ivan mikloš deputy prime minister and minister of finance of the slovak republic munich june 18,...

Ivan Mikloš

Deputy Prime Minister and Minister of Financeof the Slovak Republic

MunichJune 18, 2004

GROWTH FOR BETTER SOCIAL STANDARDSBETTER SOCIAL STANDARDS FOR GROWTH

Munich Economic Summit Munich

June 18, 20042

THE BEST SOCIAL POLICY:BRING PEOPLE BACK TO WORK

• Ensuring that everyone has a well-paid job is the best social policy.– having a job improves individual’s economic well-being– having a job improves individual’s social and mental well-being

• Economic growth is the best way toward “more and better jobs”– it leads to more job creation– it ensures steady growth of wages


June 18, 20043

GROWTH PERFORMANCE IN THE EU IS UNSATISFACTORY

Source : EC

EU15's GDP per person employed(US=100, at current prices in PPS)

0

10

2030

40

50

60

7080

90

100

1960 1970 1980 1990 2000

GDP per capita in the EU15 and US('000s of PPS)

0

5

10

15

20

25

30

35

40

1960 1970 1980 1990 2000

EU 15 USA


June 18, 20044

POTENTIAL GROWTH AND PRODUCTIVITY ARE ACTUALLY DECREASING IN THE EU15

Source : EC

EU potential growth

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

1981-90 1996-02

labor capital total factor productivity

US potential growth

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

1981-90 1996-02

labor capital total factor productivity


June 18, 20045

GDP GROWTH PERFORMANCE IN THE NEW MEMBER COUNTRIES IS MUCH BETTER

• “new” member countries have been growing much more rapidly then the “old” member countries

• reasons:– convergent growth– structural reforms

* ForecastsSource : EC

Real GDP growth

0%

1%

2%

3%

4%

5%

2000 2001 2002 2003 2004*

EU 15 EU 10 ("new" members)


June 18, 20046

NEW MEMBER COUNTRIES CAN LEAD THE WAYWITH STRUCTURAL REFORMS

1989 2004

CENTRALLY PLANNED ECONOMY

FUNCTIONING MARKET ECONOMY

GOALS OF REFORMS

TYPES OF REFORMS

• functioning market economy

• real convergence with the rest of EU

• long-term competitiveness

• privatizations

• price deregulations

• market institutions

• structural reforms


June 18, 20047

THE SLOVAK TAX REFORM: GOALS

BASIC PHILOSOPHY:LIGHT, NONDISTORTIVE, SIMPLE AND TRANSPARENT

TAX SYSTEM

• create business and investment friendly environment for both individuals and companies

• eliminate existing weaknesses and inefficiencies in the tax law

• eliminate distortive roles of tax policy as instruments for achieving non-fiscal goals

• improve tax fairness by taxing all types and all amounts of income equally


June 18, 20048

THE SLOVAK TAX REFORM: SPECIFIC CHANGES

• radical simplification of the tax system– elimination of virtually all exceptions, exemptions, deductions, special rates,

and special regimes– elimination of dividend, inheritance, gift taxes, and real estate transfer tax

• shift from direct to indirect taxes

• introduction of low nominal rates– 19% flat individual income tax– 19% corporate tax– 19% unified VAT on all goods and services - without any exceptions


June 18, 20049

TAX RATES FACED BY INVESTORS

0% 10% 20% 30% 40% 50% 60%

USA (New York)

Ireland

France

UK

Japan

Germany

Poland

Czech Republic

Hungary

Finland

Estonia

Slovakia

Corporate tax rateEffective tax rate on investment income faced by a private investor (combined corporate tax and dividend tax)


June 18, 200410

Effective Tax Rate

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Personal Income(as a percentage of the average salary in the economy)

TAXATION IS STILL PROGRESSIVE AND LOW-INCOME PEOPLE PAY LESS TAXES THAN BEFORE

Poverty Line


June 18, 200411

THE SLOVAK TAX REFORM: RESULTS

• no decrease in tax revenues– increased revenues from indirect taxes– less scope for tax evasion and tax avoidance– more motivation to pay taxes

• better incentives for investment and work– thanks to lower marginal rates– thanks to more transparent and equitable taxation

FASTER CATCH-UP = LESS REVENUES FROM EU FUNDS!


June 18, 200412

THE SLOVAK SOCIAL SYSTEM REFORM: GOALS

• „make work pay“ – activity should pay more than inactivity and employment should pay the most

• improve skills and prospects of disadvantaged individuals

• reduce the scope for abuse of the social system by improved targeting

• make the labor market more flexible to foster long-term employment growth


June 18, 200413

THE SLOVAK SOCIAL SYSTEM REFORM:SPECIFIC CHANGES

• changes in the social assistance (poverty assistance)– benefit no longer equals long-term income replacement– parts of the benefit conditioned upon activity– increased replacement rate when moving into employment– reducing the poverty trap – no longer 100% effective tax rate

• new system of public employment services– shift from heavy subsidization to investment in human capital and more client-

based approach towards the unemployed

• labor code reform– hiring and firing has been made easier– flexible contract arrangements made possible– increased overtime limit– reduction of union powers


June 18, 200414

THE SLOVAK SOCIAL SYSTEM REFORM - RESULTS

• increased activity– more than 100,000 people activated in small community works– rising employment also in high-rate areas

• more intense assistance to those in need– raising the level of benefits without harming motivation– new programs

• subsidized meals in basic schools for kids in material need• scholarships for secondary students in material need• merit-based scholarships for pupils in basic schools

• new labor code– important factor in investment decisions of foreign firms


June 18, 200415

CONCLUSION: ENLARGEMENT CAN PROVIDE THE EU WITH A NEW REFORM AND GROWTH STIMULUS

• EU needs to expedite progress on structural reforms.

• Enlargement should help thanks to:– competitive pressures coming from the new Member states

• current EU members will have to reform as well if they will want to stay competitive in medium and long term

– ”change of mood” within the EU• at least 10 out of 25 people around the table are now from dynamic countries

with significant reform push and experience

Ivan Mikloš

Deputy Prime Minister and Minister of Financeof the Slovak Republic

MunichJune 18, 2004

GROWTH FOR BETTER SOCIAL STANDARDSBETTER SOCIAL STANDARDS FOR GROWTH

ivan mikloš deputy prime minister and minister of finance of the slovak republic munich june 18,...

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