of the government. The information contained
in these programmes provides the basis for the assessment made in this staff
working document.
The
preparation of the national reform programme involved the Council for
Solidarity and Development, which encompasses a broad range of stakeholders.
The programme was also subject of a publicly accessible consultation process
and was approved by a parliamentary committee. The stability programme was
approved by two parliamentary committees and the Parliament.

2.        
Economic situation
and outlook
Economic situation

After robust growth in 2012, the Slovak economy
slowed down in 2013, with real GDP increasing by 0.9%.
Domestic demand continued to act as a drag on growth, mainly due to falling
investment and stagnating private consumption. Net exports continued to grow,
albeit at a slower pace, and remained the main contributor to Slovakia’s positive overall growth rate. Inflation decreased significantly in the second
half of 2013, mainly due to a fall in energy prices. The high overall rate of
unemployment remained broadly stable, at around 14 % in 2013, while long-term
unemployment remains a serious concern.

Economic outlook

Economic growth is expected to
gather pace. According to the Commission 2014 spring 
forecast, real GDP will increase by 2.2% in 2014 and by 3.1% 2015. The
composition of growth will become more balanced as the main driving force
shifts from net exports to domestic demand. The situation in the labour market
is set to improve only marginally with unemployment expected to remain close to
13%. Given declining commodity prices and weak demand-pull pressures, inflation
is projected to remain low in 2014.
The macroeconomic outlook presented
in the stability programme is in line with the Commission 2014 spring forecast. Both project real GDP growth rates of around 2% in 2014 and of
around 3% in 2015. However, there are some differences regarding the expected
sources of this growth. The Commission forecast projects growth to be driven
mainly by domestic demand, while the forecast underpinning the stability
programme expects a larger contribution from net exports. The two
forecasts have similar expectations with regards to the unemployment rate,
which they see as remaining around 13% until 2015, and to inflation, which they
project to remain low in 2014 and to pick up in 2015. Overall, the scenario
underpinning the stability programme appears to be realistic regarding Slovakia's macroeconomic prospects in 2014 and 2015. The macroeconomic scenario
underpinning the national reform programme is identical with that of the
stability programme. The national reform programme 2014 includes estimates of
the macroeconomic impact of four structural reforms presented therein. The
impact is quantified and based on the QUEST III model.

3.        
Challenges and assessment of policy agenda
3.1.                
Fiscal policy and taxation
Budgetary developments and debt dynamics

Fiscal policy
remains focused on complying with EU fiscal rules and generating sustainable
long-term outcomes. The main goal of the stability programme
is to retain a fiscal position which will ensure the sustainability of public
finances in the long term. In the short term, this implies retaining the
deficit below 3% of GDP reference value to ensure an abrogation from the
Excessive Deficit Procedure. The authorities plan to reach their Medium Term
Objective (MTO), defined as a structural deficit of around 0.5% of GDP, in
2017, one year earlier than originally planned. Although the MTO target is
stated in somewhat weaker terms than in the 2013 stability programme (i.e.
'around' instead of 'at'), it is more stringent than what the Pact requires.
The headline
deficit in 2013 was slightly lower than budgeted. The general
government deficit reached 2.8% of GDP in 2013 compared to a target of 2.9% of
GDP. Much stronger collection of VAT, lower co-financing of projects financed
from the EU funds, lower costs of debt financing, better outcomes of
self-governing regions and universities, and the impact of the incorporation of
the Slovak Railway Company in the general government sector all contributed to
this result. One-off measures accounted for an improvement of 0.3% in the
headline balance. On the other hand, revenues from income taxes, dividends and
the sale of emission quotas fell short of the budgeted levels. The sale of
telecom licences was postponed and the sale of emergency oil reserves was not
accepted by Eurostat as general government revenue. An additional negative
impact of around 0.2% of GDP came from financial corrections related to EU
funding. The Commission 2014 spring forecast projects the headline deficit to
remain just below 3% of GDP in 2014 and 2015.
The stability
programme presents a more ambitious deficit target for 2014 compared to the
Draft Budgetary Plan (DBP). In 2014, the authorities target a
deficit of 2.6% of GDP, the same as originally presented in the 2013 stability
programme and 0.2 pp lower than envisaged by the DBP. However, the stability
programme acknowledges that without additional measures, the headline deficit
would not change compared to 2013 and remain at 2.8% of GDP. This estimate
reflects an already realised revenue shortfall from dividends and the sale of
telecom licences vis-à-vis values projected in the DBP. Nevertheless, stronger
revenue from VAT (partly from improved collection) and non-budgeted revenues
from a fine for a cartel in the construction sector as well as envisaged large
one-off proceeds (0.2% of GDP) from a levy on industries operating in a
regulated environment are expected to offset the shortfalls in dividends and
sale of licences.[4]
The stability programme envisages also further mandatory expenditure cuts
triggered by the domestic constitutional debt brake (as the government ratio
exceeded 55% of GDP in 2013). These cuts are not incorporated in the deficit
estimate presented for 2014. The Commission 2014 spring forecast projects a
deficit at 2.9% of GDP, assuming expenditure cuts due to the domestic debt
brake, but excluding the planned revenue from the levy on regulated industries
due to lack of details, while projecting a stronger increase in the public wage
bill in view of persistent expenditure overruns in this area.
As of 2015, two
thirds of the measures that are specified and quantified in the stability
programme concentrate on the revenue side. The main
measures include retaining the revenue yield from VAT (which is assumed to
refer to maintaining the standard VAT rate at 20% instead of reducing it to 19%
from that year, as previously planned) and the introduction of cash registers
for doctors and other free professions. Savings on the expenditure side are
envisaged to stem from the ongoing reform of the state administration – ESO.
The constitutional debt brake which was triggered by the public debt ratio
exceeding 55% of GDP in 2013 is expected to yield additional savings (vis-à-vis
the no-policy-change scenario) as the local governments have to keep their
spending at the levels budgeted for 2014. This rule will be tested for the
first time and the programme baseline for 2015 and later years does not yet
incorporate it. Finally, as of 2016, an annual settlement of social
contributions is planned to provide additional revenue (see Box 1).
The envisaged
fiscal adjustment is back-loaded and requires specification of additional
measures after 2014. The programme aims to reduce the
general government deficit to 2.5% of GDP in 2015, 1.6% of GDP in 2016 and 0.5%
of GDP in 2017. The headline deficit targets are somewhat less ambitious
compared to the 2013 stability programme and require specification of
additional measures in order to be achieved. With no additional measures, the
deficit in 2015 would reach 2.8% of GDP (in line with the Commission 2014
spring forecast), 2.0% of GDP in 2016 and 1.3% of GDP in 2017. 
The
consolidation path is subject to a number of risks, which could be mitigated by
the prospect of higher revenue from a better-than-expected recovery and the
dampening impact of expenditures cuts from the application of the
constitutional debt brake. In 2014, the consolidation effort still
relies markedly on one-off measures, to the effect of 0.5% of GDP, although to
a lesser extent than in the DBP of autumn 2013. Moreover, the planned one-off
revenue related to the organisational changes in SPP (the gas company) will
depend on a successful implementation and will be subject to Eurostat's
decision as to whether it can be accounted as general government revenue. The envisaged
reduction of the public wage bill by 0.6% of GDP in 2014 is not adequately
supported by sufficiently specified measures. Savings from the ESO in 2015,
which is reaching the more advanced phases and can be hence more difficult to
implement, are also subject to a degree of uncertainty. On the other hand, this
could be mitigated by stronger tax collection during the recovery phase and
required savings stemming from the application of the debt brake rules. 
Efforts to
improve the efficiency of public spending have continued but growth-enhancing
expenditure does not appear to be sustained. Slovakia has
continued the state administration reform (ESO), which is expected to yield
cost savings and improve the use of public resources, although it remains subject
to implementation risks. The national reform programme declares an intention to
increase spending on education in future years. However, the state budget for
2014-16 reflects this intention only in 2014. Projected spending on education
in the following years would decline also in nominal terms.
In light of the
above considerations and of the fact that the headline deficit is projected to
remain below 3% of GDP in 2014 and 2015, the Commission concludes that Slovakia
sustainably corrected its excessive deficit in 2013 in compliance with the
recommendation by the Council. This consolidation was supported
by a strong fiscal effort spanning over a number of years. The general
government deficit was reduced from 8% of GDP in 2009 to 2.8% of GDP in 2013.
Over the period 2010-2013 the annual average fiscal effort reached 1.5% of GDP
(1.8% of GDP in adjusted terms), well above the average fiscal effort of at
least 1% of GDP recommended by the Council. 
Slovakia is
expected to partly respect EU fiscal rules. In 2014, Slovakia is subject to the requirements of the preventive arm of the SGP. The recalculated
planned change in structural balance of -0.4% of GDP in the Stability Programme
for 2014 would imply that Slovakia deviates significantly from the required
adjustment path towards the MTO, i.e. a minimum required fiscal effort for this
year of 0.1% of GDP. By contrast, the targeted improvement of 0.3% of GDP in
2015 would be more than the minimum requirement in that year. In the outer
years of the stability programme, the structural adjustment would not ensure
adequate adjustment towards the MTO. Further measures are hence needed to
achieve the required adjustment towards the MTO by the end of the programme
period, implying a reduced reliance on one-off and other temporary measures.
According to the information provided in the stability programme, the growth
rate of government expenditure, net of discretionary revenue measures, over the
years 2014 to 2015 is expected to contribute to an annual structural adjustment
towards the MTO of 0.5% of GDP. This is because the growth rate of this
expenditure is below 2.6%, the lower rate under the expenditure benchmark. A
much lower revenue elasticity assumed by the programme compared to the standard
elasticity explains much of the difference in signals provided by the change in
the structural balance and the expenditures growth in 2014. According to the
Commission forecast, the deviation from the adjustment path would be smaller in
2014 than foreseen in the programme, while a sufficient structural adjustment
is projected in 2015, with the expenditure benchmark being met both in 2014 and
in 2015. Following an overall assessment of Slovakia's budgetary plans, with
the structural balance as a reference and including an analysis of expenditure
net of discretionary revenue measures, there is a risk
of deviation from the adjustment path towards the medium-term objective in 2014
whereas an appropriate correction is expected in 2015.
With respect to
the adjustment path, in the 2013 Draft Budgetary Plan,  Slovakia requested to benefit from the investment clause for 2014, which allows countries to
temporarily deviate from the required change in structural balance. At
present, Slovakia cannot be considered eligible to benefit from the investment
clause, as based on the Commission 2014 spring forecast it does not meet the
condition of non-declining general government investment in 2014.
The
stability programme envisages a reduction in th        e public debt ratio by
the end of the programing period. The debt-to-GDP ratio reached
55.4% of GDP in 2013 and is projected to increase to some 56% of GDP in 2015
before declining to some 53% in 2017, under the assumption that a primary
surplus will be reached in that year. With respect to debt-relevant operations
the stability programme envisages that the planned restructuring of the
Emergency Oil Stock Agency will contribute to a debt reduction through a
classification of its debt amounting to some 0.6% of GDP outside the general
government accounts in 2014. The Commission forecast does not assume this,
which explains a faster increase in the projected public debt ratio to 57.8% of
GDP in 2015. Since the debt-to-GDP ratio would remain below the 60% of GDP
reference rate, the debt reduction benchmark is not applicable. Based on the
Commission forecast, the government debt is projected to further rise by 2030
although remaining below the reference value. The full implementation of the
stability programme would put debt on a decreasing path by 2030, confirming debt
to remain below the reference value in 2030.
     || Box 1. Main measures Additional revenue in 2014 from a fine for a cartel in the construction sector and a levy on regulated industries would be one-offs. Afterwards, the consolidation measures presented in the 2014 stability programme are from two thirds on the revenue side with the rest of the estimated effort coming from expenditure savings. These measures are of a structural nature. Main budgetary measures ||   
   || Revenue || Expenditure ||   
   || 2014 ||   
   || ·      A fine for a cartel in the construction sector (0.1% of GDP) ·      One-off revenue from a levy on companies operating in a regulated environment (0.2% of GDP) || ·      n.a. ||   
   || 2015 ||   
   || ·      Retaining the VAT revenue yield (0.3% of GDP) ·      Introduction of cash registers for doctors and other free professions (0.1% of GDP) || ·      Savings in the context of state administration reform ESO (0.1% of GDP) ||   
   || 2016 ||   
   || ·      Annual settlement of social contributions (0.1% of GDP) || ·      n.a. ||   
   || Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign implies that revenue / expenditure increases as a consequence of this measure. ||   
Box
2.
Excessive deficit procedure for Slovakia 
Slovakia is
currently subject to the corrective arm of the Stability and Growth Pact. The
Council opened the Excessive Deficit Procedure for Slovakia on 2 December 2009
and recommended to correct the excessive deficit by 2013 at the latest.
Slovakia was recommended to implement deficit reducing measures in 2010 as
planned in the budget for 2010-2012, ensure an average annual deficit effort of
1 % of GDP over the period 2010-2013, and specify the necessary measures for
correcting the excessive deficit by 2013, cyclical conditions permitting. It
was also recommended to accelerate the reduction of the deficit if economic or
budgetary conditions turned out better than expected. In addition, to limit
risks to this adjustment, Slovakia was recommended to strengthen the
enforceability of its medium-term budgetary framework and improve the
monitoring of budget execution throughout the year, in particular to avoid
expenditure overruns compared to budget plans.
The year following the correction
of the excessive deficit, Slovakia will be subject to the preventive arm of the
Pact and should ensure sufficient progress towards its MTO. 
An overview of the current state of excessive
deficit procedures is available on: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/index_en.htm.

Fiscal framework

The
main building block of the Slovak fiscal framework is a detailed three-year
government budget plan and the State Budget Act. The macroeconomic
forecast on which the government’s budgetary plans are based is produced by the
Institute for Financial Policy in the Ministry of Finance and endorsed by an
independent body (Macroeconomic Forecasting Committee), whose members represent
commercial banks and some public institutions.
In
response to Fiscal Compact requirements, Slovakia introduced a balanced budget
rule in November 2013.[5] The
law also sets out the procedure for activating a correction mechanism if there
is a significant deviation from the medium-term objective or from the
adjustment path for the balanced budget. Escape clauses in exceptional
circumstances are provided for. The law defines the roles, in relation to the
application of the balanced-budget rule, of the Ministry of Finance, the
government and the independent Council for Budget Responsibility. The latter is
given responsibility for assessing the need for activating the correction
mechanism, assessing the proposal for correction and confirming circumstances in
which escape clauses may apply. In addition, the budgetary rules for local
governments have also been strengthened. 
The
budgetary framework is weakened by the absence of expenditure ceilings and the
fact that only detailed fiscal data relating to the central government is published.
The
2013 stability programme envisaged the introduction of expenditure ceilings to support
convergence towards the medium-term objective. However, to date, these ceilings
have not been defined and the 2014 stability programme does not reiterate the
commitment to introduce them in the next programming period. The publication of
cash fiscal data for the central government is timely and relatively detailed.
However, official publication of data on other government units only began at
the beginning of 2014, and only aggregated revenue and expenditure are
provided. This hampers in-year monitoring of fiscal developments.

Long-term sustainability

Slovakia remains at medium risk regarding the sustainability of public
finances. Slovakia appears to face low fiscal
sustainability risks in the medium-term. The medium-term sustainability gap[6],
showing the adjustment effort up to 2020 required to bring debt ratios to 60 %
of GDP in 2030, is at -0.3% of GDP, primarily related to the projected ageing
costs contributing with 0.3 pp. of GDP until 2030. In the long-term, Slovakia appears to face medium fiscal sustainability risks, primarily related to the
projected ageing costs contributing with 3.4 pp. of GDP over the very long run.
The long-term sustainability gap[7],
which shows the adjustment effort needed to ensure that the debt-to-GDP ratio
is not on an ever-increasing path, is at 4.3% of GDP. Risks would be higher in
the event of the structural primary balance reverting to lower values observed
in the past, such as the average for the period 2004-2013. It is therefore
appropriate for Slovakia to further contain age-related[8]
expenditure growth to contribute to the sustainability of public finances in
the medium/long term.
Healthcare expenditure is expected
to drive the ageing costs. While pensions are
estimated to contribute to the long-term costs of ageing by 1.4, healthcare would
contribute by 2 pps of GDP,[9]
one of the highest projected increases in healthcare expenditure in the EU. Country-specific
recommendations to Slovakia also addressed the issue of the long-term
sustainability of public finances. The analysis in this SWD leads to the
conclusion that Slovakia has made limited progress in addressing these
recommendations.
One of the
2013 CSRs concerned the need to improve the long-term sustainability of public
finances by reducing the financing gap in the public pension system. No progress has been made on this recommendation. The changes
adopted in 2012 significantly reduced public pension costs in the long term.[10] Despite
this, public pension expenditure is expected to increase by 2.7 pps between
2010 and 2060, compared to an EU average increase of 1.0 pps, and the public
pension system is projected to remain in deficit until 2060.[11] One
of the drawbacks of the current pay-as-you-go pension scheme is that the
pension calculations do not incorporate any sustainability factor.
Nevertheless, Slovakia improved the sustainability of police and armed forces pension
systems, which are not part of the universal pension system, by – amongst other
things – increasing the minimum required number of contribution years and
adjusting the indexation mechanism to inflation as of 2018.
Another
aspect of the CSR concerned the increase in the cost-effectiveness of
healthcare. Overall, Slovakia has made limited
progress in this area. Slovakia is expected to have one of the highest increase
(3 pps between 2010 and 2060)[12]
in the ratio of public healthcare expenditure to GDP in the EU28. At the same
time, health outcomes for the Slovak population continue to lag behind the rest
of the EU. In particular, poor outcomes for selected indicators[13] are
less likely to be affected by population lifestyle, which indicates the
potential role of the healthcare system in delivering better health outcomes
for the Slovak population.
The problems
are most visible in inpatient care. One of the main
bottlenecks is the model of healthcare, which is
centred on hospitals. As a result, the number of acute care beds, their
occupancy rate and the average length of stay[14]
all show excess capacity, when compared to the EU average. The managers of
state-owned facilities also face the risk of moral hazard due to a lack of
incentives for proper management. In particular, there are concerns about
proper incentives for a fair contract policy between insurance funds and
hospitals. There is also a lack of transparency in the system of pricing and
billing for healthcare services, owing to poor data availability. Public-sector
procurement is not operating cost-effectively, as a result of a limited number
of bids for tenders and a lack of incentives for hospitals to save costs.
Apart from
deficiencies in the inpatient segment, there are barriers in other areas as
well. A lack of coordination within the fragmented
outpatient healthcare segment and an ineffective gatekeeping role for GPs
result in over-use of outpatient services. The relatively high levels of
out-of-pocket payments[15]
raise concerns about the accessibility of care. Given the ageing population,
there is a lack of adequate long-term services, which would also facilitate a
shift from expensive in-patient care. Proper healthcare sector workforce
planning to address predicted workforce challenges in the medium and long-term
has not taken place, leading to a shortage of nurses and a low proportion of
GPs.[16]
The lack of standard clinical guidelines creates a barrier to doctors treating
patients cost-effectively.
Given the
multiple deficiencies in the health care system, in 2013 the Commission
highlighted the need for well-designed incentive structures and an action plan
for reform. In December 2013, the government
adopted a strategic framework for health, covering the period 2014-30. The
framework sets medium and long-term objectives, including measurable targets in
the areas of outpatient and inpatient care, and public health. Implementation
strategies to meet these objectives will be developed between 2014 and 2016. The
framework contains measures to improve cost-effectiveness, such as a planned
decrease in the number of acute care beds, the introduction of the Diagnosis
Related Groups (DRG) funding mechanism in full operation by 2016 (albeit for
the in-patient care only), the introduction of a residential programme to
address the shortage of GPs, improving care with a focus on the gatekeeping
role of GPs, the development of e-health technologies and services, a
restructuring of the hospital sector and the promotion of prevention
programmes.

Tax system

Slovakia
faces significant challenges in further improving the efficiency of tax
collection, exploiting revenue sources that are less detrimental to growth, and
addressing lax rules on tax deductions. The efficiency
of the Slovak tax system appears to have improved in 2013, especially with
regard to VAT. The effective tax rate of VAT has improved markedly since the
second quarter of 2012, when it reached its lowest-ever level of 12 %. In
the last quarter of 2013, the effective VAT rate was more than 1.5 pps higher,
though still below pre-crisis levels.[17]Strengthening
the risk assessment, audit and IT capacity in the tax administration could help
sustain the ongoing improvements in the efficiency of tax collection. The basis
for housing taxation remains inadequate and rules on tax deductibles may overly
facilitate tax optimisation for self-employed people. The framework for
environmental taxes contains conflicting elements for addressing environmental
issues. In 2013, Slovakia received a country-specific recommendation on taxation.
  Slovakia was encouraged to broaden the basis for its taxation on real estate
and to improve tax collection and tax compliance, including by implementing the
action plan to combat tax fraud. The analysis in this SWD leads to the
conclusion that Slovakia has made some progress on addressing these
recommendations.
One
of the 2013 country-specific recommendations was on taxation, aiming to address
a large VAT gap in Slovakia. Slovakia has made some progress on
addressing the recommendation to speed up implementation of the action plan to
combat tax fraud and to continue efforts to improve VAT collection. There
is high awareness of this issue at national level and improving tax collection is
a priority for the Slovak authorities. Slovakia significantly improved its legislative
framework to curb tax evasion in targeted areas, particularly VAT. Roughly
half of the 50 measures envisaged in the three-stage action plan to fight tax
fraud were adopted in the review period. Measures in the first phase
concentrated on VAT-related issues, including in particular cleaning up the current
VAT registry, limiting abuse of the system by new applicants and preventing the
most obvious fraud schemes.[18]
In the second phase, the administration set up internal processes to fight
corruption and fraud within the institution.[19]
Pilot teams composed of representatives of the tax office, police and
prosecution services — known as the ‘tax cobra’ — discovered complex fraud
schemes. Since January 2014, entities paying VAT have been required to submit
VAT statements detailing all invoices, and the application of reverse charge
has broadened. In addition to efforts as part of the action plan, a ‘receipt
lottery’ was launched in September 2013, where citizens can win a prize if they
register a valid cash receipt. The lottery increased public awareness and
appears to have helped strengthen voluntary tax compliance by encouraging customers
to request receipts.[20]
The adopted measures will need to be monitored and evaluated to ascertain the
extent to which they have improved taxpayers’ voluntary compliance with tax
obligations.
Challenges
remain in addressing gaps at operational level in terms of risk assessment,
audit, debt collection and IT to ensure that the legislative framework produces
the expected results. Current efforts appear scattered and
links between tax assessment/filing, tax collection and, subsequently, risk
assessment and tax audits have not been sufficiently explored. For example, a
scheme to rank taxpayers in risk categories, making use of information from
additional sources to better target tax audits, has not yet been developed.
There is scope to develop and implement fully fledged, end-to-end processes and
strategies to manage compliance risks. No specific efforts have been made to
improve the management of tax arrears collection.[21] The
UNITAS project, designed to link the collection of taxes, customs duties and
social insurance contributions, has not advanced significantly and information
exchange between various tax bodies remains difficult. IT systems also appear
to be a significant bottleneck.[22]
In addition, Slovakia replies late to more than 80% of requests for VAT-related
information coming from other Member States suggesting that there is scope to
improve administrative cooperation with other Member States’ revenue
authorities, especially those of neighbouring countries, to tackle cross-border
VAT fraud.[23]
Slovakia may also
be able to pursue other means to broaden the effective tax
base. The
existing scheme of tax-deductible expenditure appears to provide room for
self-employed people to optimise their tax liability. In 2013, the government
implemented measures to reduce a large discrepancy between employees and
self-employed people in the tax wedge. However, the substantial gap in the
effective tax rates of the two groups observed in 2012 had not much changed in
2013. [24] The
revenue from personal income tax paid by self-employed people is low given the proportion
they make up of the labour force. It may in part result from the narrow tax
base. The ratio of declared expenditure compared to declared revenue, which has
hovered around 90 % since 2007, appears high. This suggests potential
under-reporting of revenue, over-reporting of expenditure, or both. The number
of audits to assess revenue remains relatively low (9 % of all audits). In
2014, the government intends to review the current framework of tax
deductibles, including those for self-employed people, and propose legislative
changes to make progress in this area.
In
2013, Slovakia received a country-specific recommendation to link real estate
taxation to the market value of property. Given the
absence of any adjustments to the taxation of residential real estate, no
progress has been made in this respect. The revenue from recurrent taxes on
immovable property is low. It has remained at 0.4 % of GDP since 2000,
more than 1 pp lower than the EU average. The Ministry of Finance has carried
out an analysis to propose a system for estimating market prices for property,
to facilitate linking real-estate taxation to the market value of property. However,
further implementation is envisaged only after 2015.
The
current design of the tax system does not provide a coherent framework of
incentives to help meet environmental objectives. The price of
electricity includes a levy to support electricity production from renewable
resources and cogeneration, but also electricity production from lignite, which
has a large negative impact on emissions and increases electricity prices.[25] The
preferential tax treatment for diesel compared to petrol is one of the highest
in the EU. Numerous exemptions for excise duties on coal, electricity and
natural gas discourage environmentally conscious behaviour in companies and
households. These exemptions include social and competitiveness aspects.
However, targeted redistribution to the most vulnerable households generally provides
a more efficient instrument to alleviate regressive impacts. Similarly, a
gradual phasing out of harmful subsidies can give companies time to invest in
green technologies, shielding them from immediate competitiveness impacts. The
tax system also promotes the use of company cars, as the percentage used to
calculate the taxable value of this employee benefit remains low, and does not
reflect distance driven or any CO2 performance.[26] Low
taxes on pollution in Slovakia, such as the landfill tax for municipal waste,
fail to provide incentives for a more appropriate use of resources.[27]

3.2.                
Financial sector

The banking system continues to perform
well on key stability indicators. Capital ratios
are well above minimum requirements, while loan-to-deposit ratios and the proportion
of non-performing loans has stayed low compared to the EU average. Loans to
households have grown at a robust pace, but the net flow of loans to
non-financial corporations was negative in 2013. In 2013, Slovakia did not receive a country-specific recommendation in this area.
Access to finance poses some constraints,
especially for SMEs.
According to a 2013 survey by the European Commission and the European Central
Bank, 42.4 % of Slovak SMEs consider access to finance to be a pressing
problem, by far the highest percentage in the EU.[28] The overall
strong state of the Slovak banking sector should, however, allow for funding
for promising projects given the phase of the credit cycle. Progress on implementing
financial instruments for SMEs from the European Regional Development Fund
remains slow. Only one of the three JEREMIE[29]
instruments — the first loss portfolio guarantee — started disbursing loans to
SMEs in September 2013. The other two — venture capital and the portfolio risk
sharing loan — were still selecting financial intermediaries at the end of
2013. The slow start of JEREMIE in Slovakia was mainly due to a lack of a
legislative framework to support financial engineering instruments, a lack of
private investors, and insufficient implementation know-how. Given Slovakia’s limited market size, encouraging cross-border investment will also be critical
for improving businesses financing.

3.3.                
Labour market[30], education and social policies

The labour market continues to be an area of serious concern, and
economic growth is still not sufficient to support substantial job recovery. The unemployment rate is around 14 % and is expected to
improve only modestly. Most of the country’s unemployment is long-term,
underlining that unemployment in Slovakia is more structural than cyclical. School-to-job transition is still
slow and the education system does not respond readily to labour market needs.
The integration of Roma people into the labour market and their social
inclusion in general remain limited. 

Labour market

Slovakia is experiencing high
unemployment, with significant regional disparities.
Long-term and youth unemployment rates are among the highest in the EU and the
employment rate amongst Roma people is very low. The continued shortage of
childcare services hinders labour market participation by women. The planned
increase in the retirement age calls for improving the employability of older
workers. The capacity of public employment services (PES) to provide
personalised services remains hampered by limited resources. In 2013, Slovakia received a country-specific recommendation concerning the labour market that called
for enhancing the capacity of public employment services, strengthening the
link between activation measures and social assistance, addressing long-term
unemployment, reducing the tax wedge for low-paid workers, and improving the
incentives for female employment. The analysis in this SWD leads to the
conclusion that Slovakia has made limited progress on addressing these
recommendations.
Only
limited progress has been made to address the elements of the 2013 country-specific
recommendation aimed at enhancing the capacity of public employment services
(PES), strengthening the link between activation measures and social
assistance, and tackling long-term unemployment through activation measures and
training. To
improve the quality of the support they provide, the public
employment services introduced an integrated labour market guide, offering
on-line services to jobseekers. However, progress on providing more
personalised services has been slow. The 2014 national reform
programme envisages strengthening the capacity of public employment services,
including improving services and increasing salaries of PES staff. Links
between activation measures and social assistance remain weak. In
January 2014, the government introduced requirements for benefits recipients to
accept work in order to continue to receive benefits, tightening benefit
provisions to reduce abuse and increase incentives to work.[31] This
measure does not include elements to encourage job searches or training and
education, while the coverage and level of unemployment and other benefits
remain below the EU average. The relatively low expenditure on active labour
market policies — including education and training — declined over the past two
years, as did the number of people taking part in relevant programmes.[32] A
regular and comprehensive analysis of the impact of active labour market policies
has not taken place.
No
progress has been made on the 2013 recommendation to improve the provision of
childcare facilities, especially for children under three. The
negative impact of parenthood on the employment of women continues to be among
the highest in the EU. Female labour market inactivity due to personal and
family responsibilities is almost double the EU average, while for men it is
around EU average. Despite some partial improvement in the provision of good
quality childcare services for children aged from three to six, kindergarten
places remain scarce. Many applications are rejected and availability of
affordable childcare for children under three remains among the lowest in the
EU. The 2014 national reform programme includes plans to increase funding for
childcare, but there is no strategy or legislative and budgetary framework for
the provision of childcare for children under three years of age. Furthermore,
awareness of the potential of quality early child education and care is weak. Women's
employment is also negatively affected by the low availability of flexible work
arrangements, the relatively high gender pay gap[33],
insufficient care services for the elderly and disabled, and by the
availability of parental leave for up to three years.
Slovakia has
made some progress towards reducing the tax wedge for low-paid workers, as
called for in the 2013 country-specific recommendations. Since
November 2013, long-term unemployed workers who get hired for a job that pays
less than 67% of the average wage and their employers can benefit from an
exemption to pay social and public health insurance contribution for 12 months. Since
the long-term unemployed constitute some 70% of overall unemployment, the
measures has potential to increase employment of especially disadvantaged
jobseekers. However, only 1900 people (0.67% of Slovakia's long term
unemployed) were covered by the measure as of February 2014. The impact of the
measure and its targeting will therefore need to be closely monitored.
Progress
with respect to stepping up efforts to address high youth unemployment has been
limited. At
34%, youth unemployment remains among the highest in the EU despite targeted
programmes to increase labour demand for young people. In 2012, EUR 70 million
of unused structural funds were reallocated to two national projects that
offered wage subsidises to unemployed people under the age of 29. By December
2013, EUR 62.3 million had already been committed and 11 605
jobs had been created. However, the sustainability of these jobs needs to be
monitored, as there is a risk that they will be terminated after the subsidies
are phased out. In addition, there are doubts whether the projects target those
in actual need. Slovakia has the highest long-term unemployment rate among
young people in the EU (19.1% vs. 7.5% EU average in 2012), but there is a
tendency for policy to support the short-term unemployed. Given that national
projects now provide relatively high wage subsidies for young workers who have
been unemployed for only one month, there is a risk of deadweight cost and of
leaving the youth furthest from the labour market without the necessary
support. In January 2014, Slovakia has also submitted a Youth Guarantee
implementation plan (see box below) as youth unemployment remains a
particularly significant challenge.
 Box 3. The delivery of a Youth Guarantee in Slovakia[34] The most important challenges to deliver a Youth Guarantee (YG)[35] in Slovakia are: ·         Too much emphasis on provision of counselling and advisory services to young people while the YG is about guaranteeing a job offer, training, internship or apprenticeship; ·         High reliance on EU funding might compromise sustainability of the delivery of the YG; ·         Insufficient capacity of the PES, for early intervention, for adapting services according to jobseeker profiles and for providing a wider range of activation measures; ·         Lack of active outreach to young people who are not in education, employment or training (NEETs) and are not registered with PES. In addition, more focus is needed on early intervention measures to ensure outreach to the most vulnerable young people, including young Roma. 
Several
additional challenges hamper the improvement of the labour market situation. The
employment of Roma people is far below the average for non-Roma living in the
same regions.[36] Data
show that improving educational participation and attainment of younger Roma
(when compared with older age groups) does not translate into a rise in
employment, which suggests significant structural
barriers,
such as discrimination.[37] Despite
strong regional differences in unemployment levels, regional labour mobility in
  Slovakia is relatively low, limiting matching between jobseekers and
vacancies. Factors hampering mobility include high housing costs relative to
income, an immature housing rental market and high travel costs.[38]
Employers report skills shortages, and adult participation in lifelong learning
activities (LLL) — especially for low-skilled adults — is among the lowest in the
EU and decreasing.[39] Low
access to LLL and to good-quality training prevents older workers from easier
access to employment. Missing legislation on recognition and validation of
learning outcomes gained through non-formal and informal learning, and the lack
of incentives for employers or individuals to participate in further learning
(envisaged in the 2012 action plan) partly explain the low adult participation
in lifelong learning.

Education

The low quality
of education and training systems in Slovakia and their limited relevance to
the labour market hampers the supply of a suitably skilled labour force to the
economy. The school-to-job
transition is difficult and anticipation of skills´ needs remains insufficient.
Other than that, the public expenditure for education remains largely under the
EU average[40] and the 2014 national reform programme
announced the intention to increase the funding of education to the OECD
average in 2020. However, the 2014-16 budget reflects an
intention to raise the funds from the state budget in 2014 only. Funding levels and education models are not
appropriate for improving quality, and the funds earmarked for teaching
activities remain limited. This reduces the attractiveness of the educational
sector for talented young professionals. In turn, this — combined notably with
the insufficient capacities of pre-primary education — has a negative impact on
outcomes for pupils in primary education. In 2013, the
Council Recommendations for Slovakia contained CSRs on education. These advocated
  Slovakia to encourage young people to join the teaching profession, which
would improve educational outcomes. The Council also recommended that Slovakia
improve the provision of work-based learning in companies, create more
profession-oriented bachelor programmes that are also better focused on meeting
workplace needs, and improve access to high-quality and inclusive pre-school
and school education. The analysis in this SWD leads to the conclusion that Slovakia has made limited progress to address these recommendations.
Slovakia has made some progress on steps to attract young people to the
teaching profession but a considerable challenge remains given the low starting
point. Teachers’ wages in Slovakia were 45 % of the average wage
for university graduates, while the OECD average varied from 82 % to 90 %
in 2010 depending on their level of education. Teachers’ salaries rose by 5 %
in 2014 and a bonus has been introduced for new teachers. To further tackle the
shortage of teachers, the possibility for professionals from various
backgrounds to qualify as teachers through a supplementary teacher training
programme was re-introduced. However, funding for higher education declined in
2014 compared to 2013 and the focus is on reducing inefficiency in expenditure.
The country-specific recommendations
in 2013 emphasised the poor educational outcomes in Slovakia. Only limited
progress has been made in this regard.
The performance of pupils in compulsory education is below the EU average and
has decreased significantly[41] and the provision of textbooks to schools remains insufficient.
Unlike in other countries, PISA and PIAAC results show a narrow and closing
proficiency gap between older and younger generations.[42] Initial teacher training is being improved with a greater
emphasis on practical experience. New standards for teachers are being tested
in pilot programmes, with the support of EU funds. A new national test for
pupils in grade 5 (ages 10-11) is being piloted. State curricula will be
changed in response to the declining level of educational achievement among
Slovak pupils. There is a lack of adequate support for underperforming schools,
teachers and pupils, and better support for teachers and high-quality learning
material and equipment is missing. In order to be able to provide more focused
support, experts and stakeholders are calling for a more precise assessment of
schools’ results.
As concerns vocational
education and training, the 2013 country-specific recommendations recognised
the need to improve the provision of work-based learning in companies. Slovakia has made some progress on this. Despite Slovakia’s efforts, however, school-to-job transition remains difficult, due in particular
to skills mismatches and inappropriate anticipation of skills needs.[43]
Initiatives for entrepreneurship education are not coordinated and there is a
lack of data collection to support appropriate skills anticipation. Reform of
vocational education and training, aimed at introducing elements of a dual
system, has begun and adoption of a new law on vocational education and
training is expected in 2014. However, it is not clear whether sufficient
incentives for employers to offer apprenticeships will be provided, or to what
extent capacity building for companies will be supported. Cooperation with
employers, German, Austrian partners and EU-funded projects are expected to
support this ambitious reform. The 2014 national reform programme confirms that
funding of vocational education and training will be largely based on an analysis
of the labour market needs from 2015 onwards. The comprehensive Youth Guarantee implementation plan also announces
new legislative measures to recognise non-formal and informal learning from
2015.
The labour market relevance
and efficiency of higher education is low and the country-specific recommendations
in 2013 emphasised the need for more profession-oriented bachelor programmes
that are also better focused on meeting workplace needs. However, limited progress has been made on this. A relatively low
proportion of profession-oriented bachelor programmes[44] and insufficient cooperation with employers reduce the labour
market relevance of tertiary education. Skills mismatches are still clear. A
project, financed by European structural funds, was launched to enable students
to develop practical experience. Work on the new law on higher education is
ongoing with the expected entry into force in September 2015 and motivational
scholarships are to be introduced in 2014. The new law will aim, in particular,
to modify funding based on output. This could encourage the establishment of
more profession-oriented bachelor programmes and support the profiling of
institutions and programmes (academic, professional, research). Close
cooperation between academia and business sector remains a weak point (see
section 3.4).
The 2013 recommendations
recognised that the low provision of good quality early childhood education
(ECE) and care has a negative impact on educational achievements, in particular
for Roma. Limited progress has been made on improving access to
high-quality, inclusive pre-school and school education for marginalised
communities. Capacity in services for ECE and care is insufficient, and quality
and inclusiveness is poor, especially in light of the need to reduce
inequalities and raise overall educational outcomes. Participation in ECE and
care in Slovakia is among the lowest in the EU.[45] The rate is much lower for children from marginalised Roma
communities (24 % in 2011).[46] Compulsory enrolment in ECE and care for children from socially
disadvantaged environment is being discussed, as well as free participation in
ECE for socially disadvantaged pupils from the age of 3. The announced increase
in ECE capacities does not seem to be linked to the local needs and anticipated
demographic evolution. The proportion of Roma pupils in special schools with
limited curricula is also disproportionally high, reducing their future
educational and professional prospects. In 2010, only 0.3% of Roma population
(27-64) in Slovakia attained higher education degree. Initiatives to improve
educational outcomes for Roma pupils are overly reliant on EU co-financed
projects.

Social policies

Although
the number of people at risk of poverty or social exclusion is relatively low,
the deprived living conditions in marginalised Roma communities and the risk of
poverty or social exclusion for children remain key challenges. The
income support scheme to alleviate poverty, in particularly
among households with more children and low work intensity, is inadequate and
coverage is insufficient, with the non-coverage rate of social
assistance around 30 %. A sustainable
financing system for long-term care services has also not yet been created. The insufficient availability of social housing, the
provision of which is among the lowest in the EU, continues affecting
negatively social inclusion and labour mobility[47]
The
national action plan for children does not sufficiently address child poverty
and does not include methods to ensure access to appropriate resources. The
2013 amendment of the law on social services introduced new types of services
(e.g. support for home care, shelters and families with children), but it does
not sufficiently facilitate deinstitutionalisation. Funding for care services
remains an issue for municipalities. The risk of poverty for those aged over 65
slightly increased in 2012, but remains below the EU average. Slovakia introduced a reform in 2013, which could mitigate this risk by strengthening the
redistribution within the pension system through temporary indexation of
pensions by a fixed nominal amount until 2017 and introducing adjusted
‘solidarity’ coefficients as of 2018.

3.4.                
Structural measures
promoting sustainable growth and competitiveness

Increasing productivity on
the back of the cyclical recovery and subdued labour costs have led to an
improvement in Slovakia’s competitive position.
Export market shares continue to rise and Slovakia is now running a vigorous
trade balance surplus, which it expects to maintain in the forthcoming years. Slovakia’s growth model relies strongly on foreign direct investment, the stock of which
amounts to 60 % of GDP. However, the flow of foreign direct investment to Slovakia has fallen since the crisis. This could have a negative impact on long-term
growth, especially given that domestic investment in research and development
(R&D) is low and companies depend largely on imported technology. There is
also potential for more targeted, stronger cooperation among academia,
businesses and higher education to bolster the application of research and, as
a result, the innovation capacity of companies. The 2013 country-specific
recommendations to Slovakia addressed the need for structural measures
promoting growth and competitiveness, particularly in the areas of R&D and
energy. The CSR on R&D recommended supporting and encouraging the transfer
of knowledge between academia, research and the business sector. The CSR on
energy recommended improving energy market functioning, strengthening interconnections
with neighbouring countries and increasing energy efficiency. The analysis in
this SWD leads to the conclusion that Slovakia has made limited progress on
addressing these recommendations.

Research, development and innovation policies

The
main challenge facing the Slovak research and innovation system remains the
lack of cooperation between public sector research institutions and businesses,
which was also referred to in the 2013 country-specific recommendations. Only
limited progress has been made in this respect. The level of business
expenditure on R&D is low, as is the quality of public research, mainly due
to inefficiency in public spending. Despite this, the recent adoption (in
November 2013) of the national research and innovation strategy for smart specialisation
offers better prospects for encouraging effective cooperation between academia
and businesses. In particular, the strategy identifies key areas of
specialisation on which to concentrate resources, proposes an improved
governance structure for the research and innovation system[48]
and sets out objectives and measures to stimulate structural change in the
Slovak economy. Most of the proposed measures are expected to be funded by EU
funds, under the new research and innovation operational programme. The
strategy has the potential to encourage growth, subject to effective
implementation with proper action plans, by increasing Slovakia’s innovation ability and excellence in research and innovation. However, there is
a risk that implementing the strategy will only attract a low level of private
investment and that the conditions in which domestic innovators, mostly SMEs,
operate will continue to be poor. Some measures have been recently adopted or
are in the pipeline, including revised R&D tax incentives, support for
innovation clusters and innovation vouchers, but the effectiveness of these
measures has not yet been proven.
Box 4. Potential impact of
structural reforms on growth – a benchmarking exercise
Structural
reforms are crucial for boosting growth. It
is therefore important to know the potential benefits of these reforms.
Benefits of structural reforms can be assessed with the help of economic
models. The Commission uses its QUEST model to determine how structural reforms
in a given Member State would affect growth if the Member State narrowed its gap vis-à-vis the average of the three best EU performers on
key indicators such as the degree of competition in the economy or labour
market participation. Improvements on these indicators could raise Slovakia's GDP by about 6.4% in a 10-year period. Some reforms could have an effect even
within a relatively short time horizon. 
The model
simulations corroborate the analysis of Section 3.4, according to which the largest gains would likely stem from a reduction in final goods mark-ups, in particular in the
energy sector. The simulation also supports the analysis in the Section 3.3 and
highlights the fact that substantial gains could be made by addressing the
challenge of long-term unemployment and increasing labour market participation
by women.
Table: Structural indicators, targets and potential GDP effects[49]
Source: Commission
services. Note: Simulations assume that all
Member States undertake reforms which close their structural gaps by half. The
table shows the contribution of each reform to total GDP after five and ten
years. If the country is above the benchmark for a given indicator, we do not
simulate the impact of reform measures in that area; however, the Member State in question can still benefit from measures taken by other Member States.[50] *The long-run effect of increasing the
share of high-skilled labour in the population could be 2.8% of GDP and of
decreasing the share of low-skilled labour could be 0.7%. **EU average is set
as the benchmark. 

Business environment

The quality of
the business environment in Slovakia has deteriorated and support for
fast-growing firms has stagnated. Slovakia’s overall ‘Ease of Doing
Business’ ranking fell from 43 in 2013 to 49 in 2014.[51]
Similar international surveys confirm this result.[52]
National surveys among entrepreneurs also show a substantial increase in
companies’ negative opinion of the Slovak business environment, especially
among SMEs.[53]
The following weaknesses of the business environment are the most cited: rule
of law issues and weak law enforcement, frequently changing legislation and the
low quality of the legislative process, perceived corruption and clienteles in
particular in public procurement, excessive bureaucracy, high social
contributions and taxes, lack of a skilled workforce, and high electricity
prices.
Starting a
business has become more difficult due to the introduction of a requirement for
a financial guarantee in order to set up a limited liability company.
E-government services for companies remain underdeveloped. The Points of Single
Contact, currently located in the Ministry of Interior[54],
offer limited services and there are no plans to integrate them with the tax
administration or with the e-government platforms that are being developed
separately. New reporting obligations for businesses, introduced as part of the
action plan to combat tax fraud (see Section 3.1), have only partly been
balanced by lighter regulation in other areas, and there is scope to make tax compliance
easier for businesses.[55]
There is no SME test yet and impact assessments for new regulatory and
legislative initiatives are not done systematically. The number of SMEs
accessing e-commerce and foreign markets continues to be low. Insolvency cases
remain lengthy, and alternative dispute resolution mechanisms are barely used.[56]
In spite of the
overall deterioration in the business environment, some measures taken have
proven effective. The most important of these are: setting fixed
transfer fees, which has made it easier to register property; introducing
electronic-only communication with the authorities by companies; and combining
registers to avoid duplication of information. Protection for investors has
also improved, by allowing access to all corporate documents during trial. A
few initiatives supporting start-ups – ‘a helping hand for the young’,
organised by the National Agency for Development of Small and Medium
Enterprises (NADSME), ‘start-up weekends’ and ‘start-up awards’ – have led to
innovative companies with high growth potential. However, most of the measures
supporting entrepreneurship and innovative activities in companies have been
fragmented and thus ineffective: firm-level technology absorption, business and
technology incubators, cluster development, government procurement of advanced
technology, and technology transfer measures have failed to create real
eco-systems for innovation. The authorities intend to prepare a medium-term
strategy to develop and support SMEs, but the timetable for adoption and
implementation is unclear.

Energy market and renewables

The
market functioning of network industries, in particular for energy, remains a
weak point. Slovakia is also one of the most energy-intensive
Member States, partly due to its large proportion of industry. Relatively high
electricity prices, in particular for small and medium-sized industrial
customers, hamper the competitiveness of Slovak industry. Despite recent
efforts to liberalise the energy market, it still needs to improve further. In
particular, this could be facilitated through greater transparency and
accountability of regulatory decisions. There is also scope to improve energy
security and energy efficiency.
Given
the deficiencies in energy market functioning, the 2013 country-specific recommendations
called for more efforts to make the energy market function better. However,
  Slovakia has made no progress on improving the transparency of the method by
which tariffs are set or on increasing the accountability of the Regulator of
network industries (RONI). The switching rates for retail and wholesale
electricity customers remain low and prices for industrial consumers are very
high compared to the EU average and its European peers. Furthermore, price
regulation for SMEs was reintroduced in 2012. However, RONI does not only
impose regulatory obligations on operators having a significant degree of
market power but also on new entrants. By doing so, RONI unnecessarily impedes
the development of new entrants and ultimately harms consumers. In addition, RONI
increased the tariffs for access to the Slovak gas transmission system in 2013.
Compared to previous tariffs, the tariff for the gas imported from the Czech Republic increased by 350 % and from Austria by 50 %, respectively. RONI provided
no justification for the increase. If economic assessments of regulatory
decisions are made, they are usually not made public, nor are objections raised
by those affected by the regulatory decision, owing to a commercial
confidentiality policy. The most recent national report of RONI to the European
Commission offers scant information on levels of competition or on the
methodology for calculating the network tariffs and their determinants. In
order to address the lacking public transparency of the regulatory policy, the 2014
national reform programme announced relevant measures including setting-up a
data centre to enhance the transparency of regulatory information, a thorough
assessment of the need for further price regulation and publishing of the underpinning
economic analysis for regulatory decisions. Although, the measures are
promising, their adoption is at an initial stage and subject to implementation
risks. 
High
network charges are one of several indicators of poor regulator transparency
and accountability. According to Eurostat data, the network charges
were the highest in the EU in absolute terms in 2011 and the second highest in
terms of the proportion of the final electricity price (49 %). Slovakia is one of only three Member States for which network charges for industrial
consumers are higher than energy supply costs.[57]
Although energy costs fell, network costs increased between 2009 and 2012.[58]The
network costs include transmission and distribution tariffs. A comparison of
transmission tariffs done regularly by ENTSO-E[59]
indicate that Slovak transmission tariffs for electricity are among the highest
in the EU and no analysis examining the level of those tariffs is available. The
drivers of the high distribution tariffs are also unclear, as a result of the
lack of disclosure of the method and mechanism by which tariffs are set. The
high level of transmission and distribution tariffs may reflect many
determinants such as size of the country, its topography and amount of
electricity transported. The increase in network charges has also been affected
by increasing support for renewable energies and for combined heat and power
generation, and by environmentally harmful subsidies for domestically produced
lignite. The high network charges are translated
into electricity prices. End-user prices for medium-sized industrial consumers
in Slovakia were among the highest in the EU in 2012.[60] Over
the past five years, prices were around 21 % higher than in the Czech Republic.
While
  Slovakia has reached its interim Europe 2020 renewable energy target, the
growth of the renewable energy sector is stagnating. This is due to
the frequent changes to the feed-in-tariff support framework, complicated
administrative procedures and an electricity infrastructure that does not
support the decentralised production of renewable energy. While the renewable
energy development is staggering, the effectiveness and stability of the RES
promotion mechanism is weak and more market-based instruments are missing (e.g.
feed-in premiums). 
As
noted in the 2013 country-specific recommendations, energy infrastructure
challenges in Slovakia extend to investments, particularly in gas and
electricity grids, to strengthen interconnections with neighbours.
Overall, Slovakia has made some progress on improving interconnections with
neighbouring countries. Several projects have been selected as projects of
common interest and are currently being implemented.[61] Gas
interconnections that would diversify Slovak sources of gas suppliers and
routes have gained on importance. In this context, the Slovakia-Hungary gas
interconnection project is expected to operate commercially from 1 January
2015. Electricity projects within Hungary will alleviate the bottleneck on the
Slovak-Hungarian section of the network by increasing cross-border capacity. An
intergovernmental agreement was signed in November 2013, supporting the
implementation of improvements to Slovak-Polish gas interconnections. Given the
need to improve energy security, building a North-South gas axis in Central Europe has gained importance but its further development is proceeding only at a
moderate pace.

Energy and resource efficiency

Slovakia has
made some progress in addressing the 2013 CSR on energy efficiency. A
pilot project on the use of financial instruments in housing (JESSICA) from the
European regional development fund is being run, although greater use of
financial instruments and energy performance contracting is limited. A national
plan for increasing the number of ‘nearly zero energy’ buildings, which
requires gradual increases in energy performance levels for refurbished and
newly built buildings, has also been produced. A package of measures in line
with the 2013 CSR, including energy audits and their implementation in
enterprises, renovation of buildings, reduction of energy losses in heat
distribution networks and setting up a robust monitoring system for energy
savings, have been proposed for EU financing in the next programming period
under the relevant operational programmes (the "Quality of
Environment" programme and the "Integrated Regional Programme").
Low energy efficiency impacts negatively also on Slovakia's high energy
dependency (the energy trade balance amounted to -6.5 % of
GDP in 2011).
However,
resource efficiency issues have not been comprehensively tackled in Slovakia.
The structural transformation of the Slovak economy over the previous decade,
in particular the move away from heavy industry, has helped to decrease
negative impacts on the environment. Recycling rates are low, however, and the
main treatment option for municipal waste is disposal in landfills. Improving
and extending water supply and waste-water infrastructure is a challenge and
connection rates are among the lowest in the OECD (58 %). Slovakia has suffered from several severe floods in the previous decade but has failed to
reduce the risk of them re-occurring by taking cost-effective measures not
detrimental to nature. Air pollution also remains a significant issue, as Slovakia does not currently comply with EU standards regarding air quality.

Transport

Slovakia’s
specialisation in export-oriented manufacturing places increasing demands on
the quality of transport infrastructure. The relatively
underdeveloped rail and road transport infrastructure, however, continues to be
detrimental to economic growth. The unit costs of new and renovated transport
infrastructure are high, reflecting poor planning and design, and public
procurement weaknesses. A recent reduction of infrastructure charges for rail
transport has had a positive impact on competition, but administrative burdens
remain high, creating barriers for new entrants to the market. There has been
progress on preparing a transport plan to identify key priorities consistent
with EU transport policy, in particular the trans-European transport network.
These will provide a strong basis for structural funds financing.
The
proportion of total energy consumption used by transport increased by 5 pps
between 2005 and 2012. The main reasons for this trend are the
insufficient development of public transport and the low excise duties on motor
fuel. As a consequence, the transport sector is now second only to industry in
terms of energy consumption. In 2012, the Slovak authorities introduced a tax
on motor vehicles that, over time, is expected to improve the energy efficiency
of cars. However, no significant action has been taken to develop public
transport or the rail sector.

Digital infrastructure

Slovakia has
the third lowest coverage of fixed broadband in the EU (75.2% of households in
2012). This
figure lags significantly behind the EU average (95.5%) and Slovakia's own Europe 2020 goal of "100% broadband coverage for all". Coverage
growth has been negligible (0.2 %
between 2011 and 2012), mainly due to the failure to use most of the structural
funding dedicated to the development of broadband infrastructure from the
Operational Programme "Informatisation of Society" in the previous
programme period. The lack of broadband infrastructure has negative effects in areas,
such as employment, entrepreneurship, ICT skills and digital literacy,
eGovernment, eHealth, and social inclusion. For example, although the frequency
of individuals with medium and high computer skills in the Slovak adult
population (57.2 %) were above the EU average (50.9 %) in 2012, the
portion of the adult population that interacts online with public authorities
dropped to 32.7 % in 2013, significantly below the EU average (41.4 %).
The target value of the E-Government Index for 2020 – the only Digital Agenda
related index included in the 2014 national reform programme – can therefore be
considered overly ambitious and unlikely to be achieved.

3.5.                
Modernisation of public administration

The Slovak
public administration continues to underperform in terms of both quality and
efficiency. High staff turnover linked to the political cycle and
poor human resource management persist, and poor analytical capacities impair
evidence-based policy-making. Addressing governance weaknesses related to the
EU funding has been slow. Public procurement and transparency in judicial proceedings
remain serious challenges. Slovakia continues to score poorly on international
indicators of perceived corruption. In 2013, Slovakia received a
country-specific recommendation on public administration and the judiciary. The
analysis in this SWD leads to the conclusion that Slovakia has made limited
progress on measures taken to address this recommendation.
The
Council noted weaknesses in the Slovak public administration in 2013 and recommended
that the authorities address these. Slovakia was recommended to strengthen the independence of the public sector, improve human
resources management and strengthen analytical capacities. Progress on
addressing these areas has so far been limited. Analytical capacity was
developed at only seven ministries, but these analytical units have been
actively involved in policy making only to a very limited extent. This is seen in
weak or non-existent impact assessments for new legislation (e.g. on businesses).
Under ongoing reforms of state administration, various state administration
offices at local level were merged into unified offices, and pilot client
centres for citizens were launched. But no significant change to improve human
resources management has been implemented. The Civil Service Act has not been
amended to strengthen the independence of the public sector, but the national
reform programme envisages a draft of a new Act in 2014. In December 2013, the
government took note of a strategic framework for public administration reform
and created a steering committee to oversee the reform. The framework recognises
some of the points recommended in 2013. However, it reiterates goals from other
strategies and lacks an action plan with concrete measures, together with a
timetable and a budget. The government has tentatively committed to adopting an
action plan for public administration reform by July 2014.
Progress
on increasing use of EU funds has been limited, notwithstanding the 2013 country-specific
recommendations. Procurement procedures, management
verifications and project selection remain the main areas of weakness. The high
turnover of staff managing cohesion policy funds, due inter alia to the
political cycle, has not yet been addressed. Shortcomings continue in practical
implementation of financial management and audit procedures. The risk of
corruption in allocating EU funds threatens their efficient and effective use.[62] All
of this may have a negative impact on the prompt and efficient implementation
of the current and upcoming operational programmes between 2014 and 2020. There
are also issues with customs. The country has significant potential to improve
its performance in terms of time taken to process imports and exports in order
to reduce business costs and facilitate trade.[63]
To
address issues within the justice system, Slovakia received a country-specific
recommendation in 2013 to improve the efficiency of the judicial system and
promote alternative dispute resolution procedures. Measures adopted
and planned suggest only limited progress and are expected to have a minor impact
on the systemic problem of length of proceedings.[64] Planned
improvements to ICT tools, especially for electronic communications between
courts and parties, could help shorten the length of procedures and improve the
quality of justice. A new law on arbitration, expected to come into force in
summer 2014, separates commercial and consumer arbitration, without further
promoting alternative dispute mechanisms. Reform of the Code of Civil Procedures
is ongoing, but the amended law is not expected to come into force before 2016.
Public
confidence in the functioning of the justice system is low. According
to a recent Eurobarometer on Justice in the EU, only 25% of the Slovak respondents
tend to trust the justice system, the second lowest figure in the EU. Perceived
independence of judiciary from influences of the government, citizens or firms
has worsened during 2012-13 and is the lowest in the EU.[65] The
capacity of judicial authorities to investigate and prosecute alleged corruption
is weak.[66]
Concerns have also been raised regarding lack of individual independence of
judges in relation to the hierarchical judicial organisation.[67] Several
actions of the executive also raised questions in relation to the independence
of the justice system from political influences.[68] The
national reform programme announces a proposal of a constitutional law by
summer 2014, which aims at limiting criminal immunity of judges and separating
roles of President of the Supreme Court and the Judicial Council.
Widely
perceived corruption remains a general issue within the Slovak public
administration. According to the EU anti-corruption
report, 90 % of Slovaks perceive corruption to be widespread and 21 %
have personally experienced it in the past year.[69]
Based on the 2013 global corruption barometer, people in Slovakia most often deal with corruption in healthcare.[70] According
to the global competitiveness index, Slovakia ranks last in the EU in terms of
irregular payments and bribes, and the situation has deteriorated.[71] Slovakia also stagnates in the ranking by Transparency International at a very low level compared
to its European peers.[72] Widely
perceived corruption prevents faster progress on building a high-quality,
client-oriented public administration and the efficient allocation of public
resources. Corruption is a cross-cutting issue in Slovakia, present at all
levels of government. The 2014 national reform programme recognises this issue
and proposes measures to improve perception of corruption. 
Slovakia
recently reformed its public-procurement rules, but experience shows that
application of these rules remains problematic. The impact of
the 2013 public procurement reform seems to be limited, so far. Amendments to
the Public Procurement Act aimed to increase the independence of the Public
Procurement Office, streamline lengthy tender procedures, improve transparency
requirements and improve competition. The results, however, suggest that public
procurement has become lengthier, savings are lower and use of e-procurement
has declined.[73] The
reform does not appear to have substantially increased the transparency of
public procurement procedures or to have led to a reduction in the number of
complaints about decisions by the contracting authorities. Experience in using
EU structural funds supports these conclusions.

4.        
Conclusions

Ten years after joining the EU and five years after the Euro
adoption, the initial economic stimuli from these accessions seem to have faded
and Slovakia
requires undertaking necessary structural reforms to sustain its growth. In the past, Slovakia‘s robust growth was driven by strong domestic
and foreign demand for Slovak products, high investments and setting up of new industrial
production capacities. Nonetheless, foreign capital inflows and the overall
accumulation of production factors seem to run into limits and structural
measures identified in this staff working document are essential to buttress
economic prosperity and growth for the years to come keeping in mind the fiscal
and long-term sustainability challenges which need to be pursued in parallel.
The analysis in this SWD leads to the
conclusion that Slovakia has made limited progress in addressing the 2013
country-specific recommendations. Starting with the
fiscal field, the general government deficit was sustainably corrected under
the 3% threshold in 2013. Nevertheless, there is a risk of deviation from the
adjustment path towards the medium-term objective in 2014 whereas an appropriate
correction is expected in 2015. Sustainable progress towards the medium-term
budgetary objective hinges on substituting one-off and transitory measures by
structural ones. The long-term sustainability of public finances remains a
challenge due to limited progress in this area, mainly owing to a projected
large increase in healthcare expenditure. Concerning taxation, while Slovakia
has made some progress on improving tax collection and tax compliance, in
particular by implementing the action plan to combat tax fraud, the substantial
gap in the effective tax rates between employees and self-employed persists and
no progress has been made on real estate taxation. As regards the labour market,
although the tax wedge for low-paid long-term unemployed has been reduced, the
long-term and youth unemployment remains rising. Further substantial effort is
needed to tackle also other challenges in this area as recommended, including
providing more childcare facilities and Roma integration. In the area of education,
a reform of vocational education and training is now underway. Still, owing to
little progress and a low starting point, all measures recommended in this
field including the attractiveness of the teaching profession, deserve more
attention going forward. Despite the recent adoption of the national research
and innovation strategy, the effective transfer of knowledge between academia,
research and the business sector can be still substantially improved. On the
side of the energy market and efficiency, the measures to improve transparency
of the regulatory policy have been only announced and need to be followed while
some progress has been made on improving interconnections for both gas and
electricity and on improving energy efficiency. As regards public
administration and the judiciary substantial improvements are still required,
although the law on the civil service is currently being amended. This
concerns also managing EU funds, improving the efficiency of the judicial
system and promoting alternative dispute resolution procedures.
Over and above the
assessment of progress in the areas addressed by the 2013 country-specific
recommendations, there are further challenges ahead. The analysis in this SWD leads to the conclusion that the arduous
public procurement and widely perceived corruption remain serious bottleneck to
growth, as both prevent the efficient allocation of public resources and hamper
the development of a level playing field. A deterioration of the business
environment has put the overall competitiveness of the Slovak economy at risk. 
Apart
from the bottlenecks newly identified in this staff working document, the
challenges reported last year and reiterated in the Annual Growth Survey remain
broadly unchanged. The policy plans submitted by Slovakia address these challenges, and there is broad coherence between both the national
reform programme and the stability programme. The national reform programme
rightly recognises the shortcomings and commits to relevant measures,
particularly in areas such as public finances, employment, education, business
environment and innovation, energy and public administration. The stability
programme shows the ambitious commitment to comply with the recommendations of
the Excessive Deficit Procedure and to reach the medium-term objective within
the programme´s horizon.

Overview
table
 
 2013 commitments || Summary assessment[74] 
 Country-specific recommendations (CSRs) 
 CSR 1: Implement as envisaged the budget for the year 2013, so as to correct the excessive deficit in a sustainable manner and achieve the fiscal effort specified in the Council recommendations under EDP. After the correction of the excessive deficit, pursue the structural adjustment effort that will enable Slovakia to reach the medium-term objective by 2017. Avoid cuts in growth enhancing expenditure and step up efforts to improve the efficiency of public spending. Building on the pension reform already adopted, further improve the long term sustainability of public finance by reducing the financing gap in the public pension system and increasing the cost-effectiveness of the health-care sector. || SK has made some progress on addressing the CSR. • The recommendation with regards to the correction of the excessive deficit was fully addressed. Slovakia sus tainably brought the general government deficit below 3% of GDP treshold. • No progress on reducing the financing gap in the public pension system. No measures have been taken to improve the long-term sustainability of public pensions. • Limited progress on increasing cost-effectiveness of health care. The government has adopted a Strategic Framework for Health 2014-2030, which aims to increase cost-effectiveness. Implementation strategies to reach its objectives will be elaborated between 2014 and 2016. 
 CSR 2: Speed up the implementation of the action plan to combat tax fraud and continue efforts to improve VAT collection, in particular by strengthening the analytical and audit capacity of the tax administration. Improve tax compliance. Link real-estate taxation to the market value of property. || SK has made some progress on addressing the CSR. • Some progress on combating tax fraud, implementing the action plan, and improving tax collection and tax compliance. The legislative framework to curb tax evasion has been enhanced markedly, notably in the area of VAT, and the efficiency of the Slovak tax system seems to have improved. • No progress on real-estate taxation. No measures have been taken to link real-estate taxation to the market value of underlying property. 
 CSR 3: Take measures to enhance the capacity of public employment services to provide personalised services to jobseekers and strengthen the link between activation measures and social assistance. More effectively address long-term unemployment through activation measures and tailored training. Improve incentives for women employment, by enhancing the provision of child-care facilities, in particular for children below three years of age. Reduce the tax wedge for low-paid workers and adapt the benefit system. || SK has made limited progress on addressing the CSR. •Limited progres on strengthening the capacity of public employment services and linking activation policies and social benefits. Despite legislative amendments, progress in strengthening the capacity of public employment services and the links between activation policies and social benefits remains limited and hampered by lack of resources. •Limited progress on addressing long-term  unemployment through activation measures and tailored training. While some meassures have been taken to reform ALMP, there is still a lack of good quality training matching local labour market needs. •No progress on ensuring provision of good quality childcare services. The government plans to increase public funds allocated to childcare in 2014, but there is no strategy or legislative and budgetary framework for the provision of childcare for children under three years of age. •Some progress on reducing tax wedge for the low-paid: the long-term unemployed, which represent around 70% of the total unemployed, and their employers benefit from lower social contributions during the first year of employment. 
 CSR 4: Step up efforts to address high youth unemployment, for example through a Youth Guarantee. Take steps to attract young people to the teaching profession and raise educational outcomes. In vocational education and training, reinforce the provision of work-based learning in companies. In higher education, create more job-oriented bachelor programmes. Foster effective knowledge transfer by promoting cooperation between academia, research and the business sector. Step up efforts to improve access to high-quality and inclusive pre-school and school education for marginalised communities, including Roma. || SK has made limited progress on addressing the CSR. •Limited progress on addressing high youth unemployment. Slovakia has submitted a Youth Guarantee Implementation Plan, but its feasibility depends on the allocation of sufficient resources. •Some progress was achieved on attracting young people to the teaching profession. Teachers´ salaries were increased in 2014 and a bonus has been introduced for new teachers. •Limited progress on raising educational outcomes. While some measures aimed at improving educational outcomes have been introduced, they lack focus. Adequate support to underperforming schools, teachers and pupils is still missing. •Limited progress on reinforcing the provision of work-based learning. A reform of vocational education and training (VET) towards a dual system is ongoing, with a new Act on VET announced for 2014. •Limited progress on the creation of more job-oriented bachelor programmes. Work is on-going on a new Act on Higher Education, which aims to allocate funding according to more output-based criteria. • Limited progress on the effective transfer of knowledge between academia, research and the business sector. The National Research and Innovation Strategy for Smart Specialisation, approved in 2013, seeks to encourage more effective cooperation between academia and businesses. • Limited progress on improving access to high-quality and inclusive pre-school and school education. Compulsory enrolment in early childhood education and care for children from socially disadvantaged environment is currently being discussed. 
 CSR 5: Step up efforts to make the energy market function better; in particular, to increase the transparency of the tariff-setting mechanism, enhance the accountability of the regulator. Strengthen interconnections with neighbouring countries. Improve energy efficiency in particular in buildings and industry. || SK has made limited progress on addressing the CSR. •No progress on improving energy market functioning. No meassures have been taken to increase the transparency of the tariff-setting mechanism and enhance the accountability of the regulator. •Some progress on strengthening interconnections with neighbouring countries. Several projects aimed at improving gas, oil, and electricity interconnections have been selected as projects of common interest and are currently being implemented. • Some progress made on energy efficiency. A National plan for increasing energy efficiency in buildings has been developed and a more general package of energy efficiency measures is proposed for EU financing in the next programming period. 
 CSR 6: Take measures, including by amending the Act on Civil Service, to strengthen the independence of the public service. Improve the management of human resources in public administration. Step up efforts to strengthen analytical capacities in key ministries, also with a view to improving the absorption of EU funds. Implement measures to improve the efficiency of the judicial system. Promote alternative dispute resolution procedures and encourage their greater use. || SK has made limited progress on addressing the CSR. •Limited progress on strengthening the independence of the public service, improve the human resources management and strengthen the  analytical capacities.  A reform of state administration (ESO) is ongoing but it does not include major changes concerning human resources management. Analytical units were created in some ministries but their influence on policy is limited. •Limited progress on improving the absorption of EU funds. Procurement procedures, management verifications and project selection remain significant weaknesses. •Limited progress on implementing measures to improve the efficiency of the judicial system and in promoting alternative dispute resolution procedures. A new act on arbitration is envisaged to come into force in 2014. A reform of the Code of Civil Procedure is ongoing, although the actual Act is not expected before 2016. 
 Europe 2020 (national targets and progress) 
 Policy field target || Progress achieved 
 Employment rate target: 72% || In 2012 the employment rate (15-64 years) remained at a comparable level to the previous year (59.7%). However, the gap to reach the national target by 2020 increased to 6.9% and an average annual employment growth of 1.3% is now needed. Women and the low-slilled have especially low employment rates. 
 R&D intensity target: 1.2% || Slovakia may still achieve its R&D intensity target for 2020, provided that R&D intensity continues to increase both in the public and business sectors. Business R&D intensity has recently increased (from 0.18% of GDP in 2007 to 0.34% in 2012). Likewise, public sector R&D intensity has increased from 0.28% in 2007 to 0.48% in 2012, but both remain quite low. 
 Greenhouse gas (GHG) emissions target: +13 % (compared to 2005 emissions); ETS emissions are not covered by this national target || The change in non-ETS greenhouse gas emissions between 2005 and 2012 was -10%.According to the latest national projections with existing measures taken into account, the target is expected to be reached: -24 % in 2020 compared to 2005 (with a margin of 37 percentage points). 
 Renewable energy target: 14% Share of renewable energy in all modes of transport: 10% || The share of renewable energy sources in Slovakia reached 10.4% in 2012. Renewalbe energy sources (RES) share in transport in 2012: 4.8%. 
 Indicative national energy efficiency target for 2020: 3.12 Mtoe, which implies reaching a 2020 level of 16.2 Mtoe primary consumption and 10.4 Mtoe final energy consumption. || Some progress. The transposition of the Energy Performance Buildings Directive (EPBD) has been notified and the conformity is being assessed by the EC. In 2013, SK notified its national indicative energy target (Article 3, Energy Efficiency Directive - EED).  Measures planned to implement the Article 7 of EED were notified in time and are being assessed by the EC. Further, a Financial  Instrument is under consideration to address energy efficiency investments. 
 Early school leaving target: 6% || The rate increased from 5.3% in 2012 to 6.4% in 2013. The national target is 6%; this takes into account the  increasing proportion of Roma children, which have a high drop-out risk of . Further measures to support their educational achievements are needed to stop the negative trend in early school leaving  and to respect the national target. 
 Tertiary education target: 40% || In 2013 educational attainment increased to 26.9% compared with 23.7% in 2012, an increase of around 60% increase since 2006. Measures aimed at ensuring quality and labour market relevance, such as creation of more job-oriented Bachelor programmes, are lacking.. 
 Risk of poverty or social exclusion target: 17.2% || No major progress was achieved in reducing the number of people at risk of poverty or social exclusion which stood at 1,109,000 in 2012 (a decrease by 2,000 persons since 2008). The persistently high unemployment in and modest minimum income support for people who cannot find employment make the achievement of the 170,000 objective highly improbable. 

Annex

Standard
Tables
Table I.
Macro-economic indicators
Table
II. Comparison of macroeconomic developments and forecasts
Table III. Composition of the budgetary
adjustment
Table IV. Debt dynamics
Table V. Sustainability
indicators
Table VI. Taxation indicators
Table VII. Financial market indicators
Table VIII. Labour market and social
indicators
Table IX. Product market performance and
policy indicators
Table X. Green Growth
List of indicators used in Box 4 on the potential impact on growth of structural reforms. 
Final goods sector mark-ups: Price-cost
margin, i.e. the difference between the selling price of a good or service and
its cost. Final goods mark-ups are proxied by the mark-ups in selected services
sectors (transport and storage, post and telecommunications, electricity, gas
and water supply, hotels and restaurants and financial intermediation but
excluding real estate and renting of machinery and equipment and other business
activities[75]).

Source: Commission services estimation using
the methodology of Roeger, W. (1995). "Can imperfect Competition
explain the Difference between primal and dual Productivity?" Journal
of Political Economy Vol. 103(2) pp. 316-30, based on
EUKLEMS 1996-2007 data. 
Entry costs: Cost of
starting a business in the intermediate sector as a share of income per capita.
The intermediate sector is proxied by the manufacturing sector in the model. 
Source: World Bank, Doing Business
Database. www.doingbusiness.org. 2012 data.
Implicit consumption tax rate:
Defined as total taxes on consumption over the value of private consumption. In
the simulations it is used as a proxy for shifting taxation away from labour to
indirect taxes. The implicit consumption tax-rates are increased (halving the
gap vis-à-vis the best performers) while labour tax-rates are reduced so that
the combined impact is ex-ante budgetary neutral.
Source: European Commission, Taxation
trends in the European Union, 2013 edition, Luxembourg, 2013. 2011 data.
Shares of high-skilled and low-skilled: The
share of high skilled workers is increased, the share of low-skilled workers is
reduced (halving the gap vis-à-vis the best performers). Low-skilled correspond
to ISCED 0-2 categories; high-skilled correspond to scientists (in mathematics
and computing, engineering, manufacturing and construction). The remainder is
medium-skilled. 
Source: EUROSTAT. 2012 data or latest
available. 
Female non-participation rate: Share
of women of working age not in paid work and not looking for paid work in total
female working-age population
Source: EUROSTAT. 2012 data or latest
available.
Low-skilled male non-participation
rates: Share
of low-skilled men of working age not in paid work and not looking for paid
work in total male working-age population
Source: EUROSTAT. 2012 data or latest
available.
Elderly non-participation rates (55‑64
years): Share
of the population aged 55‑64 years not in paid work and not looking for
paid work in total population aged 55‑64 years.
Source: EUROSTAT. 2012 data or latest
available.
ALMP: Active Labour
Market Policy expenditures as a share of GDP over the share of unemployed in
the population. 
Source: EUROSTAT. 2011 data or latest
available.
Benefit replacement rate:  Share
of a worker's pre-unemployment income that is paid out by the unemployment
insurance scheme. Average of net replacement rates over 60 months of
unemployment. 
Source:
OECD, Benefits and Wages Statistics. www.oecd.org/els/benefitsandwagesstatistics.htm.
2012 data.
[1] COM(2013) 800 final
[2] COM(2013) 790 final
[3] Aside from the 16 Member States identified in the AMR, Ireland was also covered by an in-depth review, following the conclusion by the Council
that it should be fully integrated into the normal surveillance framework after
the successful completion of its financial assistance programme.
[4] The one-off revenue from the levy on regulated industries relates
to the change in the ownership structure of SPP (a gas company) where the state
has currently a 51% stake. The stability programme does not specify further
details of this transaction.
[5] The law defines the balanced budget as structural deficit equal to
or below 0.5 % of GDP (1 % if the public debt-to-GDP ratio is
significantly below 60 %) based on the European system of accounts
methodology.
[6] See Table V. The medium-term sustainability gap (S1) indicator
shows the upfront adjustment effort required, in terms of a steady improvement
in the structural primary balance to be introduced until 2020, and then
sustained for a decade, to bring debt ratios back to 60% of GDP in 2030,
including financing for any additional expenditure until the target date,
arising from an ageing population. 
[7] See Table V. The long-term sustainability gap (S2) indicator shows
the immediate and permanent adjustment         
required to satisfy an inter-temporal
budgetary constraint, including the costs of ageing. 
[8] Ageing costs comprise long-term projections of public age-related
expenditure on pension, health care, long-term care, education, and
unemployment benefits. See the 2012 Ageing Report for details.
[9] As compared to an average increase of 0.9 pps of GDP in the EU; 2012 Ageing Report and Fiscal
Sustainability Report 2012.
[10] The two most important changes were the introduction of a link
between the statutory retirement age and life expectancy from 2017, and the
switch to inflation-based indexation, starting from 2018.
[11] Council for Budgetary Responsibility, Report on the Long-term
Sustainability of Public Finances (April 2013).
[12] Fiscal Sustainability Report 2012, European Commission.
[13] Such as perinatal mortality, avoidable mortality and
vaccine-preventable diseases.
[14] 4.5 acute beds per 1000 inhabitants compared to an EU average of
3.6 per 1000 inhabitants; a 66 % occupancy rate compared to an EU average
of 75%, and an average length of hospital stay of 6.6 days, compared to an EU
average of 6.1 days. Source: European Commission, based on Eurostat and OECD
health data from 2011, or most recent data available.
[15]According to 2011 OECD data, Slovakia, with out-of-pocket payments
on all health expenditure of some 24%, is above the OECD average (20%).
[16] The proportion of GPs out of all physicians was 13.8% in 2007,
compared to an OECD average of 29.6%; the number of nurses per 1000 inhabitants
was 5.9 in 2011, compared to an OECD average of 8.8. Source: OECD health
statistics 2013.
[17] The implicit tax rate on consumption in 2012 amounted to 16.7% ­
the second lowest in the EU.
[18] The measures included removing entities who do not communicate with
the tax authorities from the VAT registry, an obligation for high-risk VAT
registration applicants to provide a guarantee, joint and several tax liability
for two payers in the VAT chain, extending the reverse charge, and a reduction
in the number of people paying VAT quarterly.
[19] The financial administration also introduced organisational changes
prior to the action plan, aiming to break personal links between local tax
administrators and taxpayers and prevent their re-emergence in the future.
[20] Irregularities related to cash registers or receipts have been
uncovered either through a refusal to register receipts for the lottery or
active reporting of malpractice. The number of these surged from 300 cases for
the period March-August 2013 to more than 4 500 cases within five months
of the launch of the lottery.
[21] In 2011, tax debt as a proportion of net revenue collections was
the highest in the EU (Tax Administration 2013, OECD).
[22] For example, the IT system is not yet able
to use data obtained from VAT statements.
[23] European Commission (2014) Commission Staff Working Document
accompanying the document Report from the Commission to the Council and the
European Parliament on the application of Council Regulation (EU) No 904/2010
concerning administrative cooperation and combating fraud in the field of VAT,
SWD(2014)39 final. 
[24] The effective tax rate (ETR) reached 0.5% for self-employed people
and 6.2% for employees in 2012. The proxy for the ETR of self-employed people
is the ratio of money paid in taxes to the mixed income aggregate obtained from
national accounts. The proxy for the employee’s ETR is the ratio of money paid
in taxes to domestic compensation of employees.
[25] In 2011, support for electricity production from coal amounted to
25% of the overall charge.
[26] As of 2014, the value of the benefit will decline, because it will
be calculated as 1% of the residual value of the car rather than the
acquisition value.
[27] 75% of Slovak municipal waste is landfilled, while in some Member
States this practice has been abolished.
[28] 2013 survey on the access to finance of small and medium-sized
enterprises (SAFE).
[29] The joint European resources for micro to medium enterprises
(JEREMIE) programme is an initiative managed by the European Commission and the
European Investment Fund, which aims to improve access to finance for SMEs by
using structural funds.
[30] For further details, see the 2014 Joint Employment Report,
COM(2013)801, which includes a scoreboard of key employment and social
indicators.
[31] The Act on assistance in material need introduced a system of
benefits conditional on work activity (32 h/month) where ad hoc work was
offered by municipalities. It attracted widespread criticism for indirect
discrimination against the Roma minority and the Public Defender of Rights
(Ombudsman) referred the legislation to the Constitutional Court for a decision
on possible violation of fundamental human rights.
[32] In
2012, the number of participants in programmes relating to active labour market
policies decreased by more than 20 000 in comparison to the previous year
(by 18 pp). EU network of independent experts on social inclusion, Z. Kusa,
Institute for Sociology of the Slovak Academy of Sciences, December 2013.
[33] In 2012, the gender pay gap in Slovakia (21.5%) is one of the
highest in the EU (the EU average was 16.4%) and is tightly linked with gender
segregation in occupations and economic sectors.
[34] Slovakia presented a Youth Guarantee Implementation Plan in
December 2013, updated in April 2014.
[35] Pursuant to the Council Recommendation of 22 April 2013 on
establishing a Youth Guarantee (2013/C 120/01): "ensure that all young
people under the age of 25 years receive a good-quality offer of employment,
continued education, an apprenticeship or a traineeship within a period of four
months of becoming unemployed or leaving formal education".
[36] Agency for Fundamental Rights (FRA): Financial and labour market
situation 2012: The employment rate is 21 % among Roma, 53 %
among non-Roma living nearby.
[37] According to the FRA, almost half of Roma people experienced
discrimination in the past five years when looking for work. In addition,
according to a 2012 survey conducted by the Institute for Public Affairs’
Advisory Centre for Civil and Human Rights, 78 % of Roma felt
discriminated against.
[38] Partnership Agreement, February 2014.
[39] 3.1 % compared to the EU average of 9 % in 2012
(Eurostat, Labour Force Survey).
[40] Public expenditure on education was 4 % of GDP in Slovakia in 2011, compared to the EU average of 5.3 %.
[41] Results in the 2012 PISA survey indicate a significantly higher
proportion of low achievers than EU average in all three areas tested, together
with a much lower performance compared to earlier results. Source: Programme
for International Student Assessment OECD survey 2012.
[42] OECD Programme for International Assessment of Adult Competencies
(PIAAC). While the survey shows that skills are highest for the age group 25-34
and decrease for older generations at EU and OECD levels, skills of Slovak
younger generations are relatively close to skills of older generations.
[43] This is reflected in a high unemployment rate of students from
vocational schools, particularly those without the ‘maturita’ (the
qualification received on completing secondary school) (16.8 %), and high
unemployment levels amongst secondary school leavers (14.6 %), OECD 2011
data.
[44] In 2011, 1.2 % of ISCED 5 students in Slovakia were in such programmes, compared with the EU average of 13.6 %.
[45] 76.9 % in 2011 compared to the EU average of 93.2%, source
Eurostat (UOE). Low ECE and care participation appears to be a strong
predictive factor of success in later educational attainment.
[46] Brüggeman, C. (2012), Roma Education in Comparative Perspective.
Analysis of the UNDP/World Bank/EC Regional Roma Survey, Roma Inclusion
Working Papers, Bratislava, United Nations Development Programme.
[47]
European Parliament, Social Housing in the EU, 2013. Slovakia has one of the lowest levels of available housing in the EU. In 2011, there were
329 inhabited dwellings per 1 000 inhabitants. Slovakia also has one of
the highest household overcrowdings rates in the EU (38.4% in 2012, compared to
the EU average of 17.2%).
[48] This includes the reorganisation of the Slovak Academy of Science
and of the higher education institutions, the introduction of common research
agendas, shared between public research institutions and the business sector,
and the reform of project-based and institutional funding systems.
[49] Final goods sector mark-ups is the difference between the selling
price of a good/service and its cost. Entry cost refers to the cost of starting
a business in the intermediate sector. The implicit consumption tax rate is a
proxy for shifting taxation away from labour to indirect taxes. The benefit
replacement rate is the % of a worker's
pre-unemployment income that is paid out by the unemployment scheme. For a
detailed explanation of indicators see Annex.
[50] For a detailed explanation of the transmission mechanisms of the
reform scenarios see: European Commission (2013), "The growth impact of
structural reforms", Chapter 2 in QREANo. 4. December
2013. Brussels; http://ec.europa.eu/economy_finance/publications/qr_euro_area/2013/pdf/qrea4_section_2_en.pdf
[51] World Bank Doing Business 2014.
[52] In 2014, Slovakia dropped 15 positions in the Heritage Foundation’s
Index of Economic Freedom and in Forbes’ Best Countries for Business ranking,
and 7 positions in the World Economic Forum’s Global Competitiveness Report.
[53] 2013 SME survey done by the American Chamber of Commerce in Slovakia.
[54] Various state administration offices at the local level were merged
in unified offices and pilot client centres were launched under the ongoing
reform of state administration (ESO). 
[55] For example, VAT taxpayers have to file statements, companies will
have to pay a minimum tax (which will be tax deductible) even during periods
when they make losses, etc. Measures that simplify doing business include
abolishing the obligation to report cash payments to physical persons exceeding
EUR 5 000 per year and reducing the obligation to keep price records for
the purposes of price regulation.
[56] Data on the number of cases of mediation or arbitration is not
collected.
[57] In 2012, Slovakia’s network charges for industry were 40 %
higher than in the Czech Republic in a consumption band IC and significantly
higher also for bands ID and IE while the energy supply costs were lower. In a
difference to industry, the charges for households in bands DC, DD and DE were
comparable to the Czech Republic while they were significantly lower in other
bands. Source: Eurostat.
[58] Network costs between
2009 and 2012 increased by around 18 %. Energy and supply costs decreased
by around 28 % between 2009 and 2012. Source: Eurostat.
[59] Slovakia has the highest tariff for "infrastructure" and second highest for
"system services". Overall, Slovakia has the third highest transmission
tariff. When correcting for "other regulatory charges", Slovakia has the highest transmission tariffs. Source: European Network of Transmission
System Operators for Electricity: https://www.entsoe.eu/about-entso-e/market/transmission-tariffs/.
[60] Excluding VAT, final electricity prices in Slovakia in 2012 were the fourth highest for industry (consumption band IC 500-2000MWh) and
the 15th highest for households (consumption band DC). Source: Eurostat.
[61]
Projects of common interest include (i) a North-South
priority corridor for gas interconnections in Central Eastern and South Eastern
Europe (‘NSI East Gas’); (ii) a North-South priority corridor for electricity
interconnections in Central Eastern and South Eastern Europe (‘NSI East
Electricity’), and (iii) a priority corridor for oil supply connections in Central Eastern Europe.
[62] Allegations of bribery and conflicts of interest in rail projects
are currently investigated as part of the operational programme on transport.
[63] World Bank (2013). Doing Business 2014:
Understanding Regulations for Small and Medium-Size Enterprises. Washington,   DC: World Bank Group.
[64] The length of judicial proceedings in Slovakia, particularly for
litigious civil and commercial cases and for administrative cases, is above the
EU average and has deteriorated. Thus despite increases in productivity, courts
generally are not able to keep up with their workload. Sources: 2014 EU Justice
Scoreboard and the Communication from the Commission to the European
Parliament, the Council, the European Central Bank, the European Economic and
Social Committee and the Committee of the Regions, COM(2014) 155 final. 
[65] World Economic Forum, The Global Competitiveness Report;
2013-2014.
[66] OECD Report on implementing the OECD Anti-Bribery Convention in
SK, June 2012.
[67] There are allegations of arbitrariness of disciplinary proceedings
due to the influence of the head of the judiciary over judicial panels, and the
overrepresentation of politically elected panel members in such panels at
second instance.
[68] For example, a considerable number of court presidents were removed
by two consecutive Ministers of Justice over a relatively short period of time,
suggesting politicisation. 
[69] EU anti-corruption report and the Report from the Commission to the
Council and the European Parliament, COM(2014) 38 final.
[70] Global corruption barometer 2013, Transparency International.
[71] WEF Global Competitiveness Report indicator ‘irregular payments and
bribes’.
[72] The 2013 edition of the corruption perception index by Transparency International ranked Slovakia as the fifth worst in the
EU, followed by Italy, Romania, Bulgaria and Greece.
[73] A study of public procurement tenders in 2009-2013, Transparency
International Slovakia, January 2014.
[74] The following categories are used to assess progress in
implementing the 2013 country-specific recommendations: No progress: The
Member State has neither announced nor adopted any measures to address the CSR.
This category also applies if a Member State has commissioned a study group to
evaluate possible measures. Limited progress: The Member State has announced some measures to address the CSR, but these measures appear insufficient
and/or their adoption/implementation is at risk. Some progress: The Member State has announced or adopted measures to address the CSR. These measures are
promising, but not all of them have been implemented yet and implementation is
not certain in all cases. Substantial progress: The Member State has adopted measures, most of which have been implemented. These measures go a
long way in addressing the CSR. Fully addressed: The Member State has adopted and implemented measures that address the CSR appropriately.
[75] The real estate sector is excluded because of statistical
difficulties of estimating a mark-up in this sector. The sector renting of
machinery and equipment and other business activities is conceptually part of
intermediate goods sector.