Slovak Republic: Selected Issues and Statistical Appendix
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This Selected Issues paper evaluates competitiveness in Slovakia and estimates the equilibrium real exchange rate path for the koruna. It takes stock of Slovakia’s growth performance over the past decade and assesses its growth potential over the medium term. It estimates the equilibrium real exchange rate appreciation in Slovakia using cross-section and time-series methods. The paper also presents production function estimates of potential output for Slovakia that imply sustainable rates of growth of 4.5–5.0 percent over the next five years.

Abstract

This Selected Issues paper evaluates competitiveness in Slovakia and estimates the equilibrium real exchange rate path for the koruna. It takes stock of Slovakia’s growth performance over the past decade and assesses its growth potential over the medium term. It estimates the equilibrium real exchange rate appreciation in Slovakia using cross-section and time-series methods. The paper also presents production function estimates of potential output for Slovakia that imply sustainable rates of growth of 4.5–5.0 percent over the next five years.

IV. Slovakias Tax and Welfare Reforms40

A. Introduction

1. This chapter reviews Slovakia’s recent reforms to its tax and welfare systems. These reforms are part of a wide-ranging agenda that also includes reforms to pensions, healthcare, the labor market, and the legal system, with further reforms planned in the education system.41 The focus on the tax and welfare reforms has two motivations. First, these reforms are important in their own right. Second, the potential for interaction between tax and welfare systems can have strong implications for incentives to work—especially important in a context of high unemployment, which remains one of Slovakia’s most pressing economic and social problems.

2. The flat-rate income tax has become a particular source of attention for regional policymakers.42 Estonia introduced a flat-rate income tax in 1995, followed by several other countries from the former Soviet Union—notably including Russia, which introduced a 13 percent tax in 2001. More recently, Poland is considering introducing a flat-rate income tax, and the Romanian government elected in late 2004 moved swiftly to introduce a 16 percent flat tax effective from January 2005.

3. The reforms have been undertaken in a context of needed medium-term fiscal consolidation. The Slovak government plans to meet the Maastricht fiscal deficit criterion—3 percent of GDP—by 2007. The fiscal deficit has been around 3½ to 4 percent of GDP in both 2003 and 2004; and the task of reducing the deficit below 3 percent in the period ahead is being complicated by additional pressures from the costs associated with EU accession and the introduction of a second pillar to the pension system. In the context of the government’s medium-term goals, the tax reform was designed as broadly revenue-neutral; and welfare reform had to be carried out within a tight expenditure envelope.

4. The chapter is set out as follows. Section B briefly outlines the tax and welfare reforms introduced in 2004. Section C examines the available evidence on the fiscal implications of the reforms. Section D looks at the efficiency implications of the reforms, in particular for incentives to work and invest. Section E notes some of the distributional implications of tax reform, and the available evidence on the effectiveness of the welfare system in its social protection role. Section F concludes.

B. Brief Overview of the Reforms43

5. The goal of the 2004 tax reform was a competitive tax system. According to the Ministry of Finance (2003a, 2003b), the reform aims to improve the efficiency, transparency, simplicity and fairness of the tax system, based on the following principles:

  • Broad revenue neutrality, by shifting the tax burden from direct toward indirect taxes;

  • Low standard tax rates, financed by eliminating special treatments and exemptions;

  • Minimizing distortions in the economy from taxes used for “non-fiscal” goals; and

  • Minimizing double taxation of income.

6. The “19 percent” tax reform greatly simplifies the tax system.

  • The reformed personal income tax features a single rate of 19 percent and a high tax-free threshold (Figures 12). It replaces 21 different tax rates, including a five-band rate structure on wage income that ranged from 10 to 38 percent, and withholding tax rates on capital income ranging from 5 to 25 percent.

  • The corporate income tax rate has also been reduced to 19 percent, and dividend taxation abolished.

  • Most income tax exemptions have been cancelled, notably tax holidays for newly established firms; future investment incentives must comply with EU state aid rules.

  • The single VAT rate of 19 percent replaces dual VAT rates of 14 and 20 percent.

  • Excise taxes were increased and aligned with EU requirements.

  • Several smaller taxes were abolished.

  • A separate reform modestly reduced overall social contribution rates by 2.4 percentage points, and increased the ceilings for pension and unemployment insurance contributions.

In general, the tax reform conforms to core IMF recommendations on tax system design (Box 1).

7. The goal of the welfare reform was to promote employment, by addressing benefit dependency and disincentives to work. Social assistance benefits are paid to individuals and families with incomes below the national poverty line, the “subsistence minimum” (Section D). Benefits had been high relative to wages, contributing to a high benefit dependency rate: the OECD (2002) observed that for a family with two children, welfare payments could exceed the net average wage.

IMF Recommendations on Tax System Design1

“The IMF has provided input into the design of tax reforms in many transition and developing countries, and generally recommended that tax systems have the following characteristics:

  • Heavy reliance on broadly-based sales taxes, such as VAT, preferably with a single rate and minimal exemptions, and excise taxes levied on petroleum products, alcohol, tobacco and a few items that are considered luxuries.

  • No reliance on exports duties, which inhibit international competition, or on small nuisance taxes, administration of which is not effective.

  • Import taxation at as low levels as possible, with a limited dispersion of rates to minimize effective rates of protection.

  • An administratively simple form of personal income tax, with limited deductions, a moderate top marginal rate, an exemption limit large enough to exclude persons with modest incomes, and a substantial reliance on withholding.

  • A corporate income tax levied at only one moderate-to-low rate aligned with the top personal income tax rate, with depreciation and other non-cash expenditure provisions uniform across sectors and minimal recourse to sector or activity-specific incentive schemes.”

1 Reprinted from Stepanyan (2003).
Figure 1.
Figure 1.

Effective Marginal Income Tax Rate

Single taxpayer

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Sources: Ministry of Finance and IMF staff calculations. For 2004, the multiple marginal effective tax rates reflect the income tax deductibility of social contributions, which are subject to different ceilings by type.
Figure 2.
Figure 2.

Effective Marginal Income Tax Rate

Married taxpayer with non-working spouse, 2 children

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Sources: Ministry of Finance and IMF staff calculations. For 2004, the multiple marginal effective tax rates reflect the income tax deductibility of social contributions, which are subject to different ceilings by type.

8. The reform introduces an “activation program” by restructuring the benefit formula to depend on work effort. The reform significantly reduced the basic benefit, but introduced an “activation allowance” for which recipients are required to demonstrate effort to improve their situation, for example participation in community volunteer work or retraining programs.

9. Social assistance benefits are now reduced less abruptly if the recipient earns labor income. The previous social assistance scheme was a simple top-up of income to the benefit level; any additional earnings resulted in a correspondingly lower benefit. In the new scheme, several types of income are deemed exempt income in the calculation of the social assistance benefit, including 25 percent of individual income from dependent services.

10. The welfare reform has had different implications for different-size families. Figure 3 presents Ministry of Labor (2004) estimates of the impact of the reform for different-sized families, assuming participation in activation programs, and taking account of the tax-welfare interactions from earning labor income.44 Assuming participation in activation programs, smaller families can maintain benefit levels near the pre-reform levels, even increasing their household income if they earn the minimum wage. However, for families with 4 or more children, benefit reductions are greater.

Figure 3.
Figure 3.

Labor Income and Net Income

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Source: From calculations in Ministry of Labor, Social Affairs and Family (2004).

C. Fiscal Impact of the Reforms: Preliminary Results

Tax reform

11. Preliminary data for 2004 point to a modest overall impact on revenue following the tax reform. The available cash-basis data show significantly better than budgeted collections of most taxes, notably income taxes (Table 1), albeit implying a small reduction in taxes as a share of GDP. However, because of delays in collections of indirect taxes following EU accession, the pending accrual-basis data will be critical to a more conclusive assessment.

12. Tax revenues fell modestly as a share of GDP in 2004. With economic growth better than budgeted, tax revenues in 2004 are estimated to have declined by only 0.3 percent of GDP from 2003. The decline is 1.3 percent of GDP taking into account 1 percent of GDP in one-off VAT refunds paid in 2003 following a change in the VAT law in 2002 (Figure 4).

Table 1.

State Budget Tax Revenues, 2004

(Cash basis)

article image
Sources: Ministry of Finance; and IMF staff estimate of nominal GDP.
Figure 4.
Figure 4.

Slovak Republic: Tax Structure

(ESA 95 basis, in percent of GDP)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Sources: Ministry of Finance and IMF staff estimates.1/ The 2003 total is adjusted to include about 1 percent of GDP in one-off VAT refunds paid in 2003 following a change in the VAT law in 2002.2/ The 2004 calculations are based on different projections of nominal GDP: Sk 1,293 billion (budget) versus Sk 1,328 billion (estimate).

13. Income tax losses due to the reform seem broadly in line with expectations, after accounting for cyclical developments. As a share of GDP, income taxes have evolved largely as expected by the Ministry of Finance and by the IMF at the time of the 2003 Article IV consultation (Table 2):

  • PIT collections (wage tax and self-employment tax) were significantly better than projected, reflecting higher-than-projected growth in economy-wide wages in 2004.

  • CIT collections were also slightly stronger than projected.

  • On the other hand, collections of withholding taxes on capital income (including the tax on dividends) were significantly less than projected. Some of these taxes may have been diverted to CIT collections: there is anecdotal evidence that firms may now be reporting as profits, income previously taxed at a lower rate as capital income. Moreover, companies may have retained earnings in 2004 rather than paying out dividends, to avoid the final year of dividend tax.

Table 2.

Estimated Impact of the 2004 Tax Reform

(ESA 95 basis, in percent of GDP)

article image
Sources: Based on Staff Reports for the 2003 & 2004 Article IV consultations.

Projections assumed revenue impact in 2005 from abolition of dividend taxation.

This estimate is subject to offsetting distortions. 2003 collections were lower by 1 percentage point of GDP, owing to one-off refunds paid following a change in the VAT law in 2002. 2004 collections may be lower owing to EU accession.

The increase in excises was brought forward to August 2003. Also subject to lower collections in 2004 following EU accession.

Following EU accession, customs duties became EU rather than national revenue.

14. Indirect tax collections are estimated to have increased by less than previously projected, reflecting several additional factors that are difficult to disentangle from the tax reform. As section B noted, the reform intended to offset lower income tax collections with higher indirect tax collections, thus achieving broad revenue neutrality. Preliminary estimates from the Ministry of Finance indeed show higher indirect tax collections in 2004 (Table 2), despite the increase in excise tax rates having been brought forward to August 2003. Collections of indirect taxes have been affected by factors other than the tax reform, especially tax administration changes required upon EU accession. The shift in tax collection responsibilities from customs offices to tax offices45 resulted in delays in collections from mid-2004, and possibly efficiency losses. Also, the lowering of the VAT registration threshold required administering many extra small taxpayers.

Social contributions

15. Social contributions fell by more than expected following the reduction in rates. The 2004 budget implied a 0.8 percent of GDP reduction in social contributions from 2003.46 However, collections are estimated to have fallen short of budget by a further 0.3 percent of GDP, with the shortfall mainly in collections by the Social Insurance Agency. Revenue losses from lower social contributions are slightly greater than losses from the reform of state budget taxes (Figure 5).

Figure 5.
Figure 5.

Slovak Republic: Tax Structure

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Welfare reforms

16. The welfare reforms have improved control of welfare spending. In 2001 and 2002, spending on state benefits and social assistance ran over budget by about 0.3–0.4 percent of GDP annually (Figure 6), reflecting benefit abuse as well as underbudgeting. The 2003 measures were successful in curbing benefit abuse, bringing welfare spending down by 0.3 percentage points of GDP and even achieving savings of 0.1 percent of GDP compared to budget. Following the 2004 reform, welfare spending is projected to have fallen by another 0.3 percentage points of GDP, and again to have been contained below the budget ceiling.

Figure 6.
Figure 6.

State Benefits and Social Assistance

(In Sk billion)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Source: Ministry of Finance and IMF staff estimates.

D. Efficiency and Incentives

17. In efficiency terms, the reforms provide several gains. The tax reforms reduce distortions in the economy and the simpler tax system should allow for significant improvements in tax administration. Regarding incentives to work, the tax reform may result in only marginal improvements in incentives to work and to hire—labor taxes have fallen only modestly for many taxpayers; and the tax burden has been shifted towards labor, away from capital—though the welfare reform should significantly improve work incentives for lower income earners.

Benefits from tax simplification

18. The reform reduces distortions in the tax base. Though the impact is hard to measure, the reduction in tax exemptions is an obvious gain to the economy. First, resource allocation is generally more efficient if based on market rather than tax signals. Second, it implies higher revenue for a given tax rate, which allows taxes to be set at lower rates. Third, it promotes transparency; many of the tax exemptions were in fact tax expenditures, implying a diversion of public resources to these sectors without the budgetary scrutiny that would accompany other expenditures.

19. The reformed tax system is much simpler and easier to administer. The system is simpler for taxpayers, who no longer face different tax rates for different types of income or commodity. Moreover, the Ministry of Finance (2003b) notes that business surveys had identified the complexity and frequent changes in the tax law as one of the main barriers to business. The reform is also promising for tax administration and compliance. Taxpayers no longer need to report different types of income, or account separately for standard-rate and reduced-rate commodities; the tax authorities no longer have to enforce the distinctions; and resulting litigation (on both sides) should fall.

20. The single-rate VAT should be particularly helpful in addressing long-standing problems with refunds. Given the wide range of commodities subject to the lower rate, it had been possible in some sectors, for example construction, to claim refunds on inputs at the higher VAT rate, and sell output taxed at the lower rate. Outright fraud also contributed to refund problems. Indeed, in 2002, VAT refunds had exceeded domestic VAT collections.47

21. The single rate for personal and corporate income tax reduces, though does not eliminate, opportunities for tax arbitrage. The multiple rates of withholding tax, as well as different rates for wage-income and profit tax had offered considerable scope for tax arbitrage. For example, under the previous system, owners of large businesses could deduct interest expenses at a rate of more than 30 percent, while maintaining interest assets in the household that were subject to withholding tax of only 5 or 15 percent. This is no longer possible. However, with employment (including self-employment) income subject to payroll taxes, there are incentives for self-employed persons to convert employment income into capital income.

Incentives to work

Tax reform and the composite tax rate

22. High marginal tax rates are widely recognized as dampening incentives to work. Disney (2000) notes that research has focused on the impact of marginal tax rates on labor supply at the upper and lower ends of the income distribution. For upper income earners, the issue is also participation in the tax system: this group may be more likely to receive non-monetary forms of remuneration and have greater access to sophisticated tax avoidance schemes. The “Laffer curve” theory suggests that cutting tax rates on these taxpayers can actually increase total tax revenue.48 For lower income earners, the relevant decision may be not only how much labor to supply in terms of hours worked, but whether to participate in the labor market at all. For this group, the welfare system also critically affects labor supply decisions (see below).

23. Evidence is mixed on whether the structure of labor taxes significantly affects unemployment. Nickell (1997) argues that the relevant tax rate for the labor market is the sum of the payroll, personal income tax and consumption tax rates; and that payroll taxes will be shifted onto workers assuming capital is mobile internationally. Consumption taxes including the VAT may be regarded as labor taxes in the long run, since neither a tax on consumption nor a tax on labor income directly affects the return that can be achieved on savings. Nickell cites several studies that find no long-run effect on unemployment from lowering payroll taxes and increasing consumption taxes—though the overall tax burden might matter. However, Daveri and Tabellini (2000) argue that payroll taxes drive a wedge between employment income versus benefit or underground-economy income; in contrast, consumption taxes affect these income sources equally. Using data for continental Europe, Daveri and Tabellini find that a 14 percent increase in labor tax rates can be associated with a 4 percentage point increase in the unemployment rate; but no statistically significant link between consumption taxes and unemployment. Nickell (2004) has countered that the Daveri-Tabellini results are biased upward because they do not control for other labor market institutions.

24. The analysis below considers labor taxes as a composite of income, payroll and consumption taxes. The measure used here includes both employee and employer payroll taxes, thus taking into account the “tax wedge”, i.e. the gap between the cost of labor to an employer, and the net benefit to an employee. From the employer’s labor demand perspective, gross wages and payroll tax costs are equivalent. From the worker’s labor supply perspective, the relevant variable is income net of all taxes, including consumption taxes, which—like income taxes—reduce the benefit to the employee from additional hours worked. Thus, the composite marginal tax rate of labor taxation is measured here as:

C = 100 × [ 1-(1-t)(1-c)(1+v)(1+p) ]

where, t is the marginal income tax rate on wages;

c is the rate of employee social insurance contribution, in percent of gross wages;

v is the marginal (tax-exclusive) rate of indirect taxation on net wages;49

p is the rate of employer social insurance contribution, in percent of gross wages.

25. The Slovak reform changes the tax structure, but reduces labor taxes only modestly for many taxpayers. At very low levels of income, the marginal tax rate is above zero because of indirect taxes; the initial increases reflect the minimum thresholds for social contributions. The highest marginal tax rates are at middle-income levels:

  • Under the previous system, the composite marginal tax rate increased with income, up to Sk 32,000 monthly before leveling off. Further increases in the income tax scale were offset by the fall in social contributions to zero, because social contributions are not payable on income above the maximum assessment base, then Sk 32,000.

  • Following the reform, the composite tax rate falls sharply after income reaches the maximum assessment bases for social contributions.

26. Composite marginal tax rates have moved in different directions for single and married taxpayers. Figures 7 and 8 show the change in the composite marginal tax rate for two cases: a single taxpayer, and a taxpayer with a non-working spouse and two dependent children. In both cases, the largest cuts in the composite marginal tax rate appear above monthly incomes of Sk 32,000—a little over twice the average wage (Sk 14,365 in 2003).

  • For single taxpayers, composite marginal tax rates increased on gross monthly incomes between Sk 8,000 and Sk 13,000 in 2004: modest income tax relief at low income tax levels was more than offset by increases in both employee social contributions and indirect taxes.

  • In contrast, for married taxpayers with a non-working spouse and dependents, the reform implies cuts in composite marginal tax rates (except for high-income ranges affected by the increase in the maximum assessment bases for social contributions) because of the large tax-free threshold from including the non-working spouse.

Note that for a married taxpayer, the tax reduction would imply stronger incentives to work for one of the couple. However, the exemption for the non-working spouse is as generous as for a working spouse; thus the spouse faces a high marginal tax rate upon entering the workforce, since income tax would be payable on the first koruna of the spouse’s earnings.

Figure 7.
Figure 7.

Composite Marginal Tax Rate

Single taxpayer

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Figure 8.
Figure 8.

Composite Marginal Tax Rate

Married taxpayer, non-working spouse and two children

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

27. Social contribution rates—and thus, the tax wedge—remain high by regional standards. Table 3 shows that overall payroll tax rates remain the highest of the Visegrad50 countries, and well above the average in western Europe. Consequently, these payroll taxes contribute to a still-high tax wedge, whether or not consumption taxes are included in the wedge. Figure 9 shows the tax wedge pre- and post-reform, for four different points on the wage distribution for a single taxpayer, using the OECD “Taxing Wages” measure51 which excludes consumption taxes. At each point, Slovakia’s tax wedge remains above the OECD average. The World Bank (2001) suggests that high payroll taxes may have a bias against unskilled labor, since for higher-skill workers it is easier to provide both wage and non-wage compensation. Moreover, the Daveri-Tabellini (2000) results suggest that capital-labor substitution—and the attendant increase in unemployment—can be significant in the presence of high tax wedges.

Table 3.

Social Contribution Rates Selected European Countries, percent of Gross Labor Income 1/

article image
Sources: Ministry of Finance (2004); and OECD statistics.

Unless otherwise indicated, data refer to 2003 and are based on the average production wage.

Unweighted; excludes Denmark.

Figure 9.
Figure 9.

Tax Wedges and Earnings

(OECD measure, single taxpayer)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Source: OECD and IMF staff calculations.
Welfare reform and the marginal effective tax rate

28. Low income earners face marginal effective tax rates arising not only from the tax system, but also from the benefit system. The composite tax rate above has implications for the labor supply response of middle- and high-income earners; but for lower-income earners, work incentives may be just as strongly influenced by the benefits system. The marginal effective tax rate (METR) is the rate at which an individual loses net income—whether through higher income taxes or withdrawal of benefits—as gross non-welfare income increases.52

More formally, following Disney (2000):

METR = 1 - [ w(1-tw-c)-b(1-tb) ] / w ( 1-t w -c )

where, b is the level of benefit; w is the gross wage; t is the income tax rate; and c is the employee payroll tax rate.

29. High METRs create strong disincentives to work, resulting in two types of “trap”.53 The unemployment trap arises when benefits are so high relative to the potential wage that an individual chooses not to participate in the labor force. The poverty trap arises when an individual is unable to increase their disposable income by increasing their work effort. The Slovak benefit reforms aimed to address these traps.

30. Interactions between the Slovak tax and welfare systems are mainly through payroll taxes and income tax credits. The linkage via income tax is limited. Before the 2004 reforms, social assistance benefits—like other social income such as pensions—were exempt from income taxation. Following the reforms, social income is legally taxable, but in practice the tax liability is zero in most cases because of the high tax-free thresholds for both individuals and families. However, part of child support is now delivered through the income tax system (up to Sk 4,800 annually per child when at least one parent is employed). Although income tax thresholds are relatively high, social contributions are payable from very low levels of income. This means that they contribute to the marginal effective tax rate, though for welfare recipients, they do not add to the rate; withdrawal of benefits as labor income increases is on the basis of income after tax.

31. Even with limited tax-benefit interactions, Slovakia’s welfare system generated prohibitively high METRs. The former “top-up” system of income assistance—with benefits withdrawn one-for-one when a recipient earned non-welfare income—implied an METR of 100 percent (actual METRs were even higher taking into account transportation and other costs).

32. The welfare reforms have reduced METRs for most welfare recipients. The authorities had aimed to reduce METRs of around 100 percent to around 75 percent, by allowing welfare recipients to keep 25 percent of non-welfare income (Ministry of Labor, 2004). Indeed, the household examples from Section B confirm that METRs of 100 percent for welfare recipients with no other income or earning minimum wage have indeed been reduced. Figure 10 shows the corresponding METRs that these households face before and after the reform.

33. The METR reduction helps address especially strong work disincentives for parents with large families. As noted in OECD (1997), METRs cause greatest disincentives not only when they are high, but when they apply over extensive income ranges. The bottom right panel of Figure 10 shows that for a family with five children, the METR had been 100 percent even at monthly incomes approaching double the minimum wage, a wider income range than for smaller families.

Figure 10.
Figure 10.

Marginal Effective Tax Rates

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Source: calculations based on labor income and net income scenarios from Figure 3.
Welfare reform and other effects on work incentives

34. The introduction of the activation program is also a critical measure to improve work incentives. The activation allowance now accounts for a significant share of the benefit, approaching 50 percent in some instances, creating an obvious incentive for the effort to qualify. Experience with activation policies in other countries have generally been successful. The OECD (2003) reports that activation strategies have boosted employment and reduced benefit dependency in several countries, even those (such as Sweden) with relatively generous benefits. However, the OECD stresses the importance of labor demand in this success, warning that it may be difficult to achieve a large employment impact where there are very few job openings.

35. The restructured child allowances also should improve work incentives, though at the cost of some efficiency in targeting. In contrast to the former system, means-testing is not applied either to the Sk 500 monthly flat, universal allowance, or to the Sk 400 monthly tax bonus—which is conditional on at least one parent being employed. Carone and Salomäki (2001) note that a frequent side-effect of in-work benefits is that they are phased out as income rises, potentially increasing marginal effective tax rates; this is not a problem in the new Slovak system, which does not phase out the restructured child allowances.

Recent employment developments

36. There is little evidence of an employment response so far. Economy-wide employment growth stagnated in 2004, despite strong economic growth (Figure 11). Ministry of Labor officials note that weak employment growth partly reflects significant public sector layoffs during 2004, including in public enterprises. Looking forward, staff projects employment to recover54 but the projection remains subject to two key risks. First, the shift in the tax burden could contribute to entrenching the recent bias of economic growth towards capital-intensive activity. Second, and relatedly, the reforms should contribute strongly to labor supply, but labor demand remains weak, especially in many of the high-unemployment areas.55

Figure 11.
Figure 11.

Economic Growth and Employment, 1999–2004

(Year-ended percentage change)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Source: Statistical Office of the Slovak Republic.

Tax reform and investment

37. The tax burden on capital has been reduced significantly. The new CIT rate of 19 percent compares to a rate of 40 percent in 1999. Moreover, the abolition of dividend taxation implies that investment income is now taxed only once.

38. The CIT rate is now low by EU standards, prompting claims of tax competition. Figure 12 shows that the CIT rate, which had been above the EU average, is now slightly below both the EU average and the average of the new member states. One sign that the Slovak reforms are indeed attractive to foreign investors is the reaction of neighboring countries: Goliaš (2004) notes that Austria, which had intended to reduce its CIT rate from 34 to 31 percent, instead announced a reduction to 25 percent from 2005; and that Hungary reduced its CIT rate from 19.6 to 17.7 percent.

39. But CIT collections remain comparable to EU averages. Slovak CIT revenue as a share of GDP is estimated at 2.4 percent of GDP in 2004, in line with the latest observations56 for CIT revenues in both the EU-15 and EU-25 (each also 2.4 percent).

40. Besides the low CIT rate, the liberalized treatment of loss carryforwards assists businesses. Losses can now be deducted from taxable income over the following five years, and annual write-off installments are no longer required to be equal. The previous treatment of losses had detracted significantly from the competitiveness of the CIT law. Private accountants in Slovakia informed a 2003 Fiscal Affairs Department mission that their clients were more concerned about their inability to write off legitimate losses, than whether the CIT rate was 15 or 25 percent. Including the inability to write off advertising expenses, some clients faced effective tax rates of 35 percent or more (in some cases reaching 80 percent), despite the then statutory CIT rate of 25 percent. The new CIT law remedies this problem.

Figure 12.
Figure 12.

Corporate Income Tax Rates, 1995–2004

(In percent)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Source: Statutory tax rates in European Commission (2004).

E. Distributional Implications

41. This section explores some of the distributional implications of the reforms. Two questions are particularly relevant: first, what are the distributional effects of the reformed tax system: is the tax system progressive, neutral or regressive? Second, is the social safety net still effective, and does the reformed welfare system adequately protect the most vulnerable members of society?

The tax system

42. Excluding social contributions, the tax system remains progressive overall, though less so than previously. However, the distributional implications of the tax system vary depending on the degree to which social contributions are regarded as taxes.

Income taxes

43. Assessing the progressivity of an income tax is relatively straightforward. In general, an income tax is progressive if the average tax rate increases as income increases (see for example, Norregaard, 1995).

44. The reformed personal income tax remains progressive, though the reform reduces the degree of progressivity. Figure 13 shows that, following the tax reform, the average income tax rate rises with income over the whole income distribution, though less steeply than before the reform. This is because the tax-free threshold, or the personal exemption, is significant. The average effective tax rate rises much more slowly for a married taxpayer, with a non-working spouse—because this taxpayer qualifies for a double exemption—and the taxpayer also receives a further tax deduction for each child.

45. Other things equal, the simplification of income tax would contribute to horizontal equity. The cancellation of different tax rates for different income types, and of most income tax exemptions, greatly reduces the number of taxpayers who have an equal ability to pay nevertheless being subject to different tax burdens.

Figure 13.
Figure 13.

Average Personal Income Tax Rate

(Percent of gross income)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Indirect taxes

46. Under the previous two-rate VAT in Slovakia, the lower VAT rate provided relatively little benefit to poorer households. Figure 14 shows the estimated VAT burden as a percentage of net household income, using data from the Statistical Office’s Microcensus survey. Pre-reform, the burden was very similar across decile groups of household net income, in part reflecting the wide range of non-necessity goods and services (including construction, for example) that were taxed at the lower rate. Even at the single rate, the estimated burden is around 14–15 percent for most income groups, though slightly lower for the highest income decile.

47. Excise taxes appear to have limited distributional effects. Figure 15 suggests that the excise tax burden is broadly proportional across household income. The tax on motor fuels is mildly progressively distributed, offsetting tobacco excises, which appear mildly regressively distributed.

Figure 14.
Figure 14.

VAT Burden and the Income Distribution

(In percent of household income, by decile groups of household net income)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Figure 15.
Figure 15.

Excise Tax Burden and the Income Distribution

(In percent of household income, by decile groups of household net income)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Source: Based on household net income data from Microcensus.
Social contributions and the average composite tax rate

48. Treating social contributions as part of the tax system introduces a regressive component. Social contributions closely resemble taxes, in that both are mandatory charges on income paid to general government agencies.57 Social contributions are payable up to a “maximum assessment base” for each type of contribution, implying that the marginal social contribution rate falls to zero for income above these maximums. Thus, for high income earners the average effective social contribution rate payable must fall as income rises.

49. At one extreme, including social contributions would imply that the overall tax system becomes regressive for the highest income earners. Figure 16 shows the average composite tax rate, based on the Section D measure including employee but not employer contributions. Prior to the reform, the average composite tax rate rose with income, reflecting the flattening in the marginal rate for incomes above Sk 32,000 per month. Following the reform, the decline in the composite marginal rate for incomes above Sk 40,000 per month, or nearly 3 times the average wage, implies that the overall tax burden turns regressive in the high-income range.

50. A small proportion of taxpayers are in this high-income range beyond the social contribution ceiling—perhaps around 1 percent—though this estimate should be treated cautiously. Data from 2003 tax returns show that some 25,000 taxpayers filed income tax returns for the tax bracket above Sk 396,000 (Sk 33,000 monthly), of whom some 14,000 filed returns for the bracket above Sk 564,000 (Sk 47,000 monthly: above all social contribution ceilings even after the 2004 increases). However, these data do not include the many wage earners whose tax liabilities are satisfied by withholding and therefore do not file tax returns. To get a sense of the proportion of taxpayers in this range, the nearest comparator is total employment from the labor force survey (2.2 million in 2003). On this basis, 0.6 percent of taxpayers have monthly incomes above Sk 47,000, well above the ceilings for all types of social contributions.

Figure 16.
Figure 16.

Average Composite Tax Rate

(Percent of gross employee income)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

51. But distributional assessments including all social contributions could be biased if the corresponding benefits are not taken into account. Although payroll taxes may be very similar to income taxes in terms of the effects on behavior (and this is the treatment in the literature on tax wedges), it is not obvious that the distributional effects of income and payroll taxes are similar as well. A ceiling on benefits may correspond to a ceiling on contributions, and also needs to be taken into consideration. For example, Slovak public pension benefits have been traditionally very redistributive (IMF, 2002), and even with the strengthening of the benefit-contribution link under the new system, will remain subject to a ceiling. On the other hand, health contributions need not be matched to a particular set of benefits for an individual. Many countries finance public health expenditures through general taxation, rather than health insurance contributions. Figure 17 shows the average composite tax rate including health contributions, but excluding other social contributions. Including only this narrow subset of social contributions implies that the overall tax burden becomes proportional at higher income ranges, and that the system remains mildly progressive overall.

Figure 17.
Figure 17.

Average Composite Tax Rate

(Excluding non-health SSCs; percent of gross employee income)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A004

Social protection

52. Section D argued that the welfare reforms have corrected strong disincentives to work, but an important question remains whether the reformed safety net continues to provide adequate support. This chapter can provide only partial answers on this question. The Ministry of Labor (2003b) notes that current national statistical sources do not fully meet Eurostat requirements for monitoring poverty and social exclusion and is developing new statistical instruments in line with Eurostat recommendations.

53. Previous studies found the pre-reform social assistance system to be effective at mitigating poverty. The World Bank (2001) Living Standards study found that the social transfer system alleviated poverty significantly. The study estimated on the basis of the 1996 Microcensus that canceling social transfers except for pensions would imply a poverty rate of 19 percent of all individuals, compared to an actual rate of 10 percent. For households whose main income earner is unemployed, canceling non-pension social transfers would imply nearly a poverty rate of 80 percent, compared to an actual poverty rate of 45 percent. Poverty risks may have since deteriorated: the Ministry of Labor (2004) estimates a risk-of-poverty rate of 28 percent before social transfers, and 21 percent after all social transfers.58

54. However, benefit dependency has contributed to the marginalization of some Roma communities, which are among the poorest in Slovakia. Roma are estimated to account for up to 10 percent of the Slovak population. Though some Roma are well integrated, others live in isolated settlements, in some cases with unemployment rates around 90 percent. The OECD (2002) estimates that Roma account for up to a fifth of overall unemployment in Slovakia. Thus, this group may be particularly strongly affected by the welfare reforms, especially since many have large families: implying both that they were particularly subject to poverty traps before the reforms, and that they face some of the largest benefit cuts as a result of the reforms. The Ministry of Labor (2003b) noted that the most recent hard data—from 1997—showed as many as 80 percent of Roma were dependent on social assistance benefits. The UNDP (2003) study of Roma in five central and eastern European countries found Roma unemployment rates around 70 percent in Slovakia, the highest of the five countries. The study found that these unemployment rates reflected not only weak labor market conditions, but also the “strong work disincentives that are built into the Slovak Republic’s social welfare system”.

55. For several years, welfare benefits have been below the “subsistence minimum”. The subsistence minimum is a measure below which a household is considered to be in material need. The measure depends on family size, increasing by a flat amount per dependent child, and is uniform nationwide. It is indexed each July (Table 5.1). Although recent studies, including the OECD (2002), have noted the generosity of the social assistance scheme compared to average wages, social assistance benefits have been below the subsistence minimum since 2001 (Ministry of Labor, 2004).

Table 4.

The Subsistence Minimum

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Source: Ministry of Labor, Social Affairs and Family.

56. The gap between the subsistence minimum and social assistance benefits has increased following the reforms, especially for families that do not participate in activation programs. The examples shown in Figure 3 assume one parent is employed and the other participates in activation programs; in these cases, the real benefit is unchanged at zero labor income only for the one-child family, and reduced for the other families. If neither parent is employed, the child tax bonus is not payable; and benefits are significantly lower without participation in activation programs. For families with 5 children, Ministry of Labor staff estimate typical benefit reductions of around 10–20 percent if parents participate in activation programs; if the parents do not participate, the benefit reductions—and the gap with the subsistence minimum—can exceed 50 percent.

57. But the existence of a gap between the legal subsistence minimum and social assistance benefits is not clear evidence that benefits are necessarily inadequate. As noted, the subsistence minimum is uniform nationwide; but wages and living costs are generally higher in western Slovakia, and lower in eastern Slovak regions where poverty is highest. Also, some of the gap between the benefit and the subsistence minimum may be filled by in-kind benefits, in particular for poor children who may receive free school meals. In cases where the child allowance is not paid to parents, for example due to child neglect or the child’s failure to attend school, the municipality determines the most appropriate way to provide the child with the benefit.

F. Conclusions

58. With the tax and welfare reforms so recent, the conclusions to be drawn are a mixture of firm and tentative. Perhaps the clearest conclusion is that the tax reform has gained widespread attention from investors and policymakers alike, with several other countries looking to implement their own variants of the Slovak reform.

59. The fiscal implications of the reforms are not yet fully clear, but the initial evidence is encouraging. The tax reforms appear to have had a limited revenue cost, but more importantly, do not appear to have compromised the government’s objectives of fiscal consolidation and reducing the fiscal deficit to Maastricht levels by 2007. But a clearer picture will emerge when more complete data for 2004 become available.

60. The tax and welfare reforms have reduced distortions in the economy and together have strengthened incentives to work and invest. The elimination of most exemptions contributes to better resource allocation, and makes the tax system easier to administer—as does the single-rate VAT, which will help address long-standing problems with excessive VAT refunds. The tax reforms themselves may have only limited effects on work incentives, in view of the modest change in labor taxation for many taxpayers. But work incentives have been strengthened by the welfare reforms, through both the activation programs and lower marginal effective tax rates on incomes of welfare recipients.

61. The tax system is less progressive than previously; whether it remains absolutely progressive depends on the assessment of social contributions. The flat-rate personal income tax includes large tax-free thresholds, ensuring the tax is progressive rather than proportional. Household spending data suggest that the single-rate VAT, and the higher excises, may have had only limited distributional effects. But the reform of social contributions was on a different track to the reform of state budget taxes, and social contributions—which are payable only up to a ceiling—remain a regressive component in the tax system. It is not obvious, though, whether social contributions should be treated simply as taxes, or whether they should be considered as being linked to future benefits.

62. Welfare reform has faced a difficult trade-off between addressing benefit dependency, and risking deteriorating poverty. With ample evidence that the previous welfare system had promoted benefit dependency, reforms to curb dependency and encourage work effort were arguably necessary conditions for long-term reductions in poverty and unemployment. However, the short-run costs of the reforms may have been high for some of the poorest Slovak families, especially large families—particularly in regions where job opportunities have not been available to absorb newly willing labor supply.

Appendix:I Slovak Republic—Background Information on the Reforms

Tax reform

Reform of state budget taxes

1. The single-rate personal income tax replaces multiple tax rates according to level and type of income. According to the Ministry of Finance (2003b), the single 19 percent PIT rate replaces 21 different tax rates, including a five-band rate structure on labor income that ranged from 10 to 38 percent, and withholding tax rates on capital income ranging from 5 to 25 percent. The reform also simplifies the definition of taxable income; Goliaš (2004) notes that the previous tax system included 443 classifications of income.

2. The tax-free threshold is now much higher. The reformed PIT includes a basic tax allowance (tax-free threshold) per taxpayer of Sk 80,83259 annually (previously Sk 38,760), plus a further Sk 80,832 spousal allowance (previously Sk 12,000). The reform also includes an annual tax credit of Sk 4,800 per child, which is part of the new child support system. (Figures 1 and 2 show the effective marginal income tax rate faced by an individual and a two-parent/two-children household before and after the reform.)

3. The corporate income tax has been lowered, and dividend tax abolished. The 19 percent CIT rate is down from 25 percent in 2003, and compares to 40 percent in 1999. With the aim of taxing income only once, the reform also ends withholding tax on dividends, though taxes remained payable on dividends subsequently paid out of profits earned before 2004.

4. Most income tax exemptions have been cancelled. Investment incentives have been scaled back: the reform cancels legislation providing for tax holidays (of up to 10 years) for newly established firms.60 Tax base reductions for certain sectors, such as agriculture and forestry, have been cancelled. The tax exemption on income from the sale of securities, held for three years or more, has also been cancelled.

5. Other CIT changes reduce the tax burden on businesses. The reform shortens the depreciation period on some groups of tangible assets, notably property and buildings, from 30 to 20 years. Loss carry-forward rules have been relaxed: losses can now be deducted from taxable income over the following five years, and annual write-off installments are no longer required to be equal. Also, limits on the tax deductibility of advertising and of vehicle depreciation have been cancelled.

6. The VAT rate has been unified at 19 percent, and harmonized with EU law. The previous dual VAT rates had recently been brought closer, from a main rate of 23 percent and reduced rate of 10 percent in 2002, to 20 percent and 14 percent respectively in 2003. The reduced rate had applied to a wide range of items, including food, electricity and thermal energy, heating oil, coal, pharmaceutical products, aids for disabled persons. The EU’s Sixth Directive on VAT permits a reduced rate only on a narrower range of distributionally sensitive items, and so the introduction of the single VAT rate brings Slovakia into compliance. Slovakia has reduced its annual turnover threshold for VAT registration from Sk 3 million (equivalent to just over € 70,000) to Sk 1.5 million (just over € 35,000), but has a permanent derogation from the Sixth Directive requirement of only € 5,000.

7. Excise taxes are also being increased to harmonize with EU requirements. The excise increases were implemented already in August 2003, being brought forward to address an expected revenue shortfall in 2003. Taxes on motor fuels were increased from Sk 12.4/L to Sk 15.5/L; taxes on beer increased from Sk 30/°Plato/hL to Sk 50/°Plato/hL; and taxes on tobacco products were also increased significantly, for cigarettes from Sk 0.95 per cigarette to Sk 1.40.61 Further increases in tobacco excises will be necessary to fully harmonize with EU requirements; Slovakia has agreed to phase in these increases by 2007.

8. Some other smaller taxes were abolished. Inheritance and gift taxes, which together raised Sk 0.2 billion in 2003, were abolished from 2004. The real estate transfer tax, which raised Sk 2.4 billion in 2003, was cut from 6 percent to 3 percent effective January 2004, and abolished from 2005.

9. Further changes to the tax system from 2005 reflect the decentralization process, which aims to give municipalities a more predictable revenue stream and to strengthen their revenue-raising powers:

  • PIT is now subject to revenue-sharing. A recently approved package of decentralization laws provides that from 2005, 70.3 percent of PIT will go to municipalities, 23.5 percent to the eight regional self-governments (“VUCs”), and 6.2 percent to the central government. The shared PIT replaces a direct discretionary transfer from the state budget.

  • The decentralization laws define 12 local taxes and one local fee, which municipalities are free to set themselves; central-government ceilings no longer apply to these taxes. The most important of these taxes are road tax, and real estate (ownership) tax.

Social contributions

10. Contribution rates were reduced modestly in 2004. Changes to social contributions were implemented separately from the reform of state budget taxes. Effective 2004, overall payroll taxes fell by 2.4 percentage points, with a small rise in employee contributions—0.6 percentage points, for pension contributions—being offset by a 3 percentage point cut in employer contributions for sickness and unemployment insurance (Table A1).

Table A1.

Slovak Republic: Social Contributions, Rates and Ceilings

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Sources: Ministry of Finance (2004); and Social Insurance Agency.

“Maximum assessment base”, in koruny per month.

From 2005, employer contributions will be rebalanced; the old-age contribution rate will fall to 14 percent, and the reserve fund contribution rate will increase to 4.75 percent.

For self-employed persons, the maximum assessment base was Sk 24,000.

Increased to Sk 43,095 effective January 2005.

11. Ceilings on contributions have also been reformed. Through 2003, each type of contribution was subject to a monthly “maximum assessment base” of Sk 32,000; that is, there was a ceiling on contributions equivalent to slightly more than twice the economy-wide average wage. In 2004, health insurance contributions remained subject to the Sk 32,000 maximum, but for most other social contributions, including pensions, the ceiling was raised to 3 times the average wage. Following the recent passage of health reform, the maximum assessment base for health insurance contributions will rise to Sk 43,095 from January 2005.

Welfare reform

12. In 2003, initial reforms included a benefit ceiling and administrative measures to curb abuse of benefits. The government introduced a ceiling on monthly benefits per family of Sk 10,500; this was binding only for large families (6 or more dependent children). Administrative measures included stricter enforcement of eligibility requirements, including requiring recipients to appear in person to collect benefits.

13. The centerpiece of the 2004 reform was the introduction of an “activation program” by restructuring the benefit formula to depend on work effort. The basic benefit was significantly reduced; for example, the basic monthly benefit of an individual was reduced in January 2004 from Sk 2,900 to Sk 1,450 (Table A2). On the other hand, the reform introduced an “activation allowance”—initially Sk 1,000, raised in April 2004 to Sk 1,500—for which recipients are required to demonstrate effort to improve their situation, for example participation in community volunteer work or retraining programs. Unlike unemployment insurance (see below), the activation allowance is payable indefinitely. For individuals deemed unable to participate in activation programs, an equivalent “protective allowance” is paid instead.

Table A2.

The Monthly Social Assistance Benefit

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Based on information provided by the Ministry of Labor, Social Affairs and Family.

The previous system distinguished between material need for “objective” and “subjective” reasons. “Objective” reasons included involuntary unemployment and inability to find work despite search efforts. “Subjective” reasons included an individual voluntarily leaving a job or refusing a job offer. Material need was usually deemed to be for “subjective” reasons for households in the system for more than 24 months.

The activation allowance was increased in April 2004. Basic benefits were indexed in September 2004.

Paid only to a single person or couple without children.

14. Participation in activation programs increased steadily through 2004. Most activation programs are organized by municipalities. Following shortages in early 2004, the Ministry of Labor has worked with municipalities to increase the number of available activation positions. Municipalities and NGOs are not required to pay wages to activated persons; they receive Sk 400 monthly for each activated person. The Ministry of Labor reports just over 100,000 individuals participated in activation programs by October 2004, compared with 56,000 in April. As at October, over 90,000 beneficiaries were participating in community-based services organized by municipalities; just under 4,000 were undertaking further education or retraining.

15. Social assistance benefits are now reduced less abruptly if the recipient earns labor income. The previous social assistance scheme was a simple top-up of income to the benefit level; any additional earnings resulted in a correspondingly lower benefit. In the new scheme, several types of income are deemed exempt income in the calculation of the social assistance benefit, including 25 percent of individual income from dependent services.

16. The reform also changes the structure of supplementary child support. In addition to the basic social assistance benefit, the previous system included means-tested child bonuses (starting at Sk 270 per child, rising to Sk 890, depending on household income and the age of the child). The new system replaces these with a flat Sk 500 child bonus—conditional on the child being enrolled in school62—plus a Sk 400 tax credit. The Sk 500 child bonus is universal. In contrast, the tax credit is payable only to households in which at least one parent is employed, though it is refunded if the overall tax liability is negative (for example, a parent employed on minimum wage).

Other benefit reforms

17. Although this chapter focuses on the reforms to the tax and welfare systems, unemployment benefits and the pension system also have implications for work incentives. The major labor market concern in Slovakia is long-term unemployment, which accounts for roughly two-thirds of the total unemployment rate of nearly 18 percent. Slovak unemployment insurance benefits are payable only in the short-term and have played a much more limited role than the welfare system in sustaining unemployment. The World Bank (2001) found that those receiving unemployment benefits tend to spend longer unemployed compared to those not receiving unemployment benefits, but look for work more actively than non-recipients, and find private-sector jobs more often. Nonetheless, recent reforms to unemployment benefits and to the pension system should also contribute to stronger incentives to work.

Unemployment insurance

18. Eligibility periods have been cut and the benefit more closely linked to past contributions. An unemployed person is eligible for benefits for up to six months, compared to nine months until end-2003. The beneficiary must have contributed for 24 of the previous 36 months to be eligible. The replacement rate is 50 percent of past gross income; previously, this had been 55 percent for the first six months, falling to 45 percent for the last three months. Benefits remain subject to a ceiling, now being raised: the ceiling had been around half the economy-wide average wage, and was raised to 60 percent of the average wage in 2004. The ceiling will increase further in 2005 and 2006.

Sickness benefits

19. Responsibilities have been shifted from the public to the private sector. From 2004, the responsibility for paying the first ten days of sickness benefits has been shifted from the public sector (via the Social Insurance Agency) to individual employers. This measure has not only lowered costs to the public sector (though offset by a reduction in the sickness insurance contribution rate), but also gives employers much stronger incentives to verify that sickness claims are genuine.

Pension benefits

20. The pension reform approved in 2003 reforms the existing public pension system, and introduces a mandatory, privately funded pillar.63 The reform of the public pay-as-you-go system provides for a gradual increase in retirement ages to 62 years for both men and women, from 60 (men) and 57 or less (women); and a closer link between future benefits and contributions. The first increase in retirement ages was effective from January 2004. The new privately funded (second) pillar starts operations in 2005.

Statistical Appendix

Table A1.

Slovak Republic: Gross Domestic Product at Current Prices, 1999–2003

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Sources: Slovak Statistical Office; and IMF staff estimates.

Nonprofit institutions serving households.

Table A2.

Slovak Republic: Gross Domestic Product at Constant Prices, 1999–2003

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Sources: Slovak Statistical Office; and IMF staff estimates.

Nonprofit institutions serving households.

Table A3.

Slovak Republic: Gross Domestic Product by Sectors at Current Prices, 1999–2003

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Sources: Slovak Statistical Office; and IMF staff estimates.

Also includes repairs of motor vehicles and personal goods, hotels, and restaurants.

Imputed banking services charges, indirect taxes, and own supplies.

Table A4.

Slovak Republic: Gross Domestic Product by Sectors at Constant Prices, 1999–2003

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Sources: Slovak Statistical Office; and IMF staff estimates.

Also includes repairs of motor vehicles and personal goods, hotels, and restaurants.

Imputed banking services charges, indirect taxes, and own supplies.

Table A5.

Slovak Republic: Gross Fixed Capital Formation by Sector, 1999–2003

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Source: Statistical Office of the Slovak Republic.
Table A6.

Slovak Republic: Employment by Sector, 1999–2003

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Sources: Statistical Office of the Slovak Republic; and IMF staff estimates.

Average number of employed, including persons employed by entrepreneurs and entrepreneurs themselves, excluding women on maternity leave, apprentices, and armed forces.

Table A7.

Slovak Republic: Average Monthly Wages, 1999–2003

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Sources: Statistical Office of the Slovak Republic.

The payout associated with profit sharing and rewards for standby services are not included in the average monthly wage.

Estimate.

Since 2000, as of 1 October of the reference year.

Table A8.

Slovak Republic: Unemployment and Vacancies, 1999–2003

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Sources: Statistical Office of the Slovak Republic; and National Labor Office.

From 2003 without persons on parental leave.

Table A9.

Slovak Republic: Profits and Losses of Enterprises, 1999–2003 1/

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Source: Statistical Office of the Slovak Republic.

Enterprises with 20 or more employees including subsidized public organizations.

Data for financial intermediaries refer to all enterprises (including NBS), irrespective of the number of employees.