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# 52013SC0375

**COMMISSION STAFF WORKING DOCUMENTAssessment of the 2013 national reform programme and stability programme forSLOVAKIAAccompanying the documentRecommendation for a COUNCIL RECOMMENDATIONon Slovakia’s 2013 national reform programme and delivering a Council Opinion onSlovakia’s stability programme for 2012-2016 /\* SWD/2013/0375 final \*/**

  

Contents

Executive summary. 3

1........... Introduction. 5

2........... Economic developments
and challenges. 6

2.1........ Recent economic
developments and outlook. 6

2.2........ Challenges. 7

3........... Assessment of policy
agenda. 9

3.1........ Fiscal policy and
taxation. 9

3.2........ Financial sector 20

3.3........ Labour market, education
and social policies. 21

3.4........ Structural measures
promoting growth and competitiveness. 25

3.5........ Modernisation of public
administration. 29

4........... Overview table. 32

5........... Annex. 35

Executive
summary

Economic Outlook

After holding up well in 2012, the global downturn
started to take its toll on the Slovak economy in 2013. After experiencing one of the strongest
post-crisis recoveries in the EU, growth slowed to 2% in 2012, held up by net
exports. According to the Commission's spring 2013 forecast, GDP is expected to
decelerate to 1% in 2013 before rebounding to 2.8% in 2014. The situation in
the labour market is not set to improve, however, with unemployment expected to
stay above 14% in 2013 and 2014. Inflation, which rose to 3.7% in 2012, is set
to stabilise at close to 2% in 2013 and 2014, mainly on the back of lower
domestic demand.

Slovakia's general government deficit is projected to
improve, while the public debt remains on the rise. According to the Commission's forecast, the
deficit is forecast to decline to 3% of GDP in 2013 from 4.3% of GDP in 2012.
In 2014, the deficit would increase slightly to 3.1 % of GDP despite a pick-up
in economic activity. The structural budget deficit is projected to fall from
4.1% of GDP in 2012 to 3% in 2013 and 2.4% in 2014. In 2010-2013 the adjusted
annual average fiscal effort is estimated to have reached 1.4% of GDP a year
(above the 1% of GDP recommended under the EDP). Slovakia confirmed its
medium-term objective at -0.5% of GDP in structural terms. The government debt
is forecast to remain below the 60% reference value, reaching 54.6% in 2013 and
56.7% in 2014.

Key Issues

Slovakia is at a crossroads. For well over a decade,
its growth rates were amongst the highest in the EU and it experienced one of
the speediest recoveries from the financial crisis. But with real GDP growth rate expected to
remain below the pre-crisis levels and persistently high unemployment, it must
strengthen domestic production and diversify sources of growth, whilst building
on progress made in terms of structural reforms and public finances.

In the last year, Slovakia has made progress on fiscal
and structural policies. The
budget deficit is on a downward path after the adoption of a sizeable
consolidation package. There was a major pension reform to increase the
statutory retirement age in line with life expectancy. An action plan to combat
tax fraud was also adopted. Reforms to boost employment and growth have been
launched but remain at an initial stage, particularly those that tackle public
administration reform, vocational education and public employment services.

Despite the progress made, more needs to be done in
the medium to long term to bolster growth potential and ensure that public
finances are sustainably managed. Further progress is needed on labour market, energy and public
administration. The efficient use of EU structural funds will be crucial in
financing key reforms to increase growth potential in many areas.

·
Public finances: Considerable progress was made in recent
years in terms of fiscal consolidation, though some measures are temporary or
one-off and will need to be replaced. Much can be gained by broadening the tax
base, improving tax collection and making expenditure more efficient,
especially healthcare expenditure. Despite the positive effects of the recently
adopted pension reform, there is still a gap between revenue and future
age-related spending. Building on the recent adoption of an action plan to
reduce tax fraud, efforts need to continue in this area and be underpinned by a
comprehensive tax compliance strategy going beyond VAT. An expenditure review
could reduce inefficiencies and reallocate spending to areas with greater
growth potential.

·
Labour market: The steep increase in unemployment in the
wake of the crisis (14% in 2012) requires action to strengthen education and
ensure that unemployed people – especially young unemployed people (34% in
2012) – are helped back to work. Long-term unemployment is amongst the highest
in the EU at 9.4% of the labour force, while employment rates for low-skilled
workers are among the lowest. Despite some recent improvements in the design of
the Slovak tax and benefits system, the tax wedge for the unemployed taking up
a low-paid job remains large. The shortage of good quality, affordable early
childhood education and care is an obstacle to female participation in the
labour market (which stood at 57.3% in 2012). The integration of the Roma
population into the labour market is very limited (the Roma unemployment rate
is between 2 and 8 times higher than the non-Roma unemployment rate) and the
participation of Roma children in early childhood education and care is very
low (77.5% compared to an EU average of 92.5%).

·
Public
administration: Several
measures were adopted to make public procurement and the judiciary more
transparent. Nevertheless, experience with implementing EU structural funds
suggests that there are still problems in this area. Weaknesses also persist in
the functioning of public institutions, law enforcement and the business
environment. Better use could be made of EU funds available to finance
educational reforms and improve the quality of the science and technological
base.

·
Energy: Effective competition and the
transparency of price-setting mechanisms in regulated industries could be
improved, notably in the energy sector, where consumers’ switching rates are
low and unregulated electricity prices for medium-sized industrial consumers
were the fifth highest in the EU in 2011. This is cause for concern given the
high energy intensity of the economy.

1.
Introduction

In May 2012, the Commission proposed a set of
country-specific recommendations (CSRs) on economic and structural reform
policies for Slovakia. On the basis of these recommendations, the Council of
the European Union adopted seven CSRs in the form of a Council Recommendation.
These CSRs concerned public finances, taxation, the labour market, education, vulnerable
groups and public administration. This Staff Working Document (SWD) assesses
the state of implementation of these recommendations.

The
SWD assesses policy measures in light of the findings of the Commission’s 2013
Annual Growth Survey (AGS)[1] and the second annual Alert Mechanism
Report (AMR)[2], which were published in November 2012.
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 2013.
It identifies five priorities to guide Member States towards renewed growth:
implementing differentiated, growth-friendly fiscal consolidation policies;
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 was used to
determine whether macroeconomic imbalances exist or risked emerging in Member
States. It found positive signs that macroeconomic imbalances in Europe were
being corrected. To ensure that a complete and durable rebalancing is achieved,
14 Member States were selected
for a review of developments in accumulating and unwinding imbalances.[3]

Against
the background of the 2012 Council Recommendation, the AGS and the AMR,
Slovakia presented updates of its national reform programme on 24 April 2013
and of its stability programme on 30 April 2013. These programmes provide
detailed information on progress made since July 2012 and on the government’s
future plans. They also provide the basis for the assessment in this SWD.

The programmes submitted were the subject of a consultation
process, which was publicly accessible. The preparation of the national reform
programme involved the Council for Solidarity and Development, which
encompasses a broad range of stakeholders. The stability programme is sent for
information to the Parliament, while the economic parliamentary committee
discusses the national reform programme.

Overall assessment

The analysis in this SWD leads to the conclusion that
Slovakia has made some progress on measures taken to address the CSRs of the Council
Recommendation.

Regarding fiscal consolidation, taxation and the
long-term sustainability of public finances, a sizeable consolidation package,
an action plan to combat tax fraud and an important reform to reduce the
long-term financing gap of the pension system have been adopted during the last
12 months.

Progress has also been achieved in implementing the
CSRs on labour market policies, education and the public administration. The
youth action plan has been launched, amendments to the acts on vocational
education and training (VET) and higher education (HE) have been adopted in
2012 and a reform of public administration was recently launched. Only limited
progress has been made on implementing the 2012 CSR on marginalised Roma
communities.

Despite the progress made, more needs to be done in
all of these areas and the challenges identified in July 2012 remain. In
the short term, the main challenge is to ensure that the fiscal consolidation
strategy is sustainable while implementing measures for a return to growth and
job creation, in particular by improving public administration, public
employment services and the capacity to efficiently use EU funds. In the medium
term, continuing efforts to improve the quality of education, institutions and
the business and regulatory environment and to improve tax compliance and
broaden the tax base will be instrumental in fostering and sustaining economic
and employment growth.

Slovakia’s
policy agenda is relevant and addresses most of challenges identified in last
year’s Staff Working Document. The two documents are fully aligned with
each other. The national reform programme reiterates the commitments made by the
authorities to tackle the problems in the labour market and to improve the
education system and the business environment, with a special focus on public
administration. In the stability programme, Slovakia confirms its commitment to
meeting the requirements under the Excessive Deficit Procedure, improving tax
collection and continuing consolidation over the programme period so as to
converge towards the medium-term objective in line with the Stability and
Growth Pact. Sometimes, however, the measures planned do not address the
challenges in a comprehensive way.

2.
Economic developments and challenges

2.1.
Recent economic developments and outlook

Recent economic developments

After holding up well in 2012, in early 2013 the
Slovak economy started to feel the toll of the protracted global economic
uncertainty and a weaker external environment.
Having experienced one of the strongest post-crisis recoveries in the EU, the
Slovak economy maintained momentum in 2012, with real GDP growing by 2 %.
The situation in the labour market, however, did not improve. The unemployment
rate increased to 14 %, partly reflecting GDP growth below the level
historically associated with falling unemployment. Economic growth was entirely
driven by net exports, boosted by a major increase in production in the
automotive industry. Import growth remained subdued as domestic demand
contracted. Private consumption and household real disposable income continued
to decline in real terms. After a spike in 2011, investment also dropped.
Production declined by around 10 percentage points (pps) in the construction
sector, with companies putting investment decisions on hold because of the
uncertain economic outlook.

Economic outlook

According to
the Commission’s 2013
spring forecast, economic activity will remain weak in 2013 but should pick up
in 2014. With no further expansion of car production
planned for 2013, export growth is expected to decelerate in the first half of
the year yet to continue to support growth in 2013 as a whole. After a negative
contribution to real GDP growth in 2012, domestic demand is expected to remain
subdued in 2013 and to contribute significantly to growth only in 2014. GDP
growth is hence forecast to decelerate to 1 % in 2013, and there are
downside risks given weak external demand and the reliance of the economy on a
few cyclically-sensitive sectors. With external demand expected to pick up in
the second half of the year, consumer confidence and domestic demand growth are
forecast to gradually strengthen in 2014, underpinning a rebound in GDP growth
to 2.8 %. This scenario builds on the assumption that the relatively high
profitability of Slovak corporates and the growing size of manufacturing
clusters will help attract fresh investment.

The
unemployment rate is set to remain above 14 % up to the forecast horizon, some 4 pps above its pre-crisis level. With a large and
increasing pool of resources sitting idle, household real disposable income is
expected to stagnate in 2013. Households are nonetheless expected to offset a further
drop in consumption by drawing on their savings. In line with developments in
the labour market, unit labour cost growth is expected to remain low. Inflation
is therefore set to stabilise at close to 2 % due to low domestic demand
pressures and imported inflation, as well as the fading out of base effects
from previous price shocks.

The
macroeconomic scenario underlying the SP and NRP is plausible. It projects a pick-up in economic activity from 1.2 % in 2013
to 2.9 % in 2014. This is comparable with the Commission’s spring
forecast, which projects real GDP growth of 1.0 % and 2.8 % in
respective years. While the two forecasts differ in terms of composition of
growth in 2013 (i.e. the Commission forecast projects a larger contribution from
net exports), both expect a balanced contribution of domestic demand and net
exports to growth in 2014. The macroeconomic scenario of the SP/NRP does not
include estimates of the macroeconomic impact of structural reforms.

2.2.
Challenges

Slovakia
continues to face significant structural challenges and challenges with regard
to public finances. The overriding challenge
is to strengthen its domestic production base and progressively diversify
sources of growth, whilst consolidating the progress made so far on structural
reforms and public finances. This challenge, highlighted in the 2012 SWD for
Slovakia, remains critical.

The public
finance situation has improved but there are still concerns about the
sustainability of the adjustment in the medium term. Some of the measures adopted to consolidate public finances, though
serving the immediate purpose of reducing the budget deficit, are temporary or
one-off and will need to be progressively replaced with more structural
measures. In addition, the progress on improving pension sustainability will
need to be followed up and complemented with healthcare reform to bring public
finances on a sustainable footing.

Given the
need to support continuing economic convergence through expenditure in key
areas such as education, innovation and transport infrastructure, a key
challenge is to acquire additional resources by
broadening the tax base and limiting the scope for tax fraud and evasion. To
maximise the positive structural impact, greater recourse to taxes that are
less detrimental to growth, such as property and environmental taxation, is
needed. Building on the recent adoption of an action plan to reduce tax fraud,
efforts need to continue in this area and be underpinned by a comprehensive tax
compliance strategy going beyond VAT fraud. Additional cuts in capital
expenditure would be detrimental to Slovakia’s infrastructure, undermining the
economy’s long-term growth prospects. An expenditure review could help reduce
inefficiencies and reallocate spending to areas with greater growth potential.

As high
unemployment persists amid clouded labour market prospects, the risk that the
recent cyclical surge in unemployment becomes a structural one is sharply
increasing, with young people among those most affected. School-to-job transition is weak and the education system does not
respond readily to labour market needs. Long-term unemployment remains among the highest in
the EU, partly reflecting large regional disparities. Public employment
services do not have sufficient capacity to provide personalised services to
jobseekers and to assess the effectiveness of active labour market policies
(ALMPs). Employment of the low-skilled also remains among the lowest in the EU.
Despite some recent
improvements in the design of the Slovak tax and benefits system, the tax
wedge for the unemployed taking up a low-paid job remains large. The persistent shortage of good quality,
affordable early childhood education and care is an obstacle to female
participation in the labour market. Despite the projected increase in
retirement age, more remains to be done to increase the employability of older
workers and access to lifelong learning is insufficient. The integration of the
Roma population into the labour market is very limited. The participation of
Roma children in early childhood education and care is very low.

A further key
challenge in terms of supporting growth and competitiveness in the medium term
relates to strengthening institutions, human capital, innovative capacity and
the business environment. Despite the recent
adoption of several measures to make public procurement and the judiciary more
transparent, experience of implementing EU structural funds suggests that there
are still problems in this area. Weaknesses also persist in the functioning of
public institutions, law enforcement and the business environment. The
political cycle has a high impact on staff turnover in public administration,
capacities for evidence-based policy-making are not sufficiently developed,
there is no clear framework regulating lobbying activities, perceived judicial independence is low and
judicial and enforcement proceedings are long. With
regard to human capital, the per capita funding of education favours quantity
over quality and the proportion of funding allocated to teaching activities
(teachers, material, and equipment) is low by international comparison. Better
use could be made of EU funds available to finance educational reforms and improve
the quality of the science and technological base. Effective competition and
the transparency of price-setting mechanisms in regulated industries could be
improved, notably in the energy sector where consumers’ switching rates are low
and unregulated electricity prices for medium-sized industrial consumers are
among the highest in the EU. This is cause for concern given the high energy
intensity of the economy. It also suggests that gains from improvements in
energy efficiency would be considerable.

3.
Assessment of policy agenda

3.1.
Fiscal policy and taxation

Budgetary developments and debt dynamics

Slovakia’s fiscal
targets meet its obligations under the Pact. The
stability programme defines the general goal of the government’s fiscal policy as
achieving a fiscal position that ensures long-term sustainability of public
finances. To achieve this goal, the government confirms the target of reducing
the headline deficit below the 3 % of GDP reference value in 2013, as
recommended by the Council on 2 December 2009 under the Excessive Deficit
Procedure (EDP). After 2013, the stability programme envisages further
reductions in the deficit consistent with reaching its medium-term objective
(MTO) confirmed at 0.5 % of GDP in cyclically adjusted terms net of
one-off and temporary measures. The MTO reflects the objectives of the Pact. It
is to be reached by 2018, outside the programme period.[4]

The government’s
deficit target for 2012 was overachieved. The
general government outturn in 2012, a deficit of 4.3 % of GDP, was some
0.3 percentage point lower than envisaged in the 2012 stability programme. It
resulted from the combination of revenue measures adopted by the government in
the course of the year as well as a lower-than-budgeted drawdown of EU funds,
non-budgeted revenue, lower investment by local governments and savings on
social insurance expenditure. One-off measures that improved the revenue
outturn included a one-off bank levy, special levy on high-profit enterprises operating in a
regulated environment and the opening of the statutory
fully funded pension pillar, which enabled pension savers to move their savings
to the public pension scheme. The resulting net savings more than offset the
deficit-increasing impact of substantial revenue shortfalls (especially for
VAT) and a higher-than-budgeted assumption of past hospital debts.

The programme
envisages further reduction of the headline deficit to 2.9 % of GDP in
2013. This is to be achieved mainly through a
combination of temporary and permanent revenue measures (expected to induce an
increase in the revenue ratio by 1 pp to 34.1 % of GDP) as well as some
expenditure cuts (expenditure is to decline by 0.4 pp to 37 % of GDP).[5] Measures with a one-off effect constitute almost a third of all
planned revenue measures. These include enabling pension savers to move their
assets from the statutory fully funded pillar to the public pension scheme,
extra dividends from state-owned companies, the sale of part of the emergency
oil stocks (on the revenue side), and the sale of the frequency band freed up
by eliminating analogue broadcasting (which is accounted for as an expenditure
reducing measure). Furthermore, substantial reductions in expenditure would
come from local governments and budgetary entities not under the direct control
of central government. The Commission’s spring forecast projects a slightly
higher general government deficit of 3.0 % of GDP in 2013, partly because
some envisaged savings were deemed not to be fully attainable.

The budgetary
targets in 2014 and beyond are not sufficiently underpinned by specified
measures. The government plans further
consolidation after 2013, with a view to progressively lowering the headline
deficit, to reach 1.3 % of GDP in 2016. Compared to the 2012 stability
programme, these targets are slightly less ambitious and they rely on
expenditure restraint, with the expenditure-to-GDP ratio projected to decline
faster (by some 3 pps) between 2013 and 2016 than the revenue-to-GDP ratio (set
to fall by 2.4 pps). The adjustment appears to be back-loaded. The programme
intends to reach the 2014 headline deficit target through a combination of
actions, including an additional sale of emergency oil stocks, a freeze in public
wages at the 2013 level and a reduction in subsidies — mainly those granted by
local authorities to local public transport. The one-off additional sale of the
emergency fuel stock would constitute the major part of the consolidation.
Moreover, additional and as yet unspecified measures would still be necessary
to reach the target. Under the assumption of unchanged policies, the Commission
projects the headline deficit to increase slightly in 2014 to 3.1 % of GDP
despite the pick-up in economic activity, as several revenue measures adopted
to achieve the 2013 target expire in 2014. The assumed achievement of budgetary
targets in the outer years of the programme is not supported by specified and
quantified measures. In addition, the currently on-going process of unification
of healthcare insurance providers might induce arbitrage between the private
health insurance companies and the state, with a possible negative impact on
public finances during the programme period.[6]

Some
projected expenditure developments may not be sustainable in the medium to long
run. The programme projects a decline in the public
investment ratio from 1.9 % of GDP in 2012 to 0.6 % of GDP in 2016, a
very low level especially for a catching-up economy. An initial planned
increase in expenditure on research, development and innovation in 2013 is
followed by a decline in later years. In addition, expenditure cuts carried out
in the past on goods and services and the public wage bill and planned also for
2013 and 2014 may not be sustainable, as they can impair the efficient
functioning of the public sector. A more targeted cost reduction, prioritising
growth-enhancing expenditure and supported by an expenditure review would be
beneficial.

Meeting the
fiscal obligations under the EU surveillance framework appears to be within
reach. For the period 2010-2013 the adjusted annual
average fiscal effort[7] is estimated to have reached 1.4 % of GDP annually, compared
to a recommended average fiscal effort of at least 1 % of GDP, implying
that effective action has been taken in response to the 2009 EDP recommendation.
For the years following the expected date of correction of the excessive
deficit, the projected improvement in the (recalculated) structural balance[8] appears to be ensuring sufficient progress on the adjustment path
towards the MTO in 2014 and 2015 (0.6 pps and 0.7 pps of GDP, respectively),
but it would be insufficient in 2016 (0.3 pps of GDP). According to the
information provided in the programme, the growth rate of government
expenditure, net of discretionary revenue measures, in the years between 2014
and 2016 is expected to contribute to an annual structural adjustment towards
the MTO by 0.5 % of GDP. This is because the growth rate of this
expenditure is set at (in 2014 and 2015) or below (in 2016) 1.5 %, the
lower rate under the expenditure benchmark. Following an overall assessment of
Slovakia’s budgetary plans, with the structural balance as a reference,
including an analysis of expenditure net of discretionary revenue measures, the
adjustment path towards the MTO over the programme period seems to be
appropriate. However, based on the recalculated change in the structural balance,
Slovakia would not carry out sufficient structural effort in 2017.

Box 1. Main measures

|| Main budgetary measures ||

|| Revenue || Expenditure ||

|| 2013 ||

|| · Unification of and increase in the assessment bases for social contributions (0.2 % of GDP) · Introduction of social contributions for contracts ‘by agreement’ — revenue effect (0.2 % GDP) · Increase in taxation of self-employed (e.g. limiting lump-sum deductions) (0.1 % of GDP) · Changes in the fully funded pillar (e.g. reduction of the contribution rate from 9 % to 4 % and reintroduction of voluntary participation) (1.0 % of GDP) · Increase in the bank levy (0.1 % of GDP) · Introduction of a special levy on high-profit enterprises operating in a regulated environment (0.1 % of GDP) · Changes in the income taxes (e.g. increase in CIT from 19 % to 23 %, the introduction of a 25 % tax bracket for PIT) (0.5 % of GDP) · Sale of free frequencies (0.1 % of GDP) · Sale of emergency oil stocks (0.3 % of GDP) || · Savings on goods and services and other current and capital transfers in the state budget (-0.5 % of GDP) · Savings of the local governments and other general government units outside the central government (-0.7 % of GDP) · Increase in the expenditure on the healthcare system (0.2 % of GDP) · Reduction in the wage bill in the state budget (-0.1 % of GDP) · Increase in the wages in the primary and secondary schools (0.1 % of GDP) ||

|| 2014 ||

|| · Sale of emergency oil stocks (0.2 % of GDP) || · Reduction in the public wage bill (-0.1 % of GDP) · Reduction in subsidies (-0.1 % of GDP) · Increase in capital expenditure by local governments (0.1 % of GDP) ||

|| Note: The budgetary impact in the table is the impact reported in the programme, i.e. by the national authorities. A positive sign means that revenue/expenditure increases as a consequence of the measure. The degree of detail reflects the information made available in the stability programme and, where available, in a multiannual budget. ||

·

According to
the programme, the public debt ratio is projected to stabilise at the end of
the programme period. After increasing to 56.7 %
of GDP in 2015, the debt-to-GDP ratio is to decline to close to 56 % of
GDP by 2016. Persistent general government deficits are the main driving force
behind the projected increase. In view of the limited capacity of the Slovak
financial sector to absorb sovereign bonds, Slovakia has issued several bonds
abroad since 2012, thus diversifying the investor base and issuance currencies.[9] To maintain unimpeded access to international markets, Slovakia
will need to continue implementing prudent fiscal policies. Since the
debt-to-GDP ratio is expected to remain below the reference rate of 60 %
of GDP over the programme period, the debt reduction benchmark is not
applicable. Medium-term debt projections (see Graph below Table V in annex)
indicate that full implementation of the programme would imply increasing debt
until 2015, although remaining below the 60 % of GDP reference value,
followed by a slight decrease towards 2020.

Box 2. Excessive deficit procedure for Slovakia On 2 December 2009 the Council adopted a decision stating that Slovakia had an excessive deficit under Article 126(6) of the Treaty on the Functioning of the European Union (TFEU). At the same time, the Council recommended under Article 126(7) TFEU that the excessive deficit be corrected by 2013. In particular, 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. An overview of the current state of the excessive deficit procedures is available on: http://ec.europa.eu/economy\_finance/economic\_governance/sgp/deficit/index\_en.htm (please refer to country sections at the bottom of the page).

Long-term sustainability

The long-term sustainability of public finances has
improved. Slovakia does
not appear to face a risk of fiscal stress in the short term. Nonetheless, the
country is at medium sustainability risk in a medium-term and long-term
perspective, conditional upon full implementation of the planned ambitious
fiscal consolidation and on maintaining the primary balance well beyond 2014 at
the level expected to be reached in that year. The risks would be much higher
if the structural primary balance were to revert to more negative values
observed in the past, such as the average for the period 1998-2012. The focus
should therefore be on resolutely and swiftly continuing to implement measures
which improve sustainability. In addition, further containing age-related
expenditure growth, including through further adjustments to the pension system,
remains a priority so as to contribute to the sustainability of public finances
in the long term.

However, the sustainability gap remains large. The long-term sustainability gap (S2) of
4.9 % of GDP remains well above the EU average of 3 % of GDP. In
addition to the initial budgetary position in 2014, the sustainability gap largely reflects the contribution from the
projected long-term cost of ageing (3.5 pps). Pension expenditure would
contribute 1.5 pps, and health care spending 2 pps to the sustainability
gap.

Major changes to the pension system were adopted in 2012 but while significantly reducing pension costs these do not fully
ensure its sustainability in the longer term. The most important changes in the public pension
pillar are linking of the statutory retirement age to life expectancy from 2017
and a switch to inflation-based indexation starting from 2018.[10] Redistribution in the system was increased
and rules regulating early retirement have become stricter. The generous
pension regimes for special categories such as the armed forces and police were
also curbed, although not as much as initially proposed. The recommendation to
include a sustainability factor in the pension formula was not adopted. The
measures should reduce the projected increase in pension expenditures in
the 2010-2060 period by half, to 2.6 percentage points of GDP,[11] significantly improving the sustainability
of the public pension pillar. However, given rapid population ageing, the
public pension pillar is projected to remain in deficit.[12] This would warrant swifter phasing-in of
the pension reform. In addition, with the exception of
low earners, the changes in the calculation and indexation of pensions adopted
as part of the 2012 reform are likely to reduce the replacement rate in the
long run, undermining the adequacy of retirement income.

The fully funded statutory pension pillar
was downsized. Pension
savers were allowed to opt in or out of this pillar.[13] Moreover, the contribution rate was
reduced from 9 % to 4 % of the base until 2016 (and the funds
rerouted towards the public scheme) although there will be a gradual increase
in the contribution rate back to 6 % by 2024. In addition, voluntary
participation was reintroduced for new labour market entrants, who can decide whether
to participate in the funded pillar until the age of 35. These measures have a positive short-term impact on the accounts of the general
government. The reverse is true in the long term, because the pension
liabilities of the state increase. Nevertheless, the measures taken in the
first pillar more than compensate for this impact within the projection period.
However, in light of past experience, these changes are likely to impact
negatively on the size and scope of the fully funded pillar.[14]

Healthcare
expenditure is projected to increase significantly in the long term. Although expenditure on healthcare remains below the EU average
(6.2 % of GDP as against 7.1 % in 2010, respectively), it is
projected to increase by 3 pps of GDP by 2060, reaching 9.2 % of GDP.
While starting from a lower base, this would be the second highest increase
among the Member States.[15] In addition, public expenditure on healthcare as a percentage of
the overall general government spending amounted to 16 % in 2010, above
the EU average of 14.7 % and some 6 pps higher than in 2000. The rapid expansion
in healthcare expenditure that has taken place in recent years has not been
mirrored by improvements in health outcomes,[16] while the rise in
out-of-pocket spending on healthcare raises concerns
about access to care.

Measures were taken to curb expenditure on pharmaceuticals, but the
authorities could usefully consider whether further efficiency gains can be
achieved. Slovakia introduced the requirement that
the active component be prescribed alongside the brand name to encourage the
prescription of generic medicines. Prices of medicines use the average of the
three lowest prices in the EU as a reference and clearer rules on coverage of
medicine prices by public insurance have been introduced. These measures are
expected to have helped to keep the rapid growth of expenditure on
pharmaceuticals in check. An evaluation would be useful to determine whether there
is scope for further reducing spending on pharmaceuticals.

Repeated debt build-up points to existing inefficiencies in
hospitals. Slovakia’s system of healthcare
provision is centred on hospitals and is characterised by a high number of
facilities[17] and acute care beds[18] and a high average length of inpatient stays.[19] Remuneration of hospitals is on a per-diem basis rather than by
diagnosis-related groups (DRGs), possibly leading to a  high number of
in-patient cases. These inefficiencies are aggravated by weak accounting
mechanisms, a lack of effective monitoring of hospital activity and an
ineffective incentive structure. Labour costs represent a large part of the
cost structure of hospitals.[20] Public expenditure on hospitals, both as a share of GDP and as a
share of the overall public healthcare budget, is one of the lowest in the EU.[21] However, the low efficiency of the system coupled with the limited
financial resources and the pressure of an ageing population all point to the
need for a substantial hospital reform, including streamlining the hospital
network, changing costing and remuneration, improving control and monitoring
and promoting better management practices.

The authorities envisage taking additional measures in the health
care system. The National Reform Programme
envisages improving information systems, strengthening hospital management,
implementing centralised procurement and introducing DRGS, which would lead to substantial
efficiency gains. The government also plans to unify all health insurers into
one public health insurance provider, with a view to addressing the comparatively
high administrative costs in the healthcare system.[22] The impact of this operation on public finances, if pursued, should
be carefully considered. Overall, the implementation of the government’s plans on
health care reform appears to be still at an initial stage.

Increasing
the efficiency of the healthcare system will require well-designed incentive
structures and an action plan for reform. It is
essential that the measures envisaged by the authorities are complemented by the
introduction of effective incentive structures and control mechanisms in
hospitals. A clearly defined timed action plan would help ensure stepwise
monitoring and control of the reform process.

Fiscal framework

Slovakia has
taken substantive steps to strengthen its fiscal framework. The first of the 2012 Council Recommendations called on the authorities
to accelerate the establishment of the Fiscal Council and adopt rules on
expenditure ceilings. The Commission concludes that Slovakia has made
substantial progress on measures to address the first part of the
recommendation. The Fiscal Council,[23] which was established by a constitutional law on 1 March 2012,
was set up in the second half of the year in line with the CSR.[24]

However, the
rules on expenditure ceilings have not yet been adopted. While Slovakia sets multiannual budgetary objectives, these are not
binding, except for the first year. This weakens the overall set-up of the
fiscal framework and could be remedied by adopting binding multiannual
expenditure ceilings. There is a legislative proposal to amend the Budgetary
Rules Act to determine the procedures for setting such ceilings for general
government, excluding local government, but its adoption has been postponed to
September 2013. Member States are encouraged to ensure that any adopted
expenditure rule is consistent with the expenditure benchmark set in the
revised Stability and Growth Pact, in terms of definition and coverage. The
authorities plan to adopt legislation addressing the requirements of the Fiscal
Compact[25] that was ratified by the Parliament in December 2012.

Tax system

Improving the
efficiency of the taxation system and increasing reliance on sources of
taxation that are less detrimental to growth remains an important task given the need to finance the convergence process. In 2012, a
Council Recommendation on taxation called on Slovakia to improve the efficiency
of tax collection, in particular VAT, reduce distortions in the taxation of
labour across different types of employment; link real estate taxation to the
market value of property; and make greater use of environmental taxation. Some
progress has been achieved towards addressing the CSR.

In 2012,
Slovakia adopted important measures reducing the large differences in taxation
among different types of employment and simplified the rules on social
contributions. These measures are described in more
detail in Box 3. The large discrepancies between various employment types were
thus reduced (see chart below) partly addressing the 2012 CSR. The latest
changes may reduce the tax burden on dependent work and the future risk of inadequately
low pensions for the self-employed and those who only work by agreement.[26] Nevertheless, no review was carried out to evaluate the
deductibility rules that apply to those that do not opt for lump-sum
deductions. This remains an important drawback of the taxation system for
self-employed persons, as their declared costs for tax purposes constitute
80-90 % of the declared revenue.[27] Thus while the self-employed represented 15 % of total
employment in 2012, they generated less than 6 % of the overall personal
income tax collected. An additional weakness is low monitoring of these
taxpayers, as the tax office focuses on VAT liabilities.[28] Given the low tax revenue from this group of taxpayers, ceteris
paribus the authorities need to tax other activities more (e.g. the income
of dependent workers, corporates, consumption, etc.) to cover the revenue gap.

Graph 1: Tax wedge before the reform || Graph 2 Tax wedge after the reform

||

The number of
contract agreements plunged after the reform. Partly
in reaction to the adopted measures, the number of contract agreements fell by
half from almost 650 000 in December 2012 to less than 300 000 in
January 2013.[29] To stem the outflow of workers to the grey economy and increase the
demand for low-skilled labour, especially at the lower end of the income
distribution, the government could consider reducing the tax wedge for low-paid
workers regardless of the type of employment, as suggested in the 2012 CSRs.
The government has so far not acted on this recommendation and no measures are
envisaged in the NRP.

Box 3 — Changes to the taxation of employment

In
2012, the Council recommended that Slovakia ‘reduce distortion in taxation of
labour across different employment types, also by limiting tax deductions’. The
government adopted a set of measures that markedly reduce these large
discrepancies between various employment types. The following measures were
adopted for various employment types.

·
In the
case of the self-employed, the assessment base for calculating social
contributions was adjusted by increasing its minimum level.[30] It will gradually be
broadened over the 2013-15 period by reducing an arbitrary coefficient that
previously lowered the base.[31] The possibility of deducting
40 % of expenses without any bookkeeping to reduce the tax base was
limited in nominal terms to EUR 5 040 per year or EUR 420 per
month.[32]

·
Social
contributions were increased significantly for workers by agreement who have a
regular income, to match those of dependent workers. Those with an irregular
income will pay somewhat lower rates. Students (within certain limits),
invalidity and regular pensioners were granted exceptions.

·
A new
25 % tax bracket was introduced for dependent work. It will apply to those
whose tax base exceeds 176.8 times the subsistence minimum (for 2013 it amounts
to EUR 34 402).

The
differing rules for the assessment bases of social contributions were unified
and the ceiling was raised for all employment types.[33]

In mid-2012
the government approved an action plan to fight tax fraud. This three-phase plan sets out precise measures and the timeline
for implementing them, with a particular focus on VAT. A company cannot be
registered if the founder has outstanding tax liabilities; people deemed by the
tax authorities to pose a high-risk of non-compliance must pay a deposit when
they register for VAT refunds and when re-exporting; and all payments above EUR
5 000 must be made electronically. These measures can contribute to
fighting tax fraud. Nevertheless, no tangible impact has been observed so far,
as VAT collection subsequently dropped by some 10 % in cash terms. The
authorities intend to continue efforts in this area, mainly by tackling
transfer pricing and introducing compulsory reporting of large international
transactions by financial institutions.

The toolkit
for addressing tax fraud includes improving the current poor IT infrastructure,[34] broadening the competences of the
authorities and ensuring judicial follow-up. Good IT infrastructure is
essential, as a system that works well can enable the tax authority to collect
data for required analyses, minimise the need for manual tasks,[35] easily access the data of other (state) institutions and carry out
cross-checks. The UNITAS project could partly improve this, but so far it has
not been successfully implemented. The authorities’ powers to prevent tax fraud
and recover unpaid taxes appear to be limited.[36] Although the number of people convicted of tax crimes has increased
in recent year, the rate of rejected tax investigations remains high. In 2011,
investigators rejected about 65 % of all notifications by the tax
authority, in most instances without thoroughly analysing the case. This leads
to low levels of tax-related prosecutions and subsequent convictions.[37]

No progress
has been achieved in reforming property taxation.
To date, the government has not taken measures to reform the taxation of
residential real estate to reflect the market value of property, in contrast
with the Council’s recommendation in 2012. The measures planned to improve the
situation include obtaining a more detailed description of property on its
registration in the land register (including the price) and/or a more detailed
tax declaration form for real estate to include property characteristics.

There is
scope for accommodating some environmental concerns in the taxation system. In 2012, Slovakia changed the car registration fees for new cars.
The new fee structure reflects car engine power. Although this measure does
have environmental aspects, environmental taxation as such could be improved by
introducing an annual car tax directly linked to CO2 emissions. As pointed out
in the NRP, due to its geographical location, Slovakia has limited scope to
significantly increase taxes on fossil fuels and energy independently from
neighbouring countries. According to the SP, the introduction of a carbon tax
could have a negative impact especially on lower-income households and it would
be detrimental to the competitiveness of Slovak businesses. While
competitiveness and distributional concerns must be carefully weighed when
designing environmental taxes, Slovakia’s implicit tax rate on energy remains
among the lowest in the EU, suggesting that there is still room to broaden the tax
base in this direction. The Slovak authorities could, for instance, reconsider
the application of certain exemptions provided in the Energy Tax Directive. Taxes on pollution are negligible and could also be
increased.[38]

3.2.
Financial sector

The largely foreign-owned
financial sector proved resilient during the crisis. The stability of the banking
sector is expected to continue to be supported by declining yet relatively
healthy profitability, high deposit-to-loan ratios and a negligible share of
loans in foreign currencies. Efforts to ensure strong coordination between home
and parent banks remain critically important. Despite the overall resilience of
the sector, ease of access to financing was negatively affected in 2012 by both
the cyclical downturn and the increase in credit risk. While the number of
loans to non-financial firms[39] increased at a moderate pace
from 2010 to 2011, in 2012 it declined by 3.6 %. The stock exchange and
venture capital market also remain underdeveloped and no substantial progress was
made in 2012. Equity financing is very limited, providing small and
medium-sized enterprises (SMEs) and start-ups with very few alternatives to
traditional bank loans. As a part of the JEREMIE initiative, the Slovak
Guarantee and Development Fund implemented the first loss guarantee in 2012.[40] The risk capital instrument
should be launched later in 2013, after the evaluation of received offers is
completed.

3.3.
Labour market, education and social policies

Labour market

The unemployment rate remains high at 14 %
and gives reason for concern. The number of unemployed persons went up from 260 000 in 2008
to 380 000 in 2012, an increase of nearly 50 %. While the persistence of high unemployment to a large
extent is due to the slow pace of the post-crisis recovery, some long-standing
structural challenges exacerbate the situation. About 60 % of the
unemployed are low skilled and two thirds are long-term unemployed, partly reflecting persisting regional
disparities and skills mismatches. Youth unemployment also remains among the
highest in the EU. The employment
rate of older women and low-skilled workers, including Roma, is among the
lowest in the EU.

To date, labour market services and active labour
market policies (ALMP) have not proved sufficiently effective. In response to the 2012 Council
Recommendation, Slovakia is reforming ALMPs. A reform is in force since May
2013, improves the targeting and efficiency of such policies but its
implementation is constrained by a lack of resources. While it aims to increase
the provision of personalised services and to improve evaluation of ALMPs, it
is not clear how the public employment services will be able to fulfil the new
tasks with the existing capacity.[41]
Many of the labour offices remain understaffed and there is no regular
comprehensive analysis of ALMPs based on harmonised data collection.

Regional disparities in employment are very
large, mirroring differentials in economic development. The share of ALMP participants among job
seekers is significantly lower in regions with higher unemployment rates.[42] Workers appear reluctant to move from
areas with high unemployment to those where there are vacancies (in particular,
urban areas). Part of the reason for the current mismatch is the underdeveloped
rental housing market and the lack of affordable housing in economically
dynamic regions. Three activation policies currently aim to increase regional
mobility.[43]
However, so far they have not significantly reduced unemployment.

Graph 3: Nominal GDP per capita by region (Euro) || Graph 4: Registered unemployment rate by region (% of labour force)

||

Source: Commission || Source: Commission

Despite relatively low expenditure in
unemployment and social assistance, the existing array of social and activation
policies suffers from considerable complexity and the existence of
disincentives.
Unemployment benefits only last for six months. After that, the unemployed can
request social assistance and receive limited individual support but are not
obliged to register with the labour office. They may therefore be uninformed
about vacancies, activation or training opportunities, and may progressively
become detached from the labour market. While a comprehensive reform is planned
for 2014, some changes aimed at eliminating the misuse of social assistance
entered into force in January 2013 and go in the right direction. By contrast,
the tax and benefits system continues to provide insufficient incentives for
the longer-term unemployed to take up low-paid jobs because social benefits are
withdrawn rather quickly and not through a more gradual phasing out.[44] Existing
activation measures for long-term unemployed are not sufficiently effective.[45] At the same
time, social security contributions paid by an employer hiring a low-paid
worker have remained high at around 35 % of the gross wage. Although the
reformed system of ALMP envisages a hiring subsidy in the form of a
contribution to employment of disadvantaged jobseekers and a contribution to
support local and regional employment, the support is not focused solely on the
long-term unemployed. Insufficient progress has therefore been made in reducing
the tax wedge for the low-skilled unemployed.

Despite some improvements, the situation of
young people remains difficult. Long-term unemployment among the young (15-24) is almost three times
higher than the EU average (18.1 % vs 6.4 % across the EU in 2011). The graduate
practice scheme for unemployed graduates under 26 is being reformed to improve
targeting and effectiveness. In autumn 2012, two projects (worth EUR 70
million) co-financed by the European Social Fund were launched in the framework
of the Youth Action Plan. They aim to create 13 000 jobs mainly for young people. Through the Youth Employment Initiative, the ESF will reinforce its
action targeted at young people not in employment, education or training.[46] The implementation of a Youth Guarantee
would help to set a more coherent framework to address youth employment.[47]

The recently adopted Labour Code
entered into force on 1 January 2013. It introduced an increase in employment protection for regular and
temporary contracts and a new definition of dependent
work to minimise the use of other forms of work as disguised employment (see
also section 3.1).[48] Although the
labour market remains flexible, the recent reform might increase labour costs
and discourage employers from hiring at a time when the economy is slowing down
and the labour market remains sluggish. It is too early to assess the impact of the labour
code reform on employment, but it is important that it is regularly monitored
and independently evaluated.

Women face barriers to entering or staying
in the labour market. The
gender employment gap for young women (20-29) is almost double the EU average
and the impact of parenthood on female employment remains among the highest in
the EU. There are not enough good quality, affordable early childhood education
and care services, which also contribute to supporting children’s development.
In particular, facilities for children under three are insufficient due to a
lack of resources at local level and to shortcomings in legislative provisions.[49] Maternity
leave and parental leave can be very long, making it more difficult for mothers
to smoothly re-enter the labour market.[50]
Slovakia is among the Member States with the highest gender pay gap but has no
policies in place to tackle this problem. Insufficient progress has been made
in acting on the 2012 Council Recommendation on the availability of childcare
facilities.

Policies promoting access to lifelong
learning and increasing the employability of older workers also appear insufficiently developed.
Participation in lifelong learning remains among the lowest in the EU and
contributes to the persistence of skills mismatches. Given the projected
increase in the retirement age, promoting longer working lives will be
important, also with a view to ensuring pension adequacy.

Education

High youth unemployment partly reflects the
low quality of the education and training systems and their limited relevance
to labour market needs.
Relatively low public expenditure in education and the low attractiveness of
the teaching profession exacerbate this problem.[51] Recently
adopted and proposed reforms go in the right direction. Notably, the NRP sets
the objective of gradually increasing public expenditure on education to 6 %
of GDP by 2020 while increasing efficiency by adjusting the number of schools
and teachers to demographic developments. However, much
of the planned increase in education is likely to be outside the current
government’s mandate. The NRP
also announces several measures for teachers. Improved initial training of
teachers and continuous monitoring of the recently introduced career system for
teachers could contribute to improving the quality of educational outcomes,
which strongly depends on the role of teachers, by increasing the
attractiveness of the profession and encouraging teachers to participate in
in-service training. It will be essential to ensure that the courses offered
respond to the needs of teachers and that the status of teachers and the overall
system of incentives for them are sufficient to make the teaching profession
attractive to graduates.

Higher education reform was adopted in
December 2012. It aims to
improve internal quality assurance systems and the quality of part-time studies
and teaching. It also contains incentives to increase the internationalisation
of higher education institutions. However, there are not enough professionally
oriented bachelor degrees. A comprehensive new law on higher education
institutions is under consideration, as is a revised funding mechanism that
would link the financing of education more closely to the overall quality of
education. A revised law on vocational education and training (VET) was adopted
in 2012. It creates a more flexible and closer link between VET institutions
and the labour market.[52]
Pilot projects creating new apprenticeships in companies have been introduced.
The authorities are working on further developing work-based learning in VET
and reinforcing the involvement of social partners.

Social policies

Despite a relatively low number of people
at risk of poverty or social exclusion, around 10 % of the population
suffered from severe material deprivation in 2011. Children are much more at risk than the overall
population, with a risk-of-poverty rate of 21.2 % compared to 13 %
for the overall population. Yet Slovakia did not use the 2012 allocation of
funds (EUR 5 million) from the EU programme for food for the most
deprived because it was unable to coordinate the delivery of assistance. The
situation of those with the lowest incomes has also
been negatively impacted by
rising out-of-pocket spending on healthcare,[53] which may have adversely affected their
access to healthcare. A strategy
for de-institutionalisation of social services[54] was adopted in December 2011, but the
implementation of the pilot national projects has been considerably delayed.

Insufficient progress was made in acting on the Council
Recommendation concerning the marginalised Roma community. Education measures were announced,
but have not been adopted yet. Employment measures, on the other hand, have yet
to be drafted. Even if access
to pre-school education is legally guaranteed for all, participation in early
childhood education is low compared to the EU average (77.5 % vs 92.5 %),
and minorities from disadvantaged areas are mostly concerned. At the same level
of education, the Roma unemployment rate is between two and eight times higher
than the non-Roma unemployment rate in the same area.[55] Anti-segregation education policies and anti-discriminatory
employment policies are inadequately implemented.[56] The numerous projects funded through the Structural Funds brought
no significant improvements due to inefficient coordination, weak capacity in
the line ministries and among project promoters (e.g. remote municipalities)
and insufficient involvement of Roma stakeholders in designing and implementing
projects. No relevant social considerations are currently being taken into
account in public procurement contracts in Slovakia (for example through
contract performance clauses).

3.4.
Structural measures promoting growth and
competitiveness

As a small open economy with relatively
high profitability and productivity growth, Slovakia is in a favourable
competitive position.
Manufacturing plays a very important role, accounting for 26 % of total
value added compared to the EU average of 15.5 %. The country’s industrial
base is, however, specialised in a few capital-intensive, cyclically sensitive
sectors. While technology imports have been a source of major productivity
gains in the past ten years, the marked specialisation of the economy makes it
highly dependent on external demand and vulnerable to global sector-specific
developments. In the long term, the contribution of foreign direct investment
to growth is bound to diminish, while labour costs and productivity are
expected to converge with EU levels. Due
to weaknesses in institutions, education and the innovation system, the
innovation capacity of domestic firms remains limited.

Research,
development and innovation policies

So far,
progress towards developing an effective policy framework supporting research,
development and innovation has been limited. Policy documents and measures adopted since 2007 have
identified existing weaknesses. But ‘knowledge triangle’ policies remain beset
by governance problems and fragmented responsibility. The lack of excellence in
research and the quality of tertiary education remain major weaknesses as
demonstrated for example by the low number of frequently quoted scientific
publications. The generation of intellectual assets and patent revenues is low
by international comparison. Collaboration between companies and domestic
research centres is limited, resulting in a low proportion of innovative
enterprises. Against this background, an important
priority is to finalise and
implement the research,
development and innovation strategy for smart specialisation.[57]

In 2012,
several measures were announced to improve collaboration between the public and
private sector but they have been implemented only partially, due in part to
insufficient and ineffective use of funding. The R&D Operational Programme provided 81 %
of R&D funds, whereas innovation policy measures were almost completely
funded by the Competitiveness and Growth Operational Programme. Most financial
assistance was provided through grants. Although planned for several years,
more sophisticated funding mechanisms such as support for clusters and innovation
vouchers have not yet been put into operation. Although the Slovak Government’s
Council for Science, Technology and Innovation was recently established, an
effective governing structure is not in place yet.

Business environment

Despite
some recent improvements, Slovakia’s regulatory policy environment scores
poorly as regards administrative capacity and the administrative burden on
start-ups. A comprehensive
strategy to improve the business environment was adopted in 2011 and an update
with new measures was approved by the Government in 2013. While 54 measures
have been implemented since 2011, the goal of reducing the administrative
burden on businesses by 2012 has not been reached. On the other hand, the time
needed to start up a business was reduced to two days for a trade licence and
three days for company registration by the court. With some notable exceptions,
overall analytical capacity at central government level remains rather limited.
Impact assessments are often carried out only formally and tend to focus only
on the impact on the state budget. To address this problem, analytical units are
being further developed in key ministries. The indicators measuring various
aspects of entrepreneurship are well below the EU average, suggesting that
school education does not sufficiently encourage a sense of business
initiative. Slovakia has a relatively low score for ease of paying taxes in
international comparisons.

Network
industries

There
is room for improvement in the market functioning of network industries,
notably in the energy sector. Competition in the energy sector has improved in recent years, with
retail consumers gradually starting to benefit from liberalisation of the
market. On the other hand, consumers’ switching rates remain low and
electricity prices for medium-sized industrial consumers are among the highest
in the EU (see Box 2 for a discussion of the energy market).[58] Following the
adoption of the Postal Service Act, the postal market has been fully liberalised
since 2012. However, the letter mail market is dominated by the incumbent and
there is still only limited competition. Professional services are subject to
entry and conduct regulations but there are no quotas or economic need tests.
Slovakia is also lagging behind when it comes to the award of spectrum to
operators for the rollout of mobile broadband. This delay compounds the problem
of low broadband coverage and the take up of broadband is also among the lowest
in the EU (19 % of the population in January 2013, 9 pps below the EU
average).

Box 4 — Energy market in Slovakia

Due to
partial liberalisation of the sector, the number of retailers in both the
electricity and gas market has risen in recent years. However, the regional
market share of incumbents remains high, especially in the household segments.

In the
Slovak Republic, the Regulatory Office for Network Industries (RONI) sets a
price cap on end-user gas and electricity prices for households and small
industrial consumers.[59]
The price cap on electricity and gas prices for small industrial consumers was
reintroduced in 2012, in contrast with the Commission Communication ‘Making the
internal energy market work’ (COM(2012) 663) and its country specific
annex. On the other hand, prices for medium and large industrial consumers
remain unregulated.

Electricity
retail is dominated by three regional companies which also operate distribution
networks through their legally unbundled subsidiaries. In 2011, switching rates
were still low (1.6 % for industrial users and 0.8 % for households),
pointing to a non-dynamic market. Retail activities in the gas sector are
concentrated, with one company covering more than 75 % of the market. In
2011, only 0.21 % of gas consumers switched operator although the rate was
10.1 % among large industrial users[60]

Due to
effective market coupling, Slovakia has the same wholesale electricity prices
as the Czech Republic. However, the unregulated end-user prices for
medium-sized industrial consumers in Slovakia were the fifth highest in the EU
in 2011.[61]
On average they were around 21 % higher than those for their Czech
competitors in the past four years. This appears to be due less to end-price
regulation, taxes or generation prices, than to the high network costs, which are among the highest in the EU.[62] Unlike energy costs, which decreased, network costs
increased between 2009 and 2012.[63]
The high level of transmission and distribution tariffs, which form part of the
network costs, may reflect the size of the country, its topography, the volume
of electricity transported, or the recent re-evaluation of assets by the Slovak
transmission system operator and of the three distribution system operators.[64] The increase
in network costs 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.[65]

Differences
in network costs may also reflect a lack of transparency in the tariff setting
mechanism applied by the RONI. In addition, there appears to be no sound
economic analysis underpinning the regulatory regime and this weakens the RONI’s
accountability. As a consequence, the overall regulatory framework is viewed as
scarcely predictable, with adverse consequences for tariffs, longer-term
investment and multi annual contracts for customers. As regards infrastructure,
there is still no comprehensive roll-out plan for smart meters; unplanned flows
of electricity originating from the Austrian and German grids limit cross-border
transmission capacity and are a source of concern for the security of Slovakia’s
network. The construction of new electricity lines and interconnections would
be needed to address these issues.

Retail
prices of gas are below the EU average for households while they are slightly
above the EU average for industry.[66]
As in other Eastern European countries, wholesale gas prices are higher than
prices in north-west Europe where access to multiple sources of gas and
competitive trading has led to price decreases. There are still no gas
interconnections on the north-south axis. The main gas company in Slovakia
imports gas from Russia predominantly with long-term contracts and maintains a
high market share in both wholesale and retail markets. This share has been
declining mainly in the non-regulated segments. Under the European Energy
Programme for Recovery, the EU is co-financing the Hungary-Slovakia gas
interconnector, which is currently in the implementation phase.

Energy efficiency and climate change

Despite
notable progress, more ambitious efforts are required to improve the energy
efficiency of the economy. In line with the
Directive on Energy Efficiency 2012/27/EU, Slovak authorities have notified the
energy efficiency target with final energy savings of 23 % (3.12 Mtoe), or
primary energy savings of 20 % (4.07 Mtoe) in 2020. The authorities have
also adopted an energy efficiency action plan to tackle the economy’s carbon
and energy intensity. Several positive measures were taken, such as the
implementation of the SLOVSEFF programme and the introduction of the energy
saving awareness campaign and the energy auditing scheme in industry.
Structural funds were used to support sustainable energy investments in SMEs
and the public sector. However, Slovakia has not yet complied with the
obligations on public procurement stemming from the Energy Services Directive.[67] Economic activities that have a negative impact on the
environment, such as mining, also continue to be subsidised.[68]
EU Structural funds for energy saving projects channelled through grants
may have led to distortion of competition, crowding out private investment and
commercially based financing products. On the other hand, the use of financial
instruments, including revolving funds and guarantee schemes, is not
sufficiently developed.

Regarding renewables, Slovakia is on track to meet its 2020 targets. The proportion of renewable energy sources increased from 6.2 %
in 2005 to 9.7 % in 2011. The support framework, in the form of feed-in tariffs,
was changed in 2011 and 2012. While Slovakia needs to speed up renewably energy
development, the cost-effectiveness and transparency of the renewables promotion
mechanism, including the feed-in tariff system, should be reviewed. In
addition, it is important to further simplify administrative procedures and to
reinforce the electricity infrastructure where necessary.

Transport
infrastructure

The lack
of adequate infrastructure remains an obstacle to growth in the eastern
regions. Slovakia’s
specialisation in export-oriented manufacturing places increasing demands on
the quality of transport infrastructure. There has been
a delay in completing a long- and medium-term transport master plan to identify
key priorities consistent with EU transport policy, in particular the
Trans-European Transport Network (TEN-T) and to provide a strong basis for
programming of EU funds.[69]
The very high unit costs of new or renovated infrastructure also reflect weak
planning, poor design and inefficiencies in public procurement.[70] Compared to neighbouring Member States,
Slovakia’s railway infrastructure is underdeveloped. This, together with the
high density of the rail network, may lead to greater investment needs in the
future. In terms of rail passenger and freight transport, the market has been liberalised
but the market shares of new entrants are low, partly reflecting high
infrastructure access charges.

3.5.
Modernisation of public administration

The public
administration continues to suffer from weaknesses that reduce its
effectiveness. The 2011 Worldwide Government Effectiveness indicator
ranked Slovakia 19th among the EU Member States. High
staff turnover linked to the political cycle undermines its independence and weak analytical capacities impair the evaluation and
implementation of public policies. In 2012, the
government adopted an important reform of the public administration with
implementing measures spanning over several years. The main objective of the
initial phase of the reform is to streamline the organisational structure of local-
and district-level state administration. Ministries and central government
bodies are expected to undergo functional audits to identify duplication and
optimise internal processes. At a later stage, the reform envisages the
modernisation of human resources management. Improving
the quality of public service will be crucial for the
reform to be fully and successfully implemented and the challenges identified
in this area with the 2012 CSR remain. In its current stage the reform does not
sufficiently focus on weaknesses at the level of the central administration and a modern
system of human resources management is yet to be developed. Finally, whereas the
availability of e-government services for businesses is close to the EU average, e-government services for
citizens are not significantly developed.[71]

Current international indicators suggest that Slovakia
ranks low in terms of perceived corruption.[72]
Concerns also exist with regard to the capacity of judicial authorities to
investigate and prosecute corruption offences.[73]
Despite greater transparency, irregularities
in public procurement procedures have also persisted. The average and median
number of bids are among the lowest in the EU, indicating a very low overall
level of public procurement competition. In 2013, Slovakia significantly
amended the Public Procurement Act to streamline lengthy tender procedures,
improve transparency requirements and enhance competition.[74] In addition
to the amendment, the government also decided to substantially strengthen the
Public Procurement Office. Progress has hence been made in addressing the 2012
CSR on public procurement. The effective application of the new procurement
rules, however, could be facilitated by further developing the skills of
officials in charge of drafting terms of references, and of evaluating and
selecting bids.

Judicial and
enforcement proceedings for civil and commercial cases remain long and
perceived judicial independence is the lowest in the EU.[75] The relatively high number of pending
litigious civil and commercial cases and their sub-optimal rate of resolution
results in delays impairing access to effective legal recourse. Insolvency proceedings take twice as long as the EU average. Alternative dispute resolution systems remain
underutilised. Digital infrastructure for the electronic communication and
information exchange between courts and their environment require further
investment and reforms.[76]
With regard to competition
law, various court panels deal with appeals by different parties in the same
case against the competition authority’s decisions. They are often not used to
dealing with competition law cases and have limited awareness of the principles
of EU competition law. This may result in inconsistent court rulings and
undermines the judiciary’s effective enforcement of competition rules.
Following preparatory work in 2013, the NRP announces a legislative proposal in
2014 on the new Code of Civil Procedure. The NRP further proposes amendments to the Rules of
Enforcement and the introduction of an insolvency register. In 2012, several reforms came into effect
on the recruitment and evaluation of judges and prosecutors, the functioning of
the courts and the Judicial Council. Although some progress was made with regard to the judiciary, the 2012
recommendation remains largely valid.

4.
Overview table

2012 commitments || Summary assessment

Country-specific recommendations (CSRs)

CSR 1: Take additional measures in 2012 and specify the necessary measures in 2013, to correct the excessive deficit in a sustainable manner and ensure the structural adjustment effort specified in the Council recommendations under EDP. Implement targeted spending cuts, while safeguarding growth-enhancing expenditure, and step up efforts to improve the efficiency of public spending. Thereafter, ensure an adequate structural adjustment effort to make sufficient progress towards the MTO, including meeting the expenditure benchmark. Accelerate the setting up of the Fiscal Council and adopt rules on expenditure ceilings. || Slovakia is expected to make progress in terms of fiscal consolidation but at this stage it is premature to comment on the EDP. Limited progress has been made on safeguarding growth-enhancing expenditure, making public spending more efficient and laying down an adequate structural adjustment towards the medium-term objective. The Fiscal Council has been set-up. The original plan to adopt rules on expenditure ceilings has been postponed to the first quarter of 2013. No information on current progress towards reaching this goal is available.

CSR 2: Increase tax compliance, in particular by improving the efficiency of VAT collection; reduce distortions in taxation of labour across different employment types, also by limiting tax deductions; link real estate taxation to the market value of property; make greater use of environmental taxation. || Progress has been made on reducing distortions in the taxation of labour across different employment types. However, no review of tax deductions has been carried out. The legislative changes adopted to fight VAT evasion go in the right direction and can help make VAT collection more efficient. Nevertheless, there continued to be shortfalls in VAT revenue in 2012 and the challenge in this area remains. No progress has been made on real estate and environmental taxation.

CSR 3: Further adjust the pay-as-you-go pension pillar, mainly by changing the indexation mechanism, introducing a direct link between the statutory retirement age and life expectancy and introducing a sustainability factor in the pension calculation formula reflecting demographic change. Ensure the stability and viability also of the fully funded pillar. || A comprehensive pension reform has been adopted. Within the pay-as-you-go pillar, the indexation mechanism was changed and the link between the statutory retirement age and life expectancy introduced. The sustainability factor in the pension calculation has not been introduced. Repetitive opening of the fully funded pillar, the reintroduction of voluntary participation and several other changes undermined the stability of its set-up. After the Ageing Working Group reviews and recalculates the S2 indicator, it will assess the impact of the changes adopted on the long-term sustainability of public finances. Preliminary estimates show that they have improved the long-term sustainability of public finances but the long-term financing gap remains high compared to that of other Member States.

CSR4: Enhance the administrative capacity of public employment services with a view to improving the targeting, design and evaluation of active labour market policies to ensure more individualised employment services for the young, the long-term unemployed, older workers and women. Ensure the provision of childcare facilities. Reduce the tax wedge for low-paid workers and adapt the benefit system. || Slovakia has only partially implemented this CSR: The ALMP reform entered into force in May 2013 and is expected to improve the targeting and design of activation policies and introduced obligatory evaluation by public employment services. However, despite additional responsibilities and increased needs for analytical capacity, public employment services have not been strengthened. No sufficient progress made on ensuring the provision of childcare facilities and reducing the tax wedge.

CSR 5: Adopt and implement the youth action plan, in particular as regards the quality and labour market relevance of education and vocational training, including through the introduction of an apprenticeship scheme || This CSR was only partially implemented. The youth action plan was adopted in October 2012. In the area of employment, a limited number of actions were taken (e.g. two national projects co-financed by the structural funds, supporting job creation for young people); a more systematic approach to supporting people seeking a job for the first time is lacking. The VET reform adopted in September 2012 is in line with the CSR.

CSR 6: Take active measures to improve access to and quality of schooling and pre-school education of vulnerable groups, including Roma. Ensure labour market reintegration of adults through activation measures and targeted employment services, second-chance education and short-cycle vocational training || Slovakia implemented this CSR to a limited extent. A Roma reform has been publicly announced. It includes measures addressing the part of the CSR that deals with education. However, this has not been followed up by the required legislative acts or by the allocation of additional resources. Slovakia launched a number of projects supporting social inclusion. They are relevant but their sustainability and scale is inadequate given the magnitude of the problems.

CSR 7: Strengthen the quality of the public service, including by improving management of human resources and strengthening analytical capacities. || Slovakia implemented the CSR to a limited extent. A comprehensive reform to make local administration more efficient was launched this year. However, a strategic policy framework to improve the quality, human resource management practices and analytical capacities of central administration is still lacking. No measures were adopted to mitigate the impact of the political cycle on staffing decisions, nor were mechanisms to reduce corruption put in place. The improvement of analytical capacities does not seem to be supported by sufficient budget allocations.

Europe 2020 (national targets and progress)

Employment rate target: 72% || Employment rate only marginally increased to 65.2 % in 2012. The unemployment rate reached 14 % in 2012 and continued rising. Long-term and youth unemployment remains among the highest in the EU, and the labour market has been marked by educational, geographical, and skills mismatches. Employment rate of Roma is below 30 %.

R&D intensity target: 1.2% || The Slovak R&D intensity (0.68% of GDP) is one of the lowest in Europe and Slovakia is not on track to reach its national R&D intensity target of 1.2%. While the overall R&D intensity was in 2011 just above its 2000 level (0.65%), there has been since 2000 a strong decrease in business R&D intensity (from 0.43 % of GDP in 2000 to 0.25% in 2011), compensated by the strong increase in recent years of the public sector R&D intensity (from 0.22 % of GDP in 2000 to 0.42% in 2011).

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 2011 was -2 %. According to the latest available projections, the target would be achieved by a wide margin as total change over 2005-20 would reach -24 %.

Renewable energy target: 14% Share of renewable energy in all modes of transport: 10% || Share of total renewable energy in gross final energy consumption was 9.7 % in 2011 and 0.4 % in the transport sector.[77]

Indicative national energy efficiency target for 2020: 3.12 Mtoe of final energy savings for the 2014-2020 period. || Slovakia has set an indicative national energy efficiency target in accordance with Articles 3 and 24 of the Energy Efficiency Directive (2012/27/EU). It has also expressed it, as required, in terms of an absolute level of primary and final energy consumption in 2020 and has provided information on the basis on which this data has been calculated. Reaching the target in 2020 implies achieving a level of 16.2 Mtoe primary consumption and 10.39 Mtoe final energy consumption.

Early school leaving target: 6% || The rate increased from 5% in 2011 to 5.3% in 2012, Slovakia being the second-best EU performer. National target is 6%, taking into account increasing proportion of Roma children at high risk of drop-out. Further measures to support their educational achievements are needed to stop the negative progression.

Tertiary education target: 40% || Despite limited progress in 2012 (from 23.4% in 2011 to 23.7% in 2012), there has been a 60% increase since 2006.

Risk of poverty or social exclusion target: 17.2% || People at-risk-of-poverty or social exclusion decreased slightly by 6 000 to 1 112 000 in 2011. The achievement of the target to lift 170 000 out of the risk of poverty or social exclusion by 2020 is not realistic given the deteriorating conditions in the labour market and the negative impact of the crisis on disposable income of households. The risk of social exclusion remains significant in particular among children, Roma (above 90 %), low-skilled, single parents with dependent children.

5.
Annex

Table I.
Macroeconomic 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 markets performance
and policy indicators

Table X. Green Growth

[1] COM(2012) 750 final.

[2] COM(2012) 751 final.

[3] The conclusions of these reviews were published on 10 April 2013.
See COM(2013) 199 final.

[4] The programme also presents a table with the convergence path
towards the MTO.

[5] On the revenue side, the consolidation package includes a hike in
the corporate income tax rate from 19 % to 23 %, a new 25 % tax
bracket in the personal income tax system, adjustments in the taxation of
self-employed and atypical work contracts, a broadening of the bases for social
contributions, and increases in administration fees. Expenditure savings are
envisaged in the wage bill for public employees, goods and services and general
government investment.

[6] As the decisions underlying the unification of healthcare insurers
into a one public insurer could be taken in 2013, the operation could have a
budgetary impact already in 2013.

[7] Adjusted for developments in potential output and revenue windfalls
or shortfalls.

[8] The cyclically adjusted balance net of one-off and temporary
measures, recalculated by the Commission services on the basis of the
information provided in the programme, using the commonly agreed methodology.

[9] According to the ARDAL (The Debt Management Agency), the currency
volatility is fully hedged.

[10] Between 2013 and2017, the weight of inflation in the indexation
formula will increase annually by 10 pps from 50 %, while the weight of
wages will be reduced. During this transition period, all pensions will be
indexed by a fixed nominal amount. The price index mirroring the consumption
basket of pensioners will be used to index pensions from 2018.

[11] On 6 March 2013, the Ageing Working Group approved the recalculated
pension costs reflecting the most recent changes in the Slovak pension system.
The Economic Policy Committee endorsed them on 16 April 2013. These projections
are the basis of the discussion in this text.

[12] An additional factor improving long-term
sustainability will be the increased ceiling of the assessment base for pension
contributions, which will not be reflected in the
calculation of pension rights.

[13] Social Insurance Agency data show that about 89 500 people
left the fully funded pillar between September 2012 and January 2013, the
period during which it was temporarily opened, while 14 700 joined it.
Although more people than expected (60 000) opted out, the volume of
assets transferred was as expected (EUR 280 million).

[14] Voluntary participation may lead to substantially lower
participation by new labour market entrants. Experience from the first time that
voluntary participation was introduced, between 2008 and 2011, suggests that
only about 10-15 % of a given age cohort could join the fully funded
pillar.

[15] See 2012 Ageing Report.

[16] The number of avoidable deaths, or the amenable mortality rate,
ranks among the highest in the EU.

[17] There are more than 120 hospitals and a large number of university
hospitals.

[18] 4.8 per 1000 inhabitants vs EU average of 3.7 in 2010.

[19] 6.7 days vs EU average of 5.9 days.

[20] In some cases, as documented by the Ministry of Healthcare, wages may
account for more than 85% of total costs.

[21] Public expenditure on hospitals amounts to 1.9% of GDP, compared
the EU average of 3% of GDP, and represents 33% of public current health
expenditure (EU average: 47.3%).

[22] Slovakia's expenditure on healthcare-related administration and
insurance is above the EU average (0.3 % of GDP compared to 0.2 %).

[23] Officially called the Council for Budgetary Responsibility. Its
main responsibilities include (i) issuing an annual report on the long-term
sustainability of public finances, (ii) assessing adherence to fiscal rules,
(iii) giving opinions on legislative proposals as necessary, and (iv) drafting
documents related to the monitoring and assessment of budgetary developments as
deemed necessary.

[24] The Parliament appointed three Board members in July. By the end of
2012 the Bureau of the Council was set up and staff hired. The Council has
already published several reports including an assessment of the 2013-15 budget
proposal and a report on the long-term sustainability of public finances.

[25] Title III of the Treaty on Stability, Coordination and Governance
in the Economic and Monetary Union.

[26] Work by agreement is an atypical working contract that was given favourable
tax treatment and was intended mainly for seasonal and student jobs. The recent
changes limited its use and reduced the tax advantages.

[27] The figure includes those who use lump-sum deductions and is based
on aggregated data from the tax declaration form type B.

[28] In 2012, the tax administration authority carried out 16 053
controls out of which more than three quarters focused on VAT, about 10 %
on corporate income tax (CIT) and 9 % on personal income tax (PIT).
Breaches of the rules were found in 65 % of controls on CIT and PIT and in
around 38 % of cases for VAT.

[29] The Social Insurance Agency has statistics on the number of
contracts but not on the number of people who ‘work by agreement’. A person can
have more than one agreement contract.

[30] About 86 % of self-employed people pay social contributions
from the minimum assessment base.

[31] The current coefficient of 2 (2.14 for healthcare contributions)
will decrease to 1.486 in 2015.

[32] The self-employed will no longer be able to apply these deductions
to rental income.

[33] Previously, the maximum base varied as follows: (i) 1.5 times the
average wage (AW) from two years before for guarantee and sickness insurance,
(ii) 3 times the AW for health insurance, (iii) 4 times the AW for old-age,
invalidity, unemployment insurance and reserve fund contributions and (iv) no
ceiling for accident insurance. The ceiling was increased to 5 times the AW.

[34] While not directly related to tax IT infrastructure, the government
passed a law to create a central register of physical persons, which may
improve interconnectivity between various databases in the future, thus
potentially giving the tax authority quicker access to a broader set of data.

[35] For example, the Slovak tax authorities state that the deadlines
for filing and payment of VAT are monitored manually through browsing a set of
reports and summaries. Another example is manual calculation for offsetting tax
credit entitlements (e.g. VAT refunds) against other outstanding tax debts.

[36] For example, the tax authority cannot suspend the deadline for a
VAT refund if it suspects fraud. Assets are manually identified during the
process of tax recovery. This may require the tax recovery officers to send a
letter to a registrar of assets.

[37] From 2003 to 2011 the number of convictions was on average 27 %
of all annual prosecutions.

[38] The landfill charge for waste is especially low compared to other
Member States. Progressively increasing the charge would help to divert waste
from landfill, which still accounts for 75 % of municipal waste treatment.

[39] National Bank of Slovakia — Statistics on loans granted between
January and December 2012.

[40] The first guarantee
agreements were signed in April 2013, allowing the participating banks to
provide up to EUR 170 million in new loans to SMEs.

[41] The caseload, estimated in terms of the
number of registered jobseekers per front line staff, has more than doubled
since 2006. Few resources are dedicated to placement and ALMP-related services
in Slovakia (around 50 %). In Luxembourg and Norway it is 80 % (Duell, 2010), OECD 2012 Economic
survey.

[42] While 12 % of unemployed people on average were participating in 2010, this
figure reached 25 % in
Bratislava and 10 % in
eastern regions (OECD Economic Surveys, 2012).

[43] Three ALMP measures
supporting internal mobility that will remain legally claimable in the amended
Act on Employment Services are contributions (i) for commuting to work; (ii)
for moving to work; and (iii) to compensate operational costs of a sheltered
workshop/workplace or transportation of employees.

[44] For people moving from inactivity with an activation allowance to
minimum wage work, the marginal effective tax rate, which measures the part of
a person’s income that goes on taxes, exceeds 60 %. It reaches 80 %
for a single parent with 2 children.

[45] According to a recent evaluation of activation strategies in
Slovakia, the probability that jobseekers participating in activation works
will not find employment in labour market is 80 %.

[46] Calls have been recently launched for the
allocation of EUR 220 million from the European Regional Development Fund to
support job creation for youth in small and medium-sized enterprises Council).

[47] Council Recommendation of 22 April 2013 on establishing a Youth
Guarantee (2013/C 120/01) to 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 four months of becoming unemployed or
leaving formal education.

[48] The new law reintroduced the possibility of benefiting of both a
notice period of up to 3 months (depending on job tenure) and a severance
payment of up to 4 months (depending on job tenure) in case of lay-off. The
maximum duration of consecutive fixed-term contracts was also reduced to 2
years. Night work was prolonged by 1 hour (now it is between 10pm and 6am). The
trade unions regain more negotiation and decision-making powers and must no
longer prove that they represent at least 30 % of employees.

[49] Only 3 % of children under three were
enrolled in formal and pre-school care facilities (compared to 29.2 % in
the EU in 2011).

[50] The current entitlement for postnatal leave
is up to three years. This can be spread over five years with the employer’s
agreement.

[51] The latest available data confirms that
public education expenditure, as a proportion of GDP, and teachers’ relative
wages, remains among the lowest in the EU. In addition, funding mechanisms
favour quantity more than quality and are insufficiently adapted to local
needs. Public and private returns on education in Slovakia are, however,
relatively high by OECD standards, especially because the chance of finding a
job increases with the level of qualification.

[52] Companies operating in sectors such as information
technology and the automotive sector report difficulties in hiring skilled workers.

[53] It increased by 15.3 % between 2000 and 2010 (OECD Health Data
2012).

[54] Deinstitutionalisation is the process of replacing long-stay care
homes for children or adults with less isolated community or family-based
services that respect the right to live on your own and to be included in the
community.

[55] Economic Survey, OECD, 2012.

[56] Prešov Regional Appeal Court’s decision of 30 October 2012 on the
illegal segregation of Roma pupils at elementary school from kindergarten
pupils in Šarišské Michaľany.

[57] The strategy should provide a coherent framework to prioritise EU
funds on a limited set of areas with genuine growth potential in the next programming period.. It should
also address issues related to governance arrangements, involvement of
stakeholders and monitoring mechanism.

[58] Data
refer to the consumption band for light industry (Band IC: 500 MWh <
Consumption < 2 000 MWh). Although it is generally used for cross-country
comparison, it covers only a small share of Slovak electricity users due to the
structure of the Slovak industry.

[59] ‘Small industrial consumers’ refers to those consuming less than 30
MWh electricity and 100 MWh gas. The calculation takes into account the value
of the regulated asset base, operational costs, depreciations and adequate
profit.

[60] Staff working document ‘Energy Markets in the European Union in
2011’ (SWD(2012)368)) using data from the CEER database.

[61] Eurostat.

[62] Cross-country comparisons of network costs are difficult to make as
different countries might include different elements in the network costs. In
particular, support for renewables and/or cogeneration can be reported either under
network costs or under taxes and levies. In the case of Slovakia and the Czech
Republic, however, renewable energy support schemes are included in network
costs and have similar shares. According to data provided by Eurostat, Slovakia’s
network costs for industrial consumers are 40 % higher than in the Czech
Republic, while they are broadly comparable for households. Network charges for
households are nonetheless among the highest in the EU in both countries.

[63] The network costs between 2009 and 2012 increased by around 18%.
Energy & supply costs decreased between 2009 and 2012 by around 28%. Source:
Eurostat.

[64] Re-evaluation of assets increases the value of assets entering the
regulated asset base that is then used for tariff calculation. If the money is
not reinvested this approach leads to higher tariffs without real cost
increases for transmission and distribution operators.

[65] All these elements are part of network costs in Slovakia. Support for
renewable energy and CHP has been the fastest growing sub-component of network
costs, according to the RONI. It rose from 0.12 EUR/MWh in 2009 to 11.95
EUR/MWh in 2012. In 2012 it represented about 9.3 % of the final
electricity price for households. Support for domestic lignite represented
around 1.5 % of the final electricity price for households. For industrial
consumers these shares are not available. RONI Annual Report 2011.

[66] Comparison of consumption bands D2 (5.56 MWh-55.6 MWh) for
households and I3 (2.77 GWh-27.8 GWh) for industrial consumers in 2011.

[67] The requirement to include a minimum of two options from the ‘list
of eligible energy efficient public procurement measures’ in Annex VI of the
ESD has not been met.

[68] Fiscal Policy Institute (2011), A subsidy of one miner constitutes
twofold of his gross wage.

[69] After the delay, the first phase of the transport plan should be
ready in June 2013.

[70] This was already communicated to the Slovak authorities in the
Position of the Commission Services on the development of the Partnership
Agreement and programmes in Slovakia for the period 2014-2020.

[71] Other areas where there is room for improvement are
government-to-government transactions and the inter-operability of databases among
various public institutions.

[72] Transparency International ranked Slovakia
62nd in its global corruption
perception index.

[73] OECD Report on implementing the OECD Anti-Bribery Convention in the
Slovak Republic, June 2012.

[74] The new law provides for a central
electronic market place that is obligatory for below-threshold off-the-shelf
procurement. The use of non-competitive amendments to the existing contracts
has further been restricted. The concept of ‘abnormally low tenders’, which can
be excluded from procurement, was defined in more detail. A new appeal body, with a majority of
external members, will decide on appeals against decisions by the Public
Procurement Office (‘Office’).

[75] Based on the 2010 data in the EU Justice Scoreboard.

[76] Idem.

[77] Source: Eurostat.
April 2013. For 2011, only formally reported biofuels compliant with Art. 17
and 18 of Directive 2009/28/EC are included.

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