Slovaks Must Promote Growth as Prospects Uncertain: OECD

Slovakia’s efforts to cut its fiscal deficit should be accompanied by measures to promote growth as the euro-region's second-poorest economy is facing “uncertain” prospects, the OECD said.

“The main priorities are now are to restore public finances while fostering domestic drivers of growth and ensuring the funding of items to promote growth, such as education and active labor market policies,” the Organization for Economic Cooperation and Development said in a survey released today.

Even as the short-term outlook for the economy has worsened, it is set to advance 2.6 percent this year and 2 percent in 2013, one of the fastest expansions in the euro area which Slovakia joined in 2009, the OECD estimates. This matches the European Commission’s projection from November. Still, Slovakia’s medium- and long-term growth prospects are uncertain as the country must improve its labor market and education efficiency to remain competitive, the Paris-based group said.

The administration of Robert Fico, in power since April, is striving to cut the budget deficit to distance itself from the euro region’s sovereign debt crisis. The government is relying on raising taxes for high earners and the corporate sector, including special levies for selected industries, in line with Fico’s pre-election pledges to limit the impact of austerity on less well-off citizens.

The government’s plan to squeeze the fiscal gap below the European Union’s limit of 3 percent of output as early as next year is credible, the OECD said. Still, long-term fiscal issues such as sustainability of the pension system remain unresolved, it said.

The tax system should be made less harmful to growth, the OECD said, recommending to focus more on property and environment taxes, while at the same time to reduce payroll taxes on low-paid jobs to lower unemployment, which, at 13.7 percent in October, remains one of the highest in the EU.

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