Ivan Mikloš Deputy Prime Minister and Minister of Finance of the Slovak Republic Munich June 18, 2004 GROWTH FOR BETTER SOCIAL STANDARDS BETTER SOCIAL STANDARDS FOR GROWTH

Munich Economic Summit Munich June 18, 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

Munich Economic Summit Munich June 18, GROWTH PERFORMANCE IN THE EU IS UNSATISFACTORY Source : EC

Munich Economic Summit Munich June 18, POTENTIAL GROWTH AND PRODUCTIVITY ARE ACTUALLY DECREASING IN THE EU15 Source : EC

Munich Economic Summit Munich June 18, 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 * Forecasts Source : EC

Munich Economic Summit Munich June 18, NEW MEMBER COUNTRIES CAN LEAD THE WAY WITH STRUCTURAL REFORMS 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

Munich Economic Summit Munich June 18, 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

Munich Economic Summit Munich June 18, 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

Munich Economic Summit Munich June 18, TAX RATES FACED BY INVESTORS

Munich Economic Summit Munich June 18, TAXATION IS STILL PROGRESSIVE AND LOW-INCOME PEOPLE PAY LESS TAXES THAN BEFORE Poverty Line

Munich Economic Summit Munich June 18, 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!

Munich Economic Summit Munich June 18, 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

Munich Economic Summit Munich June 18, 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

Munich Economic Summit Munich June 18, 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

Munich Economic Summit Munich June 18, 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 Finance of the Slovak Republic Munich June 18, 2004 GROWTH FOR BETTER SOCIAL STANDARDS BETTER SOCIAL STANDARDS FOR GROWTH