On 12 February 2008, the Council examined the updated convergence programme of Slovakia, which covers the period 2007 to 2010. Slovakia is currently experiencing a period of strong growth induced by wide-range structural reforms introduced in previous years combined with substantial inflows of FDI, especially into the manufacturing sector. Although consequential to growth employment picked up as well and the unemployment rate fell substantially, certain segments of the population concentrated in eastern regions do not seem to take part in this economic expansion.

The main goal of the budgetary strategy is to reach the medium-term objective (MTO) for the budgetary position of a structural deficit of just below 1 % of GDP by 2010. The programme foresees the general government deficit to decrease from 2,5 % of GDP in 2007 to 0,8 % of GDP in 2010 in nominal terms, with the primary balance improving from a deficit of 1,0 % of GDP in 2007 to a surplus of 0,5 % of GDP in 2010. The adjustment in both structural and nominal terms is backloaded towards the end of the programme period. Compared to the previous update, the new update broadly confirms the planned adjustment against a more favourable macroeconomic scenario.

In view of this risk assessment, the budgetary stance in the programme seems broadly consistent with a durable correction of the excessive deficit by 2007 as recommended by the Council. A sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeconomic fluctuations (estimated around a structural deficit of 2 % of GDP) would only be provided from 2010 onwards if the envisaged consolidation is strictly implemented. Slovakia appears to be at medium risk with regard to the long-term sustainability of public finances.

Overall Conclusions
The overall conclusion is that the programme is consistent with a correction of the excessive deficit by 2007. Thereafter, it envisages back-loaded progress towards the MTO in a context of strong growth prospects; in 2008, the envisaged structural improvement is not in line with the Pact and should be more ambitious. Given risks to the budgetary targets from 2009 onwards, the MTO may not be achieved by 2010 as planned in the programme and therefore additional efforts might be required. Moreover, should inflationary pressures emerge, a tighter fiscal stance than foreseen in the programme would be required along with further structural reforms to improve the labour market performance. As regards the long-term sustainability of public finances, Slovakia appears to be at medium risk. With respect to medium-term challenges, the programme does not envisage any progress in reallocating expenditure towards R&D and innovation while it states that education spending should increasingly rely on EU funds.

Slovakia is invited to:

1. Exploit the strong growth conditions to strengthen the pace of structural adjustment towards the MTO in 2008 and strictly implement the envisaged structural consolidation thereafter backed up, if necessary, by additional measures as well as more binding medium-term expenditure ceilings; and
2. Introduce further structural reforms to improve the labour market performance and stand ready to adopt a tighter fiscal stance, in particular in order to contain possible inflationary pressures, especially after the disinflationary effect of past substantial exchange rate appreciation fades out.