Facing increasing fiscal pressure, the Slovak Government adopted a Consolidation Plan in October 2024, scheduled to take effect in 2025. The package included reforms to the personal income tax, the child tax credit, and value added taxes. This study assesses the fiscal, distributional, poverty and inequality impact of these reforms.
Assessing Slovak Republic’s 2025 Fiscal Consolidation Plan
Abstract
Revenues would increase. The combined reforms would lead to an increased annual revenue gain of EUR 266 million or 0.19% of GDP in 2025.
Bottom half of the distribution would lose most. Relative income losses would be biggest for households in the bottom half of the distribution. These losses are especially driven by the child tax credit and VAT reforms.
Poverty and inequality would increase. The child tax credit would increase post-consumption tax poverty and inequality.
Growing fiscal pressures in the Slovak Republic have increased the need for budget consolidation. In October 2024, Parliament approved a EUR 2.3 billion consolidation plan starting in 2025. The plan includes a wide range of measures, with a strong focus on raising revenues. This study covers three of them: changes to personal income tax (PIT), the child tax credit, and value added tax (VAT).
The first reform changes PIT for the self-employed. Those below a given income threshold qualify for a reduced rate. This threshold increases from EUR 60 000 to EUR 100 000.
The second reform targets the child tax credit. It has three elements. First, it removes eligibility for dependent children over 18. Second, it raises the upper limit, i.e. the credit’s maximum amount. Because this limit is defined as a share of the tax base and varies with the number of children, it effectively applies only to low-income families. Third, it introduces a phase‑out for high‑income families: for households earning more than 1.5 times the average wage, the credit falls by EUR 0.10 for each additional euro of income.
The VAT reform includes three changes: the standard rate raises from 20 to 23%. The reduced rate on selected food items falls from 10 to 5%. A new reduced rate of 19% applies to food items previously taxed at the standard rate, as well as to electricity consumption.
This study describes the fiscal, distributional, poverty and inequality impact of this selection of measures described above. The analysis uses the European Commission’s tax-benefit microsimulation model, EUROMOD, based on EU-SILC 2022 and HBS 2015 input data. All reforms are evaluated against a 2025 baseline reflecting updated policies and monetary variables.
The three reforms would increase annual revenue by EUR 266 million (0.19% of GDP in 2025; Table 1). Raising the reduced rate threshold for the self-employed would lower PIT revenue and increase tax refunds by about EUR 12 million. The child tax credit reform would raise PIT revenues by EUR 124 million and reduce tax refunds by EUR 35 million. The VAT reform would add a further EUR 121 million.
Indirect fiscal effects would remain small. They would mainly reflect the child tax credit reform. The reform would reduce the contribution base for voluntary or inactive health insurance contributions, lowering contributions from this group (“Other SIC”). At the same time, government spending on credited health insurance contributions would increase as more people would fall below the income threshold. The VAT increase would also raise revenues from ad valorem excise duties.
Note: The VAT reform assumes household do not adjust their consumption behaviour (constant quantities assumption) and adjust savings accordingly.
Source: OECD calculations using EUROMOD J1.0+, EU-SILC 2022 and HBS 2015 data.
The reform package would reduce disposable incomes across the distribution, with the largest losses in lower-income groups (Figure 1 – white diamonds). The child tax credit reform drives most of this effect. It reduces income by 0.39% on average, mainly due to the removal of the eligibility of eligibility for children over 18. Deciles 1 to 5 would face above‑average losses, while deciles 9 and 10 would see the smallest reductions (light blue bars).
The VAT reform would reduce income by 0.29% on average. The impact would remain the lowest in deciles 1, 2, 5 and 6 (medium blue bars). The PIT reform for the self‑employed would have a small effect. It would only affect those with income between the old and new thresholds. Its impact on equivalised disposable incomes would average 0.03%, with slightly larger gains in deciles 2 and 3 (dark blue bars).
The reforms to the child tax credit would be the main driver of the income losses caused by the reform package. In turn, most income losses from the child tax credit reform would come from the end of the eligibility for children above the age of 18. This can be seen in Figure 2, which shows the average child credit amounts by deciles starting from the pre‑reform scenario and adding progressively the three elements of the child credit reform: ending the eligibility above 18 years of age, increasing the upper limit of the tax credit and introducing a reduction for high-income families.
Before the reform, the credit is highest around the third decide, and lowest in the first, seventh and tenth decile. Ending eligibility for children above the age of 18 would lower the amounts in all deciles, especially in the bottom half of the distribution. Increasing the upper limit would affect mainly families in deciles 1 and 2, giving them a small gain. The reduction for “high income families” would lower the average tax credit in the highest decile only.
The small average loss from the VAT reform hides the counteracting effects of its components: an increase in the standard rate, a decrease in the reduced rate and the introduction of a reduces rate of 19% for food items previously taxed at the standard rate (Figure 3).
The higher standard VAT rate would lower post-consumption tax (CT) disposable incomes across all deciles by an average of 1.6%, with slightly larger losses at the bottom (dark blue bars). In contrast, cutting the existing reduced rate would increase incomes by 0.78% on average, with the largest gains in the bottom deciles (light blue bars). Introducing a new reduced rate for basic food items would raise incomes by another 0.49% on average, again with the largest gains at the bottom (medium blue bars).
The reform package would increase poverty, mainly due to the child tax credit reform. Although this measure would not change the disposable income poverty rate (Table 2, row 1), it would rise the post-consumption-tax (post-CT) poverty by 0.5 percentage points (p.p.) (Table 2, row 2). The VAT reform would add a further 0.1 p.p.
Income inequality would slightly rise. The PIT reform for the self-employed would have a negligible effect while the child tax credit reform would raise the Gini coefficient for disposable income by 0.0012 (Table 2, row 3). Post-CT inequality would increase by 0.0014 from the child tax credit reform, and by 0.0001 from the VAT reform (Table 2, row 4).
Note: Household disposable income is equivalised using the OECD modified equivalence scale. VAT reform assumes household do not adjust their consumption behaviour (constant quantities assumption) and adjust savings accordingly. Anchored poverty line set at 60% of median equivalised disposable income in baseline scenario.
Source: OECD calculations using EUROMOD J1.0+, EU-SILC 2022 and HBS 2015 data.
The reforms described in this note were carried out as part of the 2025 Technical Support Instrument (TSI) project “Boosting the Usage of Distributional Impact Assessments through Microsimulation”, funded by the European Commission. The beneficiary authority in Slovak Republic was the Council for Budget Responsibility. The reforms assessed during the project, including those described in this note, were for capacity building purposes only and do not necessarily reflect the official views of the beneficiary authority.
The supplementary material includes a sensitivity check showing how alternative behavioural assumptions affect the estimated impact of the VAT reform.
More information on Slovak Republic’s tax and benefit system is available in the OECD Descriptions of Tax and Benefit systems.
How do taxes and benefits affect disposable household income, benefit replacement rates, benefit adequacy, and financial work incentives? Find it out using the OECD tax-benefit web calculator.
More information on the EUROMOD microsimulation model: here.
Contact: Ella-Marie Assal (Ella-Marie.Assal@oecd.org), Daniele Pacifico (Daniele.Pacifico@oecd.org) and Sara Riscado (Sara.Riscado@oecd.org).
This work is issued under the responsibility of the Secretary-General of the OECD, and does not necessarily reflect the official views of OECD Member countries.
This document was produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union.
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