Remarks by Angel Gurría, Secretary-General OECD
6 December 2012
Bratislava, Slovak Republic
(As prepared for delivery)
Prime Minister, Ministers, Excellencies, Ladies and Gentlemen,
It is a great pleasure to be back in Bratislava to present our OECD Economic Survey of the Slovak Republic. It is an even greater pleasure to present this Survey in a European country that has recovered strongly and more rapidly from the global financial crisis than most other OECD countries.
This Survey is the result of a very dynamic and successful collaboration between the Slovak Republic and the OECD. Your experts made highly valuable contributions to this process, visiting our Organisation on three separate occasions. I want to thank your government, Prime Minister Fico, for your constant support. Let me know present our key findings.
Impressive resilience, persisting challenges
The Slovak economy has weathered the slowdown of its European trading partners quite well. In 2012, the GDP growth rate has been among the highest in the OECD, just above 2%. The automotive sector has been a particularly dynamic driving force, which indicates that Slovakia remains attractive as an investment location. Economic stability and growth are supported by a dynamic labour market and a solid banking sector.
However, this is not the time for complacency. Despite these and other achievements, the road ahead is full of challenges. The weakening of the world economy has weighed on Slovakia’s growth performance. The fiscal room gained in the run-up to euro accession quickly evaporated during the crisis. Public debt has increased considerably since 2009.
The euro area debt crisis has reduced demand from Slovakia’s main trading partners and weakened investor confidence. Medium and long-term economic prospects are uncertain. It is unclear whether the worst part of the euro area crisis is behind us. This could be particularly troublesome for Slovakia because of its dependency on exports and on foreign direct investment.
Slovakia still has a significant margin for improvement and a large potential for growth. According to our Economic Survey, Slovakia needs to restore its public finances while fostering domestic drivers of growth and promoting inclusiveness through education and labour market policies. Let me elaborate on these crucial objectives in greater detail.
Consolidating public finances in a growth-friendly way
Fiscal consolidation offers an opportunity to re-think the allocation of public funds, to review priorities, and to remove existing inefficiencies. We welcome the government’s plans to reduce the deficit below 3% of GDP next year and its initial efforts to improve its fiscal framework, such as the establishment of the Fiscal Responsibility Board. However, further reforms are needed to ensure that fiscal consolidation efforts are compatible with economic growth. Our Survey identifies a number of ways to pursue consolidation while maintaining positive prospects:
- First, Slovakia’s tax collection is one of the least efficient in the OECD. Paying taxes is still more difficult in Slovakia than in most of other OECD countries. The reason for the poor performance of the tax system is low compliance and high collection costs; thus, a more integrated tax system is needed. Increasing taxes without strengthening the tax administration system will produce few results.
- Second, Slovakia should make the tax system less distortive and more growth-friendly. For example, increasing taxes on property, particularly on real estate, is less harmful for growth than raising taxes on labour or capital.
- Third, to further strengthen the credibility of fiscal policy, we recommend introducing multi-year spending ceilings that are consistent with a structural budget balance. Such a ceiling would allow the automatic stabilisers to work and avoid over-spending in good years.
- Fourth, Slovakia should work on further improving the use of EU funds to help correct fiscal imbalances and spur growth. While progress has been made in this respect, Slovakia still lags behind its neighbouring countries.
- Last but not least, more needs to be done to improve the prioritisation of public spending and to ensure that public money is adequately used. Evaluation and monitoring of public actions would help parliamentarians and citizens better understand the impact of government spending.
These reforms will help Slovakia to maintain sustainable debt levels without deterring economic growth. But this is just one area of reform. Reducing Slovakia’s high unemployment rate and engaging more participants in labour markets is also essential to building a sustainable and inclusive economy in the long-term.
Let me now to turn to another key area: labour market reforms. Slovakia’s unemployment rate is the fifth highest in the OECD. A large number of the unemployed spend more than a year out for work. The youth, the low-skilled and the Roma are particularly affected. Regional disparities are huge and in some regions the unemployment rate is close to 20%. Active labour market policies are therefore key to reducing these alarming rates.
Promoting inclusiveness through education and labour market policies
Around 60% of Slovakia’s unemployed are low educated. According to available data, the unemployment rate of the Roma population is above 70%! While other factors play a role, the poor educational achievement of the Roma is one of the major obstacles to their social inclusion. Youth, particularly those without qualifications, or graduates from vocational schools, also have difficulties in finding a job. We must mobilise all efforts to help bring these people back to work!
This requires endowing the labour force with sufficient and adequate skills. In the course of the past decade, the Slovak Republic has demonstrated its commitment to improving education outcomes. The educational achievement both in terms of quality and equity improved significantly. However, educational outcomes still remain below the OECD average.
Increasing funding for teaching activities and for socially disadvantaged pupils, particularly the Roma children, will make the education system more inclusive. As resources are scarce, this should be accompanied by reforms to make the education system more efficient. This includes improving the use of school evaluation and developing performance-related pay for teachers. Consideration should also be given to rationalising the school network, making sure that it does not impose undue burden on commuting times.
Also, Slovakia should further strengthen cooperation between employers and schools so students can develop professional experience during their studies. In-work training can significantly improve employability among graduates. One option to promote work-based training is to develop a dual apprenticeship system. This system, where students are directly hired by firms, proves to be efficient for facilitating the transition from school to work.
Additionally, compared to other OECD countries, Slovakia spends very little on public employment services. International evidence suggests that job search assistance by a well organised public employment office is one of the most efficient tools to reduce unemployment. Well-targeted wage subsidies can also foster hiring of job seekers with low productivity. But increased spending on activation programmes on its own does not guarantee success. Efforts are also needed to better evaluate the effectiveness of programmes and to target them to those who need it most.
Ladies and Gentlemen,
The road ahead will not be easy. Pursuing fiscal consolidation while also striving towards sustainable and inclusive growth is a challenging and daunting task. This Economic Survey will help support these efforts by providing policymakers with a clear and well developed road map. Having a clear vision for the country is an essential step towards strong performance. As it is often said, “if you don't know where you are going, you'll most likely end up someplace else.”
Let me assure you that the OECD stands ready to implement these reforms with the Slovak Republic and build a sustainable and solid future for the country hand in hand.