7.3.2006   

EN

Official Journal of the European Union

C 55/17

(1)

On 24 January 2006 the Council examined the updated convergence programme of Slovakia, which covers the period 2005 to 2008.

(2)

Slovak real GDP growth averaged 4,3 % between 1994 and 2004 almost two percentage points above the EU25 average of 2,4 %. Despite improvement in 2005, the labour market situation remains the country's major problem. As a consequence of accelerated enterprise restructuring in the late 1990s, the unemployment rate increased from 13,7 % in 1994 to 18,2 % in 2004 while total employment decreased by two percentage points over the same period. The macroeconomic scenario assumes that real GDP growth will average 5,6 % per year over the programme period and, starting with a negative output gap in 2005, implies a marked swing in cyclical conditions. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions. The programme's projections for inflation also appear realistic.

(3)

On 5 July 2004, the Council decided that Slovakia was in excessive deficit. According to the Council recommendation under Article 104(7) of the same date, the excessive deficit has to be corrected by 2007. In its opinion of 17 February 2005 on the previous update of Slovakia's convergence programme covering the period 2004-2007, the Council invited Slovakia to ‘(i) seize every opportunity for an accelerated deficit reduction, including through the use of better-than-expected revenues and of savings on the expenditure side, in particular in 2005; (ii) make the medium-term expenditure ceilings more binding; (iii) be vigilant that second-round effects from the high inflation in 2004 do not affect the inflation convergence path envisaged in the programme’.

(4)

The updated programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2).

(5)

The programme aims at reducing the deficit to below the 3 % of GDP reference value in 2007, in line with the Council recommendation under Article 104(7) from 5 July 2004. The general government deficit (net of the pension reform costs) is projected to decrease from 4,1 % of GDP (including 0,8 % of GDP debt cancellations) in 2005 to 2,9 % in 2006, then decline sharply to 1,6 % of GDP in 2007 and reach 1,3 % of GDP in 2008. The profile of the primary balance is similar, which is expected to improve from -2,3 % of GDP (-1,5 % of GDP excluding debt cancellations amounting to 0,8 % of GDP) in 2005 to 0,7 % in 2008. The budgetary adjustment is mainly expenditure based. The government expenditure-to-GDP ratio is expected to fall by 3,4 percentage points between 2005 and 2008 (by 2,6 percentage points excluding 0,8 % of GDP of debt cancellations in 2005). General government revenues are estimated to remain broadly stable until 2007 and then decrease by 0,7 % of GDP in 2008. The budgetary impact of the classification of the second-pillar funded pension scheme outside the general government sector (which has to be implemented by the time of the spring 2007 notification) is estimated at 0,8 %, 1,3 %, 1,4 % and 1,4 % of GDP in 2005, 2006, 2007 and 2008 respectively. The planned fiscal consolidation is back-loaded, mainly concentrated in 2007.

(6)

(7)

The risks to the budgetary projections in the programme appear broadly balanced. Although the programme is not very explicit about the specific measures planned to be adopted in order to reach the 2007 deficit target, the update emphasizes that the medium-term budgetary framework approved by the government is based exclusively on currently valid legislation and on government approved legislative changes. The current government has so far more-than-respected the budgetary targets set in the previous programmes: after a lower-than-expected 2004 deficit, a better-than-planned result is also anticipated for 2005 (if debt cancellations of 0,8 % of GDP are excluded). Nevertheless, some of the financial resources that were freed by lower-than-expected interest expenditure in 2005 were used to cover other unbudgeted public expenditures highlighting the need for more binding ceilings for expenditure items.

(8)

(9)

The debt ratio is estimated to have reached 33,7 % of GDP in 2005, which is well below the 60 % of GDP Treaty reference value and 10,5 % points lower than envisaged in the previous update of the programme. This downward revision is mostly due to a stock-flow adjustment. The programme projects the debt ratio to increase by 2,5 percentage points over the programme period.

(10)

With regard to the sustainability of public finances, Slovakia appears to be at low risk on grounds of the projected budgetary costs of ageing populations, subject to the sustained fiscal consolidation also beyond the programme period and the full implementation of enacted reforms, as well as other reforms of a structural nature (including a reduction of unemployment). The level of debt is significantly under the 60 % reference value and should remain so under the assumption of unchanged policies for the coming two decades. However, the continuation of the currently high structural deficit will prevent the reduction of the debt/GDP ratio, which increases the risk to long-term sustainability. Implementing rigorously the planned consolidation of public finances over the medium-term is necessary in order to reduce risks to long-term sustainability.

(11)

The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008. Slovakia is on track to correct its excessive deficit by the deadline set by the Council.

(12)

The National Reform Programme of Slovakia, submitted on 14 October 2005 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant implications for public finances: (i) information society; (ii) R&D and innovations; and (iii) education and employment. The budgetary implications of the actions outlined in the National Reform Programme are fully reflected in the budgetary projections of the convergence programme. The convergence programme describes already adopted reforms of tax and pension systems. The 2006 budget as well as the 2006-2008 budgetary framework foresee significant increases in the expenditure on education and research and development and thus reflect priorities set in the National Reform Programme.

(i)

strengthen, in the context of strong growth outcome and prospects, the effort in the structural budgetary adjustment, in order to speed up the attainment of the MTO; and

(ii)

reinforce the binding character of the medium-term expenditure ceilings for central government.