Report on the Long-term Sustainability of Public Finances for 2024 (Key conclusions)

Long-term sustainability of public finances in 2024 is in the medium-risk zone

The baseline scenario in this report reflects Slovakia’s fiscal position at the end of 2024, incorporating the impact of measures adopted throughout the year. The long-term sustainability indicator reached 4.1 percent of GDP (EUR 5.7 billion), corresponding to the medium-risk zone[3]. This means that long-term sustainability was not achieved[4] in 2024 and that the fiscal burden continues to be shifted onto future generations.

Compared to 2023, there has been visible progress, driven by several measures adopted by the government and parliament. After two years, long-term sustainability has returned to the medium-risk level observed in 2020 and 2021, a period marked by the COVID-19 pandemic and occurring before the security-energy crisis. This level is even lower than in 2019, prior to the pandemic. However, the current structural deficit is significantly higher than during these earlier periods, underscoring the need for a sustained and ambitious fiscal consolidation effort. Without additional measures, public debt is projected to rise sharply over the medium term. By the end of 2024, gross debt reached 59.3 percent of GDP, compared to 48.0 percent at the end of 2019, i.e. before the outbreak of the pandemic. The structural deficit has also worsened to 4.2 percent of GDP, nearly two percentage points above its pre-pandemic level of 2.3 percent. This deterioration reflects a surge in expenditure funded from savings anticipated in the future. As a result, the debt growth rate is expected to accelerate in the coming years, which will reduce the fiscal space for future sustainability improvements through savings, particularly in the long term.

At the same time, a significant increase in the tax burden, the highest in the past 25 years, has reduced the scope for further consolidation through tax increases.

The high deficit of the pension system, which is expected to worsen further over time, accounts for more than half of the long-term sustainability gap.

The current situation in public finances, with a high deficit in 2024 and a debt exceeding the upper limit defined by the constitutional act as the decisive factor for calculating the long-term sustainability, contributes negatively to the long-term sustainability of public finances by 3.1 p.p. The contribution of the pension system deficit[5] is negative, standing at 2.1 p.p.[6]

The expected increase in age-sensitive expenditure and other implicit liabilities is also playing its role in the negative long-term outlook for public finances, with its contribution totalling 1.4 p.p. CBR expects healthcare and long-term care expenditure to have the most significant additional negative impact compared to the current state of public finances. To a lesser extent, the pension system is another contributor to the worsened situation, especially given its exceptionally high level of expenditure[7] at present. On the other hand, the impact of the estimated decline in spending on social transfers and education is positive.

Other general government revenue and expenditure contribute slightly positively to the long-term sustainability (0.3 p.p.), in particular due to expected developments over the next five years. The consolidation of public finances at the end of 2024 with an impact from 2025 onwards is a major contributor to improving the development of public finances, but its medium-term effects are nearly fully offset, for the most part, by increased defence spending[8], other expenditure-increasing measures and by the expiry of temporary taxes and social contributions after 2027.

Consolidation measures adopted in 2024 had the strongest impact on improving long-term sustainability

Compared to 2023, the sustainability of public finances improved by 2.1 percent of GDP in 2024. The measures adopted during 2024 were the main driver of this improvement, contributing a total of 1.8 percentage points to the long-term sustainability indicator:

• Starting in 2025, the approval of the so-called consolidation package contributes 1.3 percent of GDP to the improvement of the sustainability indicator. The package includes, in particular, changes to VAT, the introduction of a financial transaction tax, and adjustments to income tax. This impact also reflects pension-related measures, notably a substantial reduction in the parental pension and an increase in the maximum assessment base for social insurance contributions.
• Other revenue-increasing measures, which were approved before the adoption of the consolidation package (introduction of excise duty on sweetened non-alcoholic beverages and an increased excise duty on tobacco products), improve the indicator by 0.2 percent of GDP.
• In addition to the two measures mentioned above, two further legislative changes were adopted in relation to the pension system. One measure with an immediate impact is the increase in the 13th pension, which worsens the sustainability indicator by 0.4 percent of GDP. Conversely, the introduction of stricter eligibility criteria for early retirement improves the indicator by 0.4 percent of GDP. However, the positive effects of this measure will materialise gradually over the long term. This will translate into a faster debt growth rate over the next ten years.
• Slower wage indexation in the public sector in 2025 and 2026[9] contributed to an improvement in the sustainability indicator by 0.4 percent of GDP. However, this improvement is conditional on adherence to collective agreements and the assumption that public sector wages will not grow significantly faster than wages in the private sector. Other measures approved during 2024 contribute to the deterioration of the indicator by 0.1 percent of GDP.

New European fiscal rules have also contributed to the adoption of consolidation measures in 2024, but they might not be strict enough in the years ahead

Applicable from April 2024, the reformed European fiscal rules served as the basis for Slovakia and the EU Council in approving the maximum rate of net expenditure growth until 2028[10]. Consolidation measures adopted in 2024 might help comply with the rule in 2025[11]. However, there is a risk that, in the coming years, these rules will not lead to a substantial improvement in Slovakia’s public finances and long-term sustainability:

• For Slovakia, setting the net expenditure growth rate remains largely discretionary. According to the CBR, compliance with the prescribed expenditure path would not lead to a sustainable reduction of the deficit below 3 percent of GDP and the debt below 60 percent of GDP, which runs counter to the primary objectives of the new fiscal rules[12].
• In March 2025[13], in response to the geopolitical situation and the need to increase defence spending, the European Commission enabled the activation of a national escape clause for the next four years. This clause allows increased defence spending[14] to be considered when assessing compliance with the net expenditure rule.

Fiscal burden shifted to future generations

As indicated by generational accounts, the fiscal burden is being transferred to future generations. Individuals born in 2024 are expected to receive, over their lifetime, approximately EUR 96,000 more from public budgets than they will contribute. However, if current public policies remain unchanged, future generations will face the opposite situation. They would pay around EUR 71,000 more than they would receive, assuming they bear the full cost of current liabilities, including existing public debt, which alone accounts for EUR 32,000 of that burden.

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[1]      The need to adapt to climate change entails additional risks that are, however, beyond the scope of this report.

[2]      The CBR prepares and publishes the long-term sustainability report, including the baseline scenario and the long-term sustainability indicator, annually by 30 April, and within 30 days following the presentation of the government’s manifesto and the vote of confidence in the government.

[3]      According to the CBR, an indicator value between 1 and 5 percent of GDP signals a medium risk. A value above 5 percent of GDP is considered to indicate a high risk to long-term sustainability.

[4]      Long-term sustainability of public finances is considered to be achieved when the sustainability indicator falls within the low-risk zone, that is, below 1 percent of GDP. This threshold reflects the inherent uncertainty in long-term projections, where standard revisions to assumptions or methodological improvements may lead to notable changes in the indicator.

[5]      The reason why the CBR specifically refers to the contribution of the pension system is that it is largely an insurance-based system which, under demographic conditions that are still relatively favourable, should not be showing high deficits.

[6]      The pension system contributes to the general government deficit with 2.1 p.p. which represents the difference between the revenues from social contributions received from economically active population (old-age insurance, disability insurance and solidarity reserve fund) and the expenditure on pensions – including the minimum pension, parental pension and youth disability pension benefits. The calculation does not include one-off effects or the negative impact of the second pillar on the Social Insurance Agency’s revenues. Around 0.5 p.p. of this amount is attributable to temporary expenditure-side effects (excessive early retirements in 2023 and 2024, the original parental pension), most of which should gradually disappear over the medium term.

[7]      The currently high expenditures for pensions are also due to a significant wave of early retirements in 2023 and 2024 (contributing 0.3 percent of GDP), as well as parental pension payments made in 2024 (contributing 0.2 percent of GDP), which will be significantly reduced from 2025 onwards. Although these are temporary effects, with the related expenditure declining after they fade out in the future, their current level distorts the comparison of the long-term increase in pension expenditure compared to the current situation.

[8]      According to the CBR’s estimate, defence spending reached 1.3 percent of GDP in 2024, while assuming a minimum of 2 percent of GDP in defence spending over the entire baseline scenario (in the medium-term, spending is higher due to expected deliveries of military equipment and, from 2029 onwards, it is set exactly at 2 percent of GDP), thus automatically contributing to a higher deficit compared to 2024.

[9]      This involves, in 2025, the provision of one-off bonuses amounting to EUR 800 without wage indexation and, in 2026, the indexation of wage tariffs at 5 percent compared to 2023, which represents a reduction because the baseline scenario assumes public sector wages to grow at a rate that is on par with wages in the private sector (4.8 percent in 2025 and 6.4 percent in 2026).

[10]     Net expenditure in Slovakia’s public finances is projected to cumulatively grow no more than 14.8 percent by 2028 (in comparison with 2023).

[11]     For 2025, the CBR estimates the net expenditure to rise 9.3 percent compared to 2023 (the rule assumes a maximum cumulative growth by 10.3 percent).

[12]     The underlying reason is that, when setting the recommended expenditure growth rate, the European Commission assumes that general government revenue will increase in line with potential GDP growth over the medium term. This represents an optimistic assumption, given the current medium-term revenue forecast approved by the Tax Revenue Forecasting Committee. A significant portion of revenue, such as certain excise duties and non-tax revenues, is inelastic to GDP, meaning their share in GDP tends to decline over time. Moreover, some taxes, including healthcare contributions and the bank levy, are legislated in a way that leads to a gradual decline in their collection.

[13]     Communication from the Commission: Accommodating increased defence expenditure within the Stability and Growth Pact, March 2025.

[14]     Member States can apply for the escape clause by 30 April 2025, and if complying with the specified expenditure growth rate, they can take into account an increase in defence spending of up to 1.5 percent of GDP each year between 2025 and 2028 compared to the 2021 level (which, in Slovakia’s case, represents 1.4 percent of GDP). The CBR expects defence spending to slightly exceed 2 percent of GDP per year over the next four years.