Consolidation Measures in Slovakia

picture: Thomas Quine

In June of 2012 the newly elected Slovak government finally unveiled first official blueprint of highly rummored consolidating measures. The main objective is continuation of cutting the fiscal deficit below 3% of GDP until 2013. Although we find some of the measures positive, an overwhelming majority of the presented proposals will have a negative impact on Slovakia and its citizens as this consolidation mostly relies on imposing more taxes. Despite many government’s reassurances, most of the proposed measures are targeted directly against the middle class.  Here is our opinion on the most important of 22 proposed measures.

picture: Thomas Quine

We consider the following proposals to have a positive impact:

17. Cutting the maximum amount of unemployment benefits to a level equalling average salary in the national economy

Lowering the maximum amount of unemployment benefits a worker is entitled to claim is likely to prevent the benefits’ abuse and improve solidarity within the existing system. However, if benefits are to reach only those recipients who genuinely need them, it would be best to remove the entitlement to the benefits of all constitutional officials, whose tenures in office are determined well in advance.

18. Accelerated redemption of a financial bailout granted to Vodohospodárska výstavba, state enterprise

Even though we consider the redemption of the previous bailout as positive, it is not sure how able will the Vodohospodárska výstavba, state enterprise, be to fulfill the commitment.

19.   Raising income the Slovak land fund receives from renting land

Renting land to farmers for below market prices was creating distortions in the market. Removal of these privileges will improve the quality of the business environment.

We consider the following proposals to have a negative impact:

1.   Extension of the levy imposed on the banking sector + 2. Special levy on the banking sector

Extension of the already existing levy coupled with an additional special levy in the banking sector pose a threat for both banks and citizens alike. On one hand the banking sector is constantly forced into raising additional capital, while on the other hand this required capital is sucked out of the banks by means of an additional tax burden. Furthermore, negative results of the financial sector have a tendency to inhibit economic growth. In European context, the Slovak bank levy is currently the second highest, trailing only behind the Hungarian one. Last but not least there is a question of spreading the costs arising from the aforementioned levies. Additional burdens imposed on the banking sector will be shifted towards the customers in the form of higher prices of various banking products, or higher interest rates. Therefore, decreased competition of the Slovak banking sector and greater burdening of savers constitute main risks.

3. Introduction of a temporary levy on enterprise activity in regulated industries

The intention to introduce a special levy on business activity in regulated industries could be, in the current form, in direct contrast with the constitution and the legal framework of the EU.  The attempt to introduce a similar measure by the Hungarian government in October 2010 was abandoned under the threat of legal proceedings on part of the European Commission and submission of the case to the European Court of Justice.

6. Changes in administrative fees

We see no reason for imposing further burdens on motorists, since they are already taxed more than enough. Not only are they obliged to pay VAT when buying a car, they also have to pay administrative fees associated with registering their cars, plus additional taxes whenever they tank fuel.

7. The introduction of a new central property tax in excess of local taxes

Instead of further taxation of housing, which is, according to a study published by the OECD, already more than expensive in Slovakia, the government should perhaps consider a removal of various forms of subsidies, such as bonuses for construction savings or mortgage subsidies for young people.

8. Changes in income tax rates and an increase of the maximum assessment base for social and health insurance

10. Changes in the taxation of self-employed

A popular belief that employees pay for the pensions of self-employed is an illusion. This problem can be viewed from two different planes. Firstly, at most one fifth of self-employed remain self-employed throughout their entire lives. An average citizen changes not only occupations, but also forms of employment. Hence it is not possible to work with the assumption that a taxpayer, that is currently self-employed and pays minimum contributions, does so throughout his entire life. Moreover, if a self-employed person pays small contributions, he will be awarded a small pension. Secondly, another problem arises from a continued interchanging of “mission” of employees and self-employed. Whereas a self-employed person transfers money to the state continuously, regardless of whether he is profitable or not, an employee pays only if he has income. In fact, if an employee has no income, he receives money from the state. Furthermore, self-employed are not entitled to a vacation, sick leave and other employee benefits.

11. Restriction of agreements on work performed outside employment except for full-time students

A significant restriction on possibility of working outside employment markedly reduces the flexibility of the Slovak labour market. As a consequence of encouraging people to work in a shadow economy, the government might not be able to raise the planned amount of funds.

12. Changes in the pension system

We perceive planned changes in the pension system as a defeat for the savers.

13. Taxation of retirement pensions payable before reaching retirement age

In the case of taxing retirement pensions before reaching retirement age, compatibility with the Constitution cannot be guaranteed since the proposal only affects pensions of  narrowly selected group-  police officers and members of the armed forces. Instead, the government should consider abandoning the simultaneous payment of retirement pension in combination with the pay for work in the public sector. There is no reason why a taxpayer should pay for such a person twice.

*Article is co-authored by Boris Kučera – currently a student of Economics at UCL, co-worker of F.A. Hayek Foundation since 2012.