Slovakia’s deputy prime minister and minister of finance, Ivan Miklos, is a product of his time. Young, professional and ambitious, he is one of a breed of stellar financiers who have come to the fore in the wake of the break-up of the Soviet Union.
Miklos is winning plaudits from all over, in particular for his success in the area of tax reform – recognized this year when Miklos won a Political Entrepreneurship award in Brussels, for economic reforms in Slovakia.
“The level of tax reform that we have introduced is really very deep,” says Miklos. “We have reduced tax evasion while at the same time supporting higher growth. It has also created a more business- and investor-friendly environment in Slovakia.”
Miklos says the benefits of these structural changes are already apparent: “Even in the first half of this year there is clear evidence that this has been a successful strategy.” Although Miklos says that it is difficult to assess the impact of these major reforms accurately so soon after they have been adopted, he estimates conservatively that, “overall tax collection for 2004 will go up by 2% to 3%, equal to Kc2.6 billion.”
Under the new system, the personal income tax rate has gone to a flat rate of 19%; corporate income tax has fallen from 25% to 19%; and VAT has moved to a unified rate of 19%.
In addition, Miklos’s reforms have eliminated most forms of double taxation, including dividend, inheritance, gift and real estate transfer tax.
These reforms are helping to support robust growth in Slovakia. Miklos says that growth forecast for this year is 4.7%, making Slovakia one of the best performing economies in central Europe.
“This growth is not only created by external factors but increasingly by domestic demand. We have increased our estimates of household consumption to 2.7% this year, and we are expecting that figure to continue to grow at around 4% each year,” says Miklos, who adds that the inflation forecast has been revised downwards for this year.
All this means that Miklos is comfortably on track to reach – and even surpass – his budget deficit target for this year: “The budget deficit was passed at 4% [of GDP], but at present we are expecting to end 2004 at 3.85%.” He adds that the deficit should be 2.9% in 2006, though planned pension reforms might add another 1.1% of GDP.
The country is in the throes of implementing a three-pillar pension reform programme, including providing economic incentives to prolong working lives and strengthening the link between contributions and entitlements.
As part of the country’s public finance reforms, Miklos has also drafted a 2005-07 budget – the first time that Slovakia has presented a three-year budget framework – which fits alongside a three-year public finance reform programme that Slovakia is working on with the World Bank.
“This provides us with concrete goals and a way of measuring our efficiency,” says Miklos. “Many of our programmes last longer than one year, and this three-year budget gives us a better view of our development. The aim is to promote macroeconomic stability and enhance government credibility.”
The euro is driving many of these initiatives. “Our primary goal is to create the necessary preconditions for euro convergence. We will create this with economic growth development and improved living standards.”
“Our medium-term goal,” he adds, “is to fulfil the Maastricht criteria as soon as possible, and in a sustainable fashion – we hope by 2006. We aim to enter European Monetary Union no later than 2009.”
On Europe he says: “It presents both advantages and challenges at the same time. Overall, we are predicting higher growth and investment and lower unemployment, which is obviously a positive. However, one problem is agriculture; we view Europe’s Common Agricultural Policy as unsustainable and believe that, in the long term, it will not help the development and competitiveness of this sector.”
Miklos says that, by moving closer to Europe, the positives outweigh any negatives. One benefit is improving levels of FDI, as companies look to gain from Slovakia’s comparative advantages. “We have one of the most skilled and inexpensive labour forces in Europe,” he says.
Even unemployment – 17.2% in 2004 and a forecast 16.6% in 2005 – a bugbear for the government, could offer opportunities, Miklos claims. “A lot of resources are available. We have passed a new labour code and now have one of the most flexible labour markets in Europe.”
One success story is Volkswagen. Having first acquired a minor car assembly facility in Bratislava in 1991, the company has continued to expand its investments into the country. This has seen the number of cars manufactured there rise from zero to 225,000 in 2002, making the company the biggest exporter in Slovakia.
Volkswagen is not alone. Over 90% of current foreign investors in Slovakia intend to expand their local investments, according to a survey carried out by the US Chamber of Commerce in Slovakia. The survey also found that Slovakia has a better business climate than many of its European neighbours, including the Czech Republic, Poland, Hungary and Germany.
The country is also keen to receive investments in the knowledge-based areas of the economy. Miklos points to an abundance of engineers and other university graduates in technical fields. He adds that the country’s students are well grounded in IT and software skills. This should stand Slovakia in good stead over the next few years as it competes to win business from the world’s
leading companies.