Entrepreneurial Freedom on Decline in Slovakia

Ever since the start of the financial crisis, Slovakia has been having serious problems with the sustainability of its public finances. Public revenues have been falling down or stagnating, but public expenses have continued to rise. As a result, public debt has doubled and fiscal consolidation was needed to bring the deficit under control.

In 2012, a new government was elected, with a single left-wing party Smer winning a landslide majority. Fiscal consolidation was one of the top priorities of the newly-formed government. The government decided to raise its revenues, which in reality meant raising the various tax rates. This hit Slovak entrepreneurs especially hard.

Since the beginning of 2013, corporate income tax has been raised from 19% to 23%. Mandatory social contributions have been raised for self-employed persons. Labour Code has been reformed, so that laying off workers is now more expensive for the companies. Raising mandatory social contributions for the high-income workers has also raised the labour costs of the firms that hire them.

The government introduced new non-standard taxes, such as a temporary levy on enterprises in regulated sectors (mostly energy and telecom sector) and a special levy in banking sector, which, at the end of the day, are all paid by consumers.

All these measures which the government called consolidation of the public finances made running a business more difficult in Slovakia, which is a very risky move in a country of a 14% unemployment rate. Although the corporate tax rate was increased by more than 20%, the government is currently expecting to get only 6% more in the corporate tax revenues than last year.

Deficit of the public finances has hit the 3% GDP mark, so further consolidation is needed. Despite the government’s promise that, while it raises its revenues in 2013, it might cut the spending in 2014, consolidation is expected to continue at the ratio of 5:1 when we compare revenues increase and spending cuts.

On the one hand, the government plans to lower the corporate income tax rate by 1%. That is surely a positive sign although still far behind the original 19% rate. On the other, it will not be for free, but more than compensated by a new license for the entrepreneurs, so the tax burden of the business sector will actually increase. Since most of the small and medium businesses don’t pay the corporate income tax, because of low profitability or their tax optimization, the government plans to impose a business license which might cost EUR 1,000 annually per company. The costs of the license could be deducted from actual tax paid, but for the companies with negative profits the license would represent just a new tax they would have to pay.

Administrative costs have also been an issue: since the government is struggling with ineffective value added tax collection, it has introduced a more complicated system for the entrepreneurs to track their tax record with the intention of lowering the tax avoidance. These steps harm the law abiding businesses unreasonably, just because the government is not able to fight the tax evaders effectively.

Despite the promise to improve business environment, which is included in most government declarations, most of the measures important to entrepreneurs made the environment less business friendly. The government continues to provide investment stimulus for big companies and subsidizes job creation from the public resources. However, these actions help only certain companies and the benefits are paid by all the others.

Since most taxes and administrative costs laid on businesses during the last year were adopted with the aim of lowering the deficit of the public finances, cardinal positive changes for the entrepreneurs can only be expected once the government changes its course and starts cutting its expenses, which are now full of ineffective items representing a waste of taxpayers’ money.