Sustaining productivity growth will help Slovakia boost economic resilience

Slovakia’s economy has weathered the Covid-19 pandemic and subsequent energy crisis relatively well. However, this has come at the cost of high deficits, debt and inflation. It is time to strengthen Slovakia’s fiscal position.

The Slovak economy has proved relatively resilient to the energy crisis following Russia’s war of aggression against Ukraine and inflation has now declined substantially. However, Slovakia’s export-oriented economy remains vulnerable to external shocks, according to the latest Organisation for Economic Co-operation and Development (OECD) Economic Survey, published this week.

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The OECD is projecting GDP growth to pick up to 2.1 per cent in 2024 and 2.6 per cent in 2025 after 1.1 per cent in 2023, and projects a significant reduction in inflation to 3.4 per cent in 2024 and 2.7 per cent in 2025, down from 11 per cent in 2023.

Lower inflation will support real wage growth and lead to stronger private consumption, while absorption of EU Recovery and Resilience funds and strengthening foreign demand will support investment and exports.

A medium-term fiscal consolidation strategy is recommended to improve the efficiency of public spending, including by drawing on spending reviews, as public debt has risen and to address the challenges of population ageing.

Slovakia’s population is ageing rapidly with the share of citizens aged 65 and above relative to the working age population expected to almost double by 2050. Pension reforms in 2022 have improved sustainability, but further reforms are needed to mitigate spending pressures and prolong working lives– including by reducing options for early retirement.

“Slovakia’s economy has weathered the Covid-19 pandemic and subsequent energy crisis relatively well. However, this has come at the cost of high deficits, debt and inflation. It is time to strengthen Slovakia’s fiscal position with a credible fiscal consolidation strategy which will also help to ease ongoing inflationary pressures,” says OECD Secretary-General Mathias Cormann.

“Sustaining economic convergence and lifting productivity growth will mean developing skills the economy needs, with adequate upskilling and reskilling opportunities at all stages of the learning cycle, while encouraging investment in innovation and improving the business environment.”

Mitigating the impact of a shrinking workforce

More efficient public investment spending would maximise the impact of substantial inflows of EU funds and allow for ambitious consolidation without deterring investment in digitalisation and the green transition. Reforms to the tax system that shift taxes away from labour towards property and environmental taxes can also support growth and strengthen public finances.

Increasing employment rates of women with young children would mitigate the impact of a shrinking work force while also reducing the gender wage gap. Exceptionally long parental leave policies should be modified to encourage women to return to the labour market, with enhanced access to affordable and high-quality pre-school facilities and more flexible working arrangements put in place to support this shift.

Slovakia’s manufacturing sector has been a key engine of productivity growth, thanks to its integration into global value chains. However, the sector is highly exposed to global shocks and trends, such as automation and the green transition.

Policies should aim at improving training and offering workers more opportunities to reskill and upskill, including via expanded work-based learning, targeted funding to improve the quality of tertiary education, stronger incentives for adult learning and more training for the jobless.

For businesses, targeted support for research and development and technology adoption, especially for small firms, can help overcome financing constraints and boost their innovation capacity.

Tackling housing challenges

Making housing more efficient, affordable and environmentally sustainable is also imperative to improve living conditions and reduce carbon emissions.

Facilitating administrative procedures can help alleviate housing supply constraints by accelerating construction. Bolstering the private rental market through better balancing landlord and tenant rights and tax reforms can spur residential and labour mobility.

Strengthening incentives to renovate energy inefficient housing through targeted financial support and stricter regulations can help achieve environmental goals and reduce energy costs.

At the same time, expanding the stock of social rental housing and accelerating the formalisation of property rights in Roma settlements is key to improve living conditions of the most vulnerable households.

Photo by Pavol Svantner on Unsplash.

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