4. The budget framework calls for early action. With economic output still below potential, subdued inflation, high unemployment, and infrastructure and other needs, gradual adjustment would be advisable. However, since government debt exceeded 55 percent of GDP in 2013, Slovakia’s Fiscal Responsibility Act (FRA), calls for some spending cuts already in 2014.
5. Expenditure-based adjustment will be difficult. Consistent with the FRA’s emphasis on spending cuts, the government’s medium-term budget plan targets much lower outlays. Making the government more efficient would help achieve expenditure savings.
6. Strengthening revenue collection should be a top priority. To reduce risks from over-reliance on expenditure cuts and avoid short-changing worthwhile outlays, revenue performance should be improved. Early progress in strengthening revenue collection and reducing evasion, especially steps to raise low efficiency in VAT collection, is welcome.
7. Wide-ranging policy actions are needed to tackle very high unemployment and regional disparities. Slovakia has been among the fastest growing economies in Europe, but nonetheless has very high unemployment (14 per cent overall and much higher levels for youth, the long-term jobless, and marginalised groups), and wide gaps between Bratislava and other regions in terms of income, employment, and infrastructure.
8. Continued prudence will maintain the strength of the banking system. Sound capital levels and liquidity buffers, rising profits, and deposit-based funding contribute to the strength of the banking system, make it resilient to shocks, and should facilitate corporate lending as demand picks up, complementing strong household lending growth. Consistent with Slovakia’s membership in the euro area, key banks will take part in the comprehensive assessment in preparation for the Single Supervisory Mechanism, and the supervisory and regulatory framework will be strengthened through implementation of the Basel III framework via the Capital Requirements Regulation/Capital Requirements Directive IV, including regarding macroprudential policy.
9. Actions could help support non-bank finance and credit to small firms. Reducing high taxes on investment income and lowering transaction fees by establishing a more efficient central depository would address some of the factors that have contributed to very limited capital market activity.