Long-term sustainability of public finances in 2025 is in the high-risk zone

The baseline scenario in this report reflects Slovakia’s fiscal position at the end of 2025, incorporating the impact of measures adopted throughout the year. The long-term sustainability indicator reached 5.5 percent of GDP (EUR 7.9 billion), corresponding to the high-risk zone[3]. This means that long-term sustainability was not achieved in 2025[4] and the fiscal burden continues to be shifted onto future generations. Achieving long-term sustainability would therefore require the adoption of permanent measures improving the general government balance by approximately 5.5 percent of GDP. Part of this improvement could also come from structural reforms supporting economic growth.

Despite three rounds of consolidation measures adopted over the past three years, the long-term sustainability indicator has not improved significantly and remains in the high-risk zone. This trend is significantly influenced by a less favourable macroeconomic environment, shaped not only by external factors (high uncertainty, trade conflicts, geopolitical tensions) but also by domestic factors. These include, in particular, the composition of consolidation packages that erode the competitiveness of the economy and substantially dampen economic activity even over the medium term.

A crucial role is played by the fact that, alongside consolidation measures, additional expenditure-increasing measures were adopted, thereby undermining their overall impact on the deficit and public debt. Moreover, some of the consolidation measures are temporary in nature. If not extended, they will automatically contribute to growing general government deficits in the coming years. From this perspective, the packages adopted in particular in 2023 and 2025 represented a missed opportunity for a more significant improvement in long-term sustainability.

Consolidation has also relied heavily on revenue increases, which narrows the room for further necessary measures. The composition of consolidation is crucial: it should not undermine competitiveness or reduce the investment attractiveness of the economy, as lower growth in the future means lower revenues for the state. A risk to its continuation lies in the political climate of an election year, a time when governments are generally reluctant to implement consolidation measures. Related to this is the possible consolidation fatigue, as the three packages adopted so far have not delivered an adequate reduction in the deficit relative to their scale[5].

This is taking place at a time when the European fiscal rules are not calibrated correctly for Slovakia, and formal compliance with them may be accompanied by a significant increase in public debt towards a level of 70 percent of GDP. The government also approaches the fiscal responsibility rules in a rather formalistic manner and does not comply with the sanctions of the so-called debt brake. Last year, measures to reduce debt were not submitted to the National Council of the Slovak Republic despite the requirement of the constitutional Fiscal Responsibility Act, and the previously adopted measures proved insufficient. Furthermore, the government is unjustifiably delaying the application of the highest sanction, which is the obligation to seek a parliamentary vote of confidence.

The causes of unsustainability lie in the current state of public finances as well as in future costs associated with population ageing

Gross general government debt reached a historically high level of 61.4 percent of GDP at the end of 2025, significantly above the upper limit set by the constitutional act. The structural primary deficit of general government, which is directly decisive for long-term sustainability, reached 2.9 percent of GDP, representing a slight improvement compared to 2024. However, this is largely the result of revenue-side consolidation adopted in 2024, while the situation was worsened by new expenditure measures and the government’s own fiscal performance, particularly regarding operational expenditure.

The current state of public finances — the high level of the structural primary deficit and debt exceeding the upper limit set by the constitutional act — contributes negatively to long-term sustainability to the extent of 2.7 p.p. The current deficit of the pension system[6] alone accounts for 1.5 percent of GDP of this contribution[7].

The negative long-term outlook is also contributed to by the expected increase in age-sensitive expenditure and other implicit liabilities, with a total contribution of 2.5 p.p.

The area of long-term care represents the greatest objective need for additional expenditure in the context of population ageing, with an estimated increase of 0.9 p.p. Without achieving a fundamental improvement in the long-term sustainability of public finances, it is the system of care for predominantly older adults and other people with disabilities that will face the highest risk of underfunding.

There will also be an increase in pension system expenditure (0.7 p.p.). The total permanent burden on public finances from the pension system, combining the current (permanent) deficit and future claims, amounts to 2 percent of GDP. This represents as much as 36 percent of Slovakia’s total long-term sustainability problem.

Growing healthcare costs and a decline in property income will also contribute to the deterioration (each by 0.6 p.p.). Conversely, the estimated decline in social transfer expenditure has a slightly positive impact (0.3 p.p.).

The 2025 consolidation package improved the indicator, but new expenditure measures offset the gains

Year-on-year, the long-term sustainability indicator deteriorated from 5.3 percent of GDP (revised value for 2024) to 5.5 percent of GDP in 2025, i.e. by 0.2 percentage points.

The most significant positive contribution of 1.0 percent of GDP came from the consolidation package approved in autumn 2025 with effect from 2026. The package included, in particular, an increase in the employee health contribution rate by 1 percentage point, an increase in the progressivity of personal income tax, the abolition of contribution holidays and an increase in minimum social contributions for the self-employed, changes to VAT, and a freeze on public sector wages.

However, this gain was offset by new expenditure-increasing measures and a less favourable fiscal outturn in 2025 relative to the no-policy-change scenario:

• A 7 percent increase in wages for education sector employees from September 2025 and a further 7 percent from January 2026 worsened the indicator by 0.3 percent of GDP, as it was not fully offset.
• The necessary reform of long-term care financing worsens the indicator by 0.3 percent of GDP, as it was likewise not offset.
• Healthcare measures and the compensation of maternity periods in the pension system each contributed to a deterioration of 0.1 percent of GDP.
• The fiscal outturn in 2025, adjusted for the impact of temporarily lower investment and defence expenditure, contributed to a worsening of the indicator by 0.3 percent of GDP. The main reasons are higher operational current expenditure and lower tax and contribution revenues.

Updated macroeconomic outlook and lower growth potential deepens the sustainability problem

The Slovak economy is growing very slowly — at around only 0.8 percent in both 2025 and 2026 — and the outlook is marked by several simultaneous threats. The consolidation package for this year is simultaneously dampening the economy, primarily through an increase in the labour contribution burden. Geopolitical turbulence, tariffs, and ongoing armed conflicts are adversely affecting external demand. Energy-intensive industry with high unit labour costs is losing competitiveness in global markets.

Over the medium term, economic growth should recover to levels exceeding 2 percent per year, but over the long term it will gradually slow to around 1 percent per year in the period around 2050, when the cumulative decline in the labour force will be most pronounced.

The more conservative economic outlook has directly translated into a deterioration in long-term sustainability. The macroeconomic forecast update alone contributed to a worsening of the revised 2024 indicator by 0.6 p.p. This effect is the most significant single factor behind the revision of last year’s assessment (and likewise affected the 2025 assessment to the same degree). This reflects primarily the impact of external factors as well as the effects of consolidation to date on the future competitiveness of the economy. Public expenditure has a high degree of inertia in the short and medium term and does not adjust to the fundamental deterioration in our economy’s potential. Some external shocks also directly increase public expenditure, e.g. energy costs or pensions. This is why repeated negative macroeconomic shocks have so rapidly and significantly worsened the sustainability of public finances.

Additional factors behind the revision of last year’s sustainability assessment included the deterioration in the estimated effects of adopted measures (for example, the financial transaction tax is being collected at a lower rate than originally assumed), contributing 0.3 p.p., as well as less favourable tax collection, contributing 0.1 p.p.

The greatest risks are linked to possible pension measures, growth-unfriendly economic policy, and unjustified delays in consolidation

Sensitivity analysis shows that the most significant risk of deepening the long-term sustainability problems would be a potential reversal of pension system reforms, in particular the re-capping of retirement age combined with more generous indexation and fixing the replacement rate for new pensions. This combination of measures has the potential to worsen long-term sustainability by 2.1 p.p.

A slow pace of consolidation also represents an additional risk to long-term sustainability. If the goal of achieving sustainability were spread over as long as 10 years[9], the additional costs arising from the delay in consolidation would amount to approximately 0.8 p.p.

Persistently less favourable macroeconomic developments — a combination of higher interest rates, weaker productivity growth, and higher structural unemployment — would worsen the long-term sustainability indicator by a further 0.7 p.p.

Fiscal burden shifted to future generations

Generational accounts confirm the transfer of the fiscal burden to future generations. The average person born in 2025 will receive EUR 126,000 more from public finances over their lifetime than they will contribute. The living population will also generate an additional burden of 89.4 percent of GDP over the remainder of their lifetimes, an increase of 3 p.p. compared to 2024. If future generations were to cover these liabilities together with the existing net debt (54.4 percent of GDP), each person would have to pay EUR 110,000 more over their lifetime than they would receive from the budget.

The full text of the Report on the Long-term Sustainability of Public Finances for 2025 (in Slovak) is available here (link).

[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 government communicated a positive impact on the deficit of EUR 7.4 billion in total for the three consolidation packages (EUR 2.0 billion for the 2024 package and EUR 2.7 billion each for the 2025 and 2026 packages). However, according to the CBR’s current calculations, the contribution of these measures to a permanent reduction in the deficit is lower, at EUR 5.0 billion (3.4 percent of GDP), as a large part of the measures was only temporary in nature, and several estimates originally quantified by the Ministry of Finance proved to be overestimated.

[6]      The reason why the CBR specifically highlights 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.

[7]      The contribution of the pension system deficit to general government finances of 1.5 percent of GDP represents the difference between contribution revenues from economically active persons (old-age, disability and the solidarity reserve fund) and expenditure on pension benefits, including minimum pensions, the parental pension and youth disability pension benefits. The calculation excludes one-off effects and treats second-pillar contributions as revenues. This adjusted deficit isolates the balance of the pension system from the impact of the second pillar’s existence. Approximately 0.2 percent of GDP of this amount consists of temporary expenditure effects, which should largely fade out over the medium term.

[8]      When calculating the impact of the initial budgetary position, the structural primary balance is also adjusted for temporary factors that do not manifest in the long-term part of the baseline scenario (for example, energy subsidies). The calculation also takes into account the additional consolidation need arising from the fact that the current debt-to-GDP ratio (61.4 percent of GDP in 2025) exceeds the upper debt limit in the long term (50 percent of GDP).

[9]      Under a ten-year consolidation trajectory, it would be necessary to adopt permanent measures of 0.6 percent of GDP each year.

Príspevok Report on the Long-term Sustainability of Public Finances for 2025 (Key conclusions) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

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.

[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.

Príspevok Report on the Long-term Sustainability of Public Finances for 2024 (Key conclusions) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

The baseline scenario presented in this report is based on inputs dated at the end of 2023, covering the impacts of measures adopted in 2023. The Council concludes that the long-term sustainability of public finances has again not been achieved in 2023^[3]. The long-term sustainability indicator reached 6.2% of GDP^[4] (8.1 bn euros), leaving public finances in the high-risk band^[5].

The current situation in public finances and pensions, including the outlook for the upcoming years, are among the main causes of problems with long-term sustainability of public finances

In last year’s report, the Council noted that the positive result for 2022 was mainly driven by high inflation rate which led to a sharp rise in general government revenues; however, its effect on expenditures will fully show with a one year delay.

In 2023, the high inflation rate seen in 2022 was indeed fully reflected in the development of public expenditure, which means that the deficit has significantly deteriorated year-on-year. Measures adopted during 2022 and 2023 have also contributed to the increase in deficit. Overall, the fiscal performance in 2023 thus contributes negatively, by 2.2 p.p., to the long-term sustainability of public finances.

As the resulting general government deficit in 2023 is positively affected by factors not carried over to subsequent years (e.g. lower defence spending below 2% of GDP), the balance will deteriorate in the medium term. At the same time, with inflation expected to fall further, the development of public finances will continue to be negatively affected by delayed indexation of expenditure and measures adopted during 2023, contributing negatively to the long-term sustainability by 1.3 p.p. in total.

Beyond the medium term, i.e. between 2028 and 2073, an increase in expenditure sensitive to population ageing will be the main contributor to the negative development in public finances. The largest negative impact, at 1.6 p.p., comes from an increasing deficit in the pension system. Sustainability will also worsen by an additional 1.0 p.p. due to higher health care and long-term care expenditures.

Sustainability worsened primarily due to measures adopted in 2023 and fiscal performance

Compared to 2022, the sustainability of public finances worsened by 0.9% of GDP in 2023, or by 1.3% of GDP if the impact of the change in the second pension system pillar is excluded. The measures adopted had the highest negative effect, at 0.6 p.p., with fiscal performance in 2023 contributing as well (by 0.3 p.p.)^[6]. A slightly negative impact on sustainability is also attributable to the projected higher expenditure growth in the medium term, especially when it comes to health care (beyond the measures), which contributed by 0.2 p.p., as well as estimated macroeconomic developments (0.1 p.p.).

Year 2023 saw the adoption of several measures with an overall contribution to the increase in long-term sustainability indicator by 0.6% of GDP (excluding the impact of changes in the second pillar of the pension system):

• Measures in the education sector (funding for research, development and innovation, performance-based contracts in universities, changes in the Schools Act) will contribute, in the medium-term, to the deterioration of the long-term sustainability indicator by 0.5% of GDP. However, in the long-term, these measures may have a positive impact on the potential growth of Slovakia’s economy, thus representing a positive risk for the sustainability of public finances.
• Other factors worsening the long-term sustainability include measures in the health sector (for the most part, an increase in expenditure for health care in hospitals and specialised outpatient care) with an effect of 0.3% of GDP, as well as expenditure-side measures in other areas with a total effect of 0.1% of GDP.
• Regarding the pension system, two legislative measures were adopted, which contributed to the deterioration of the long-term sustainability indicator by 0.2% of GDP. These include, for the most part, increased minimum pensions and a higher percentage rate applied to the loss of capacity for work for selected diseases in terms of disability pensions. The special indexation, hand in hand with the payment of a special 13th pension payment in 2023, have a marginal impact on the long-term sustainability of public finances because they do not permanently increase expenditure for pensions^[7].
• On the other hand, the long-term sustainability indicator improved by 0.4% of GDP due to reduction of the second pension pillar contributory rate. The positive impact on long-term sustainability results from the fact that, over a 50-year horizon, the measure has an asymmetrical impact on public finance, in particular, due to the immediate higher revenue of the pay-as-you-go pension system (resulting from the reduced rate paid to the second pillar due to the recent reintroduction of mandatory enrolment for new entrants in the labour market), while an increase in expenditures occurring later is taken into account only partially. Most of the additional expenditure will fully materialise beyond the 50-year horizon.
• The package of measures approved in December 2023 contributed to an improvement in the indicator (beyond the impact of changes in the second pillar which were approved simultaneously) by 0.3% of GDP. In particular, these measures include increased excise duty on tobacco and tobacco products, the introduction of a minimum amount of corporate income tax and extending the special levy on regulated business activity to banks and other entities licensed by the central bank (NBS). A temporary increase of the special levy for banks and a temporary increase of the health insurance contribution by 1 p.p. until 2027 have a negligible impact on the indicator because these measures will expire in three years.

The required consolidation of public finances is postponed due to the non-approval of expenditure ceilings

The current unfavourable condition of public finances requires the necessity to commence the consolidation of public finances as soon as possible. The expected gradually strengthening economic growth, a significant decline in inflation which will temporarily generate a very strong increase in real wages, as well as a gradually recovering external demand are all factors that play in favour of consolidation. In this respect, the fact that the government has not embarked on the permanent consolidation of public finances from 2024 onwards and that expenditure ceilings have not been approved by the parliament in 2024 is regarded very negatively by the Council. The failure to align the budget with the applicable expenditure ceilings^[8] constitutes a breach of the Act on General Government Budgetary Rules. The situation in which Slovakia practically does not have an effective instrument in place for the recovery of public finances will thus continue. The unfavourable outlook in public finances is largely attributable to the long-term absence of this instrument^[9].

If public finances were consolidated at the level of requirements set by expenditure ceilings^[10], three election terms would be needed to achieve the low-risk band of the long-term sustainability of public finances. With a credible consolidation plan, the debt could be stabilised at the Maastricht threshold over the next decade, followed by a gradual decline below 50% of GDP after 2032.

Absence of fiscal space makes Slovakia’s economy vulnerable to possible crises in the future

Slovakia generally faces an external crisis once per decade and, in the past, the domestic economy and public finances coped with such crises significantly worse^[11] compared to advanced Western economies, even though Slovakia was enjoying lower debt levels and higher economic growth as opposed to what we are seeing today. If the country were to be hit by a crisis at the beginning of next decade^[12], akin to the financial crash (2008 to 2011) or the COVID-19 pandemic (2020 to 2021), the impact on the real economy and public finances could be worse than in the past due to weaker economic growth or worse condition of public finances. Even without a fiscal policy response, such a crisis would almost immediately cause the public debt-to-GDP ratio to rise by 10 percentage points on average; however, by the end of the decade following the crisis, the debt growth would even double due to slow economic recovery and rising risk premiums. The economic losses incurred due to the crisis would be permanent; a decade after the crisis, the economy would have lost about 13 percent of its potential compared to the no-crisis scenario.

Estimating the safe debt level and the probability of default

General government gross debt reached 56% of GDP at the end of 2023. Considering the high deficit estimates and assuming that no additional measures would be adopted, it will subsequently start to increase and exceed the Maastricht criterion of 60% of GDP in 2026. In 50 years, the debt projection under the no-policy-change scenario would reach 417% of GDP. The increase in debt is mainly attributable to the adoption of legislative measures that permanently increase expenditures, as well as to an increase in expenditure sensitive to population ageing. This is a hypothetical scenario because markets would stop financing Slovakia’s needs already at much lower debt levels. In fact, when the state departs from a credible fiscal policy and the risk of its default increases, interest rates in the form of risk premiums will start rising as well. From the perspective of the long-term sustainability, it is therefore key to ensure that the current debt levels are kept as low as possible, so that the debt would remain at a “safe level” even after considering the risk of increased risk premiums in the future.

A debt ratio staying significantly above the safe level for a prolonged time is associated with an increased risk of downgrading the rating to the non-investment grade unless measures are taken to improve the long-term sustainability of public finances. According to the Council’s most recent estimate, the safe level for the net debt is 46% of GDP, but its current level is higher today.

Public debt is now in a high-risk band regarding maintaining the current rating at its current level over the long term. This could lead to a sharp rise in risk premiums, triggering a snowball effect with debt growing significantly above today’s projections. In 2023, the risk of default on long-term liabilities when they become due reached 14 percent. If sufficient consolidation measures are not adopted, the risk of default can be expected to rise sharply after 2026, while more significant problems with the financing of public debt in the financial markets could occur as early as after two election terms^[13] (beyond 2031).

Assuming credible consolidation in line with expenditure ceilings, the Council estimates that the risk of default would start falling almost immediately at a faster pace compared to the baseline scenario. When coupled with debt stabilisation, the probability of default could reach 5% already at the horizon of a single election term. In terms of a safe debt level, this would mean that the debt is stabilised at around 55% of GDP. The net debt under this scenario would decline below the upper bound of the safe debt level already after a single election term. Thanks to consolidation, debt interest payments would fall below today’s levels over the period of the next decade and the real economy would be in a better shape than without it^[14]. Economic growth would be rising about 0.15 p.p. faster compared to the baseline scenario (without consolidation).

Fiscal burden shifted onto future generations

The results of generational accounts indicate a shift of the fiscal burden onto future generations. While a child born today (in year 2023) will receive 100,000 euros more from public budgets than they will actually pay over their life, the future generations would be facing an opposite situation, contributing 60,000 euros more than what they receive in case that they would have to pay all the liabilities of the current age cohorts (including the existing debt).

^[1]      Other additional risks are also based on the need to adapt to climate change, but these are beyond the scope of this report.

^[2]      The CBR prepares and publishes long-term sustainability reports, including the baseline scenario and determination of the long- term sustainability indicator, annually as of 30 April and always within 30 days of the parliamentary debate on the government’s manifesto and the vote of confidence in the government.

^[3]      The long-term sustainability of public finances is considered to have been achieved if the long-term sustainability indicator is in the low-risk band, i.e., less than 1% of GDP. This threshold corresponds to uncertainty associated with long-term projections when, as a result of standard updates to assumptions or improvements in methodology, the indicator may be subject to more significant changes.

^[4]      When EC’s methodology is applied to the baseline scenario for the development of public finances over a 50-year horizon, sustainability indicator S2 would reach 7.3% of GDP (high risk) and sustainability indicator S1 would be at 6.1% of GDP (high risk). This combination of results would imply a high-risk band in the long-term sustainability based on the EC’s criteria for the classification of the long-term sustainability risk. According to the European Commission’s estimates of 22 March 2024 (Debt Sustainability Monitor 2023), the S1 and S2 indicators have reached 8.7% and 9.9% of GDP respectively, implying the worst condition of the long-term sustainability of public finances across all EU countries.

^[5]      According to the CBR, the indicator at the level of 1 to 5% of GDP indicates a medium risk. The indicator above the 5% of GDP level is considered a high risk for long-term sustainability.

^[6]      In 2023, the structural primary deficit reached 2.1% of GDP, improving by 0.1% of GDP compared to the no-policy-change scenario. However, this improvement is related to factors the positive effects of which are not included by the CBR according to the applicable methodology, in a deficit improvement in the medium-term part of the baseline scenario (this involves, for instance, lower defence expenditure below 2% of GDP, lower expenditure for the co-financing of EU funds, a positive impact of the green energy subsidy on the balance, which are partly offset by an increase in investments above the 4-year average and by a better local government balance). Taking these factors into account, the fiscal performance in 2023 contributed to the deterioration of the long-term sustainability indicator by 0.3 p.p.

^[7]      The 2023 baseline scenario does not take into account the Social Insurance Act amendment approved by the parliament on 18 April 2024, whereby the 13th pension payment is permanently increased while at the same time tightening the conditions for early retirement after 40 years of service. Even though both measures offset each other as regards their impact on long-term sustainability, there is one important difference. The negative impact of the 13th pension payments is instant, while the cost reduction after correcting the early retirement policy will be gradually accruing over the long term. In other words, general government debt will increase immediately at first and, subsequently, all the costs associated with the introduction of the 13th pension payments will be fully offset no sooner than after 50 years.

^[8]      CBR, Opinion on the binding effect of public expenditure ceilings for 2023-2025.

^[9]      The introduction of expenditure ceilings is foreseen by the constitutional Fiscal Responsibility Act adopted in 2011. However, the ceilings were enacted as late as in 2022 and, to date, they have not been effectively implemented in the budgetary process.

^[10]     Improving the structural balance compared to the no-policy-change scenario by 0.5% of GDP per year at times of high and medium long-term sustainability risk and by 0.25% of GDP per year at times of low sustainability risk.

^[11]     During the financial crisis, the coronavirus crisis and the security and energy crisis, the downturn of Slovakia’s economy was 50% higher and lasted longer compared to the euro area.

^[12]     The analysis considers a global financial crisis with an asymmetric impact on Slovakia starting in 2030, assuming the euro area growth rate to temporarily decline 5 p.p. over two years, accompanied by a temporary weakening of the global trade growth, increased sensitivity of risk premiums for countries on its periphery, a 20 percent fall in financial markets, along with a 15 percent fall in real estate markets occurring as a one-off event.

^[13]     Assuming no changes in policies, the risk of default on long-term liabilities will exceed 90 percent at that time, and 100% in 2034.

^[14]     By the end of the next decade, household consumption would be up 0.5 p.p. and private investment up as much as 2 p.p. compared to a no-consolidation scenario. Consolidation would have a similar positive effect on the labour market as well.

Príspevok Report on the Long-term Sustainability of Public Finances for 2023 (Key conclusions) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

Príspevok Special Report on the Long-Term Sustainability of Public Finances je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

Within the upcoming decades, Slovakia will be facing higher costs caused by demographic developments, exposing the public finances to an ever-increasing pressure. One of the main tasks of the Council for Budget Responsibility (“CBR”) laid down in the Fiscal Responsibility Act^[1] is to publish the Report on the Long-term Sustainability of Public Finances. The report evaluates whether public policies, in conjunction with the assumed demographic and macroeconomic development, have been set up in a sustainable manner from the perspective of public finances.

Long-term sustainability of public finances for 2022 at high risk

The baseline scenario presented in this report is based on inputs at the end of 2022, captures the consequences of the security and energy crisis^[2] on the long-term sustainability of public finances, and covers the impacts of measures adopted in 2022. The CBR concludes that the long-term sustainability of public finances has again not been achieved in 2022 ^[3]. The long-term sustainability indicator reached 5.5% of GDP (6.6 bn euros), sending the public finances to the high-risk zone ^[4].

Development of the long-term sustainability indicator (% of GDP)

Note: BEK – direct impact of the security and energy crisis
Net of the impact of the mandatory enrolment in the second
pension system pillar, the indicator would be at 4.7% of GDP in 2022.

Source: CBR

Medium-term development in public finances and pensions among the main causes of problems with the long-term sustainability

The public finances were in a much better than expected shape in 2022, with the level of structural balance^[5] at which they would be sustainable over the next 50 years. However, the result was mainly driven by a high rate of inflation which led to a sharp rise in general government revenues but its effect on expenditures will fully be felt a year later. The 2022 result will have no perceptible impact on the long-term sustainability, nor does it indicate a further trend in the public finance development.

Long-term sustainability indicator in 2022 (% of GDP)

Note: * impact of the initial budgetary position, i.e., the structural primary balance and gross debt in 2022;
Medium-term outlook – development in all GG balance items between 2022 and 2026

Source: CBR

By contrast, due to the delayed growth in expenditures and measures adopted in 2022, the CBR anticipates a considerably less favourable medium-term development in public finances, contributing 2.6% of GDP to the increase in the sustainability indicator.

Beyond the medium term, in the period between 2026 and 2027, the development in public finances contributes additional 2.8% of GDP to the worsening of the long-term sustainability, mainly due to higher expenditures sensitive to population ageing. The largest negative impact, at 1.6% of GDP, comes from the growth in the pension system deficit. The sustainability will worsen by additional 1.2% of GDP due to higher health and long-term care expenditures.

Security and energy crisis augmented by the war in Ukraine had the largest impact on the decline in sustainability

 Compared o 2021, the sustainability of public finances worsened by 1.1% of GDP in 2022, or 0.4% of GDP if the impact of the reform in the second pension system pillar ^[6] is omitted. The security and energy crisis had the largest negative effect of 0.8% of GDP^[7]. The government’s economic policy had a neutral effect on the sustainability; however, there is a significant time mismatch between the immediate expenditures and gradually accruing future savings from the reform of the first pension system pillar. Assumed forced cuts in local government expenditures improve the sustainability by 0.5% of GDP. Macroeconomic developments not affected by the war in Ukraine had a slightly negative impact.

Change in the long-term sustainability of public finances in 2022

Note: (+) means deterioration and (-) improvement in the long-term sustainability indicator
* The reform of the 2^nd pension system pillar (due to the 50-year horizon) worsens the sustainability, even though its negative impact declines considerably over the horizon. The European Commission does not take into account the impact of the 2^nd pillar (on the revenue side) when presenting sustainability indicators.
**Including, for example, possible negative impacts of Russia’s energy policy even prior to the outbreak of the war.

Source: CBR

The negative impact of the security and energy crisis (of 0.8 p.p.) shows in the less favourable macroeconomic development immediately after the outbreak of the war in Ukraine, combined with a hike in energy prices for general government entities and an increase in defence expenditures to 2% of GDP. The CBR considers a portion of the increase in energy costs and defence expenditures to have a permanent effect.

Contributions to the change in the long-term sustainability indicator between 2021 and 2022 (% of GDP)

* estimated direct impact of the war in Ukraine on Slovakia’s macroeconomic development
** adjusted for the impact of green energy, defence expenditures (2% of GDP) and a four-year average of investments
Note: BEK – security and energy crisis, including the impact of the war in Ukraine   

Source: CBR

In 2022, a number of measures (outside local government) were approved, overall contributing to the deterioration of the long-term sustainability indicator (by 0.3% of GDP without the effect of changes in the second pension system pillar), while their impacts were compensated for by improved fiscal performance in 2022 (contributing 0.4% of GDP)^[8] and the assumed response of local governments to a worse development in their balance (contributing 0.5% of GDP)^[9]: 

• The reform of the first pension system pillar contributes to improving the long-term sustainability indicator by 0.8% of GDP (which is, however, less than the CBR’s recommendations in last year’s report). Nonetheless, it improves the long-term sustainability through measures with positive impacts that are expected to be felt in the future. Conversely, the introduction of the parental pension and the entitlement to early retirement pension after 40 years of career will increase the Social Insurance Agency’s expenditure and have an immediate negative impact on the long-term sustainability. For a long time, the Council has been warning about the significant risk that, even though the reform of the first pension system pillar improves the long-term sustainability as a whole, the structure of the measures and the varying strength of their legislative protection ^[10] carry significant risks that may not ultimately lead to the above-mentioned improvement in the long-term sustainability, and in the extreme case, may even cause the long-term sustainability to worsen as a result of the changes.

• The reform of the second pillar, although regarded positively by the Council on a repeated basis, will be contributing to the deterioration of the long-term sustainability of public finances by 0.7% of GDP over a 50-year horizon. The negative impact on the long-term sustainability consists in the asymmetry in general government balance over the 50-year horizon, in particular due to the costs in the form of revenue shortfalls of the pension system (resulting from the introduction of mandatory enrolment for new entrants in the labour market), while savings to be made later in expenditures for pensions of the people concerned are taken into account only partially. Most of these savings will fully materialise as late as after the 50-year horizon. This case shows that, for some measures, most often in the pension system, even a 50-year horizon may be insufficient. The benefits of the second pillar will be more pronounced beyond the horizon for which sustainability is calculated. In presenting the sustainability indicators, the European Commission does not take the effect of the second pillar into account.

Impact of pension reform of the 1^st and 2^nd pillar on the general government balance

Source: CBR

Impact of pension reform of the 1^st and 2^nd pillar on long-term sustainability indicator

Source: CBR

• The adoption of the so-called family package, which increases child allowances and the tax bonus, with full effect as from 2023, has significantly contributed to the deterioration of the long-term sustainability. Due to this change, the long-term sustainability worsens by 0.5% of GDP through a permanent increase in the expenditure concerned.
• Other measures deteriorating the long-term sustainability have been implemented in the health sector (notably wage increases in inpatient health care beyond the automatic pay rise mechanism), care allowance has also been increased, while the VAT rate for catering and selected services has been reduced.

Comparison of EU countries

In April 2023, the European Commission published a comparison of the long-term sustainability of public finances, using indicators S2 and S1. According to these results, Slovakia has the worst sustainability of public finances among all EU countries. However, the results are based on the European Commission’s long-term projections prepared in 2021 where, inter alia, neither the adopted pension reform nor the better development of public finances in 2021-2022 are taken into account.

When a comparable methodology for the calculation of the EC’s indicators is applied to the Council’s baseline scenario for public finances over the 2022-2070 horizon, sustainability indicator S2 would reach 5.9% of GDP (medium risk) and sustainability indicator S1 would be at 4.6% of GDP (medium risk). This combination of results would imply a medium-risk zone in the long-term sustainability based on the EC’s criteria for the classification of the long-term sustainability risk. However, Slovakia would still be in the top quarter of EU countries facing the worst problems as regards long-term sustainability.

Long-term sustainability indicator S2

*Indicators S1 and S2 quantified by the CBR using the baseline scenario projection, taking into account the current demographic and macroeconomic assumptions, legislative status as of 31 December 2022. Unlike the EC, which only takes into account the projection of selected expenditure policies in the long term, the Council considers, in its baseline scenario, the long-term projections of all revenue and expenditure items of the general government budget. The blue section of the chart for SK is comparable to EC’s results (not including the impact of the second pillar on revenue).

Source: EC, Debt sustainability monitor 2022, CBR

Long-term sustainability indicator S1

*Indicators S1 and S2 quantified by the CBR using the baseline scenario projection, taking into account the current demographic and macroeconomic assumptions, legislative status as of 31 December 2022. Unlike the EC, which only takes into account the projection of selected expenditure policies in the long term, the Council considers, in its baseline scenario, the long-term projections of all revenue and expenditure items of the general government budget. The blue section of the chart for SK is comparable to EC’s results (not including the impact of the second pillar on revenue).

Source: EC, Debt sustainability monitor 2022, CBR

Compliance with expenditure ceilings should lead to a gradual improvement in long-term sustainability

According to the Council, it is very positive that, after more than 10 years following the adoption of the constitutional Fiscal Responsibility Act, expenditure ceilings were legislated in 2022. Given the current high risk in public finances, expenditure ceilings require consolidation by at least 0.5% of GDP per year. Consolidation will translate into a gradual reduction of the long-term sustainability risk. Within the low-risk zone, the need for consolidation will be eased to 0.25% of GDP until long-term sustainability is achieved. The gradual consolidation in the form of achieving a structural surplus of 0.5% of GDP by 2035 and maintaining it until 2040 will require measures totalling 6.4% of GDP. The volume of measures is higher than the calculated long-term sustainability indicator, as the indicator assumes an immediate consolidation in the full amount as from the next year, i.e., by 5.5% of GDP.

Estimate of a safe debt level has been significantly reduced

General government gross debt reached 57.8% of GDP at the end of 2022 and is expected to fall to 56.2% of GDP by 2025 under the baseline scenario, mainly due to economic growth and the reduction of the above-average cash reserve. Without additional measures, it would subsequently start to increase and exceed the Maastricht criterion of 60% of GDP in 2028. In 50 years, the debt would reach 360% of GDP. The increase in debt is mainly attributable to the automatic deterioration of the balance as compared to 2022 (the effect of increased inflation, including the impact of the security and energy crisis), the adoption of legislative measures which are permanently increasing expenditure, and an increase in expenditure sensitive to population ageing. This is a hypothetical scenario because markets would stop financing Slovakia’s needs already at much lower debt levels. Indeed, when the state departs from a credible fiscal policy, the risk of its default increases, thus leading to higher interest rates in the form of risk premiums. From the perspective of long-term sustainability, it is therefore key to ensure that the current debt levels are kept as low as possible, so that the debt would still remain at a “safe level” even after taking into account the risk of an increase in risk premiums in the future.

A debt ratio staying significantly above the safe level for a prolonged time is associated with an increased risk of downgrading the rating to the non-investment grade in the next 50 years, unless measures are taken to improve the long-term sustainability of public finances. For the 50-year horizon, the Council’s current estimate of a safe net debt level is 44% of GDP, down 12 percentage points in comparison with the last year’s estimates (a 50-year horizon). The primary reason for a significant reduction in the threshold for a safe debt level ^[11] boils down to the legislative changes adopted during 2022 (more than 10 percentage points), in particular those of a permanent nature and with a fast onset^[12] – a package of measures to support families with children and the parental pension. The second, less significant reason includes macroeconomic factors (less than 2 percentage points), namely higher interest rates, slower economic growth, ongoing war in Ukraine, and the inflation and energy crisis.

Traffic Lights for a safe net debt level, 2022 baseline scenario vs. estimated net debt trajectory (Net Debt, % of GDP)

Note: Green and orange shades define, during a negative cyclical shock, the -1% or –2.5% development of AAA rating/the threshold of a safe debt level where rating remains unchanged. The shades of red define the development of the upper limit for a safe debt level under the given scenario within the investment grade during positive cyclical shocks (1%, 2.5%)

Source: CBR

Probability of default – development in the periods between 2022-2071 and 2042-2091

Source: CBR

At the same time, the decline in the upper threshold of a safe debt level can also be illustrated as a sharp increase in the probability of default over the next 50 years, from 5 to 15%. With a rapidly rising debt, even a gradual onset of positive effects of measures which were already adopted and improve the long-term sustainability ^[13] may not sufficiently suppress the higher probability of default. It will start to increase significantly from 2032 onwards. A rapid increase in the probability of default may be reflected in the downgraded rating followed by a fall to the non-investment grade, increased risk premiums for the government, households and companies, and, consequently, during slower economic growth, more difficult refinancing options and a steeper increase in government debt (snowball effect), significantly above today’s expectations.

[1]     The CBR prepares and publishes the long-term sustainability reports, including the baseline scenario and determination of the long- term sustainability indicator, annually as of 30 April and always within 30 days of the parliamentary debate on the government’s manifesto and the vote of confidence in the government.

[2]     The security and energy crisis includes the direct impact of the war in Ukraine, including the government’s response to the security situation in Europe by increasing defence expenditures (to 2% of GDP in line with Slovakia’s NATO commitment), and the permanent growth in general government expenditures on energy driven by the transition away from fossil fuels and the response to climate change.

[3]     The long-term sustainability of public finances is considered to have been achieved if the long-term sustainability indicator is in the low-risk zone, i.e., less than 1% of GDP. This threshold corresponds to uncertainty associated with long-term projections when, as a result of standard updates to assumptions or improvements in methodology, the indicator may be subject to more significant changes.

[4]     The indicator at the level of 1 to 5% of GDP indicates a medium risk. The indicator above the 5% of GDP level is considered a high risk for long-term sustainability.

[5]     Because the revised 2021 results improved considerably as well.

[6]     The reform of the second pension system pillar (due to a 50-year horizon) deteriorates sustainability by 0.7% of GDP, even though this impact is significantly reduced as the horizon is extended. In presenting the sustainability indicators (on the side of revenues), the European Commission does not take the effect of the second pillar into account.

[7]     Only estimated from the start of the war, i.e., it does not reflect, for example, Russia’s energy policy in the autumn of 2021.

[8]     The structural deficit improved by 1.2% of GDP in 2022 compared to the no-policy-change scenario. However, part of the improvement is related to factors, the positive effects of which are not included by the CBR, according to the applicable methodology, in a deficit improvement in the medium-term part of the baseline scenario (this involves investments below the 4-year average, lower defence expenditure below 2% of GDP, a positive impact of the green energy subsidy on the balance), including the impact of a delayed increase in expenditure due to a high inflation rate. Taking these factors into account, the fiscal performance in 2022 contributed to an improvement in the long-term sustainability indicator by 0.4 p.p.

[9]     The Council assumes that local governments will be forced to compensate the revenue shortfalls and rising expenditures by increasing local taxes, revenues and by permanent expenditure cuts. At present, this assumption is not supported by specific measures. Should the financial situation of local governments improve by increasing transfers from central government in the full extent, the assumption of a positive impact on the sustainability of public finances would not materialise and the overall long-term sustainability indicator would thus reach 6% of GDP.

[10]    While parental pension and early retirement pension are enshrined directly in the Slovak Constitution (Article 39(5) and (3)), this is not the case with linking the retirement age to the average life expectancy and reducing the replacement rate of new pensions (current pension value rising at 95% of the average wage growth) which were enacted by an ordinary law.

[11]     The CBR considers the upper threshold of a safe debt level to be the level at which the probability of default for the next 50 years is no more than 10%, assuming regular economic times. A value of 10% implies that, without adopting additional measures, exactly one default may occur with a probability of 10% over the next 50 years.

[12]    Changes in the primary balance expected in the near future are more relevant for the final determination of the safe debt level than those implemented later. Because of discounting, sudden permanent measures with an immediate onset (parental pension, a package of measures to support families with children) have a greater impact than measures with a gradual onset occurring later in the future (automatic increase in the retirement age, gradual reduction of newly awarded pensions, mandatory enrolment in the second pillar), although their impact may, on the contrary, be more pronounced in the future.

[13]    Automatic mechanism for retirement age increase from 2029 onwards, declining replacement rates of newly awarded pensions over the entire horizon.

Príspevok Report on the Long-term Sustainability of Public Finances 2022 (April 2023) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

However, the most recent results for the 2021 budget, along with the revised results for 2020, indicate a clear turning point as the long-term sustainability indicator improved deeper into the medium-risk zone and reached 3.85% of GDP (EUR 4.1 billion) .

The long-term sustainability of public finances has significantly deteriorated in 2019 in particular due to legislative changes in the pension system , as well as a worsened budgetary policy (i.e., an increase in the structural deficit in comparison with 2018). At the end of 2019, when Slovakia enjoyed economically good times and unemployment was at all-time lows, public finances came very near to the high-risk threshold.

Sustainability continued to deteriorate also during the first months of 2020 (e.g., a significant increase in public sector wages, along with the introduction of the 13th pension payments, albeit with no additional resources allocated for this purpose), which contributed to public finances entering the high-risk zone in sustainability in February 2020 (with the long-term sustainability indicator reaching 5.2% of GDP).

The original estimates from April 2021 suggested even further deterioration of the long-term sustainability of public finances for 2020 to 5.6% of GDP, in particular, due to the outbreak of the pandemic. However, after taking into account the revised results of fiscal performance for 2020 and updated forecasts of implicit liabilities associated with population ageing , the value of the long-term sustainability indicator reached 4.18% of GDP at the end of 2020 despite the pandemic, thus falling within the medium-risk zone.

Príspevok Report on the Long-term Sustainability of Public Finances (April 2022) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

The Council notes that, in May 2021, public finances were not sustainable in the long term. The long-term sustainability indicator at the level of 6.1% of GDP (EUR 6.3bn) was in the high-risk zone, which means that in order to keep the general government gross debt below the upper debt ceiling (50% of GDP) over the next fifty years, the public finance deficit would need to be improved by the same amount.

The preliminary deficit estimates for this year started deteriorating, according to the Budget Traffic Lights, from 6.8% of GDP in March to 7.7% of GDP in May. Compared to the sustainability evaluation for 2020, the long-term sustainability indicator worsened by 0.5% of GDP based on the most recent information. It means that the budgetary policy has improved the long-term sustainability by mere 0.6% of GDP since the election. This development is mainly driven by the changes in the 2021 budget which takes into account new legislative measures (introduction of the contribution for kurzarbeit, new subsidies in the area of family support, provision of subsidies to support housing development and in the area of sport support, free bus transport planned in the budget to be introduced from this year), as well as non-legislative measures (current development in expenditure compared to the assumptions contained in the baseline scenario) of the government, resulting in a worse public finance development than expected under a no-policy-change scenario.

If the present policies are preserved, population ageing will increase expenditures sensitive to demographic changes to as much as 5.6% of GDP. The debt would remain permanently above the upper threshold of the debt limit and would continue to rise rapidly to unsustainable heights: the 100% of GDP mark would be exceeded in 2039, the 150% of GDP mark in 2047, and the 200% of GDP mark in 2053. On top of that, the calculation already incorporates the passive, no-policy-change (NPC) scenario which automatically decreases the deficit from the estimated level of 7.7% of GDP in 2021 to 3.7% of GDP in 2024. In order to improve the long-term sustainability in the absence of other measures with long-term effects (such as, for example, a pension reform), it would be necessary to keep deficits below this adjustment path assumed under the NPC scenario. Unfortunately, the approved Stability Programme has no such ambition.

In order to essentially curb the long-term sustainability risks down to the low-risk zone, a structural surplus of as much as 2.1% of GDP would need to be achieved in the medium term. A lower surplus could be sufficient if other measures with long-term effects were adopted too, ones which would enhance the sustainability through a responsible countercyclical fiscal policy and improve the revenue-expenditure balance in future, mainly in the pensions system, healthcare and long-term care sectors on the expenditure side, and by structural reforms with a positive impact on the economic potential on the revenue side. Any delays in the adoption of expenditure ceilings and pension system reform with a considerably positive impact on the system’s sustainability may thus translate into more extensive consolidation efforts necessary in the future to restore the stability of public finances.y of public finances.

Príspevok Report on the Long-term Sustainability of Public Finances (May 2021) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

The long-term sustainability of public finances worsened for the third year in a row. Compared to 2018, the long-term sustainability indicator worsened by 2.6 % of GDP; the measures adopted by the government and parliament had the most adverse impact (1.7 p.p.). The legislative changes adopted in the pension system worsened the indicator by 1.3 p.p. They mainly include the introduction of a the retirement age cap, increase of the minimum pension level, and lower cuts in pensions payable from the pay-as-you go pillar to pensioners participating also in the fully-funded pillar, which will increase the pension system’s deficit by 2.7 % of GDP by 2069.

Infografiky k správe:

Long-term sustainability indicator

Baseline scenario of general government budget development

The long-term sustainability deteriorated even without the pandemic

Príspevok Report on the Long-term Sustainability of Public Finances (April 2020) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

Príspevok Report on the Long-term Sustainability of Public Finances (April 2019) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.

Príspevok Report on the Long-term Sustainability of Public Finances (April 2018) je zobrazený ako prvý na Rada pre rozpočtovú zodpovednosť.