RRZ: Consolidation Will Impact Economy Most in 2026, Positives to Appear Later

Bratislava, November 11 (TASR) - The recently approved consolidation package for the next few years will improve Slovakia's economic prospects in the long term, but it will temporarily slow down economic growth, the Budgetary Responsibility Council (RRZ) has said in its assessment of the package, adding that the economy will be affected by consolidation to the largest extent in 2026, with its positive impact becoming more apparent in the following years. The council noted that the extent and timing of the consolidation effects on the real economy stem from the structure of the part of the package that concerns revenues. In contrast to increased VAT, the increase in corporate taxes will mainly take effect after 2025. "As a result, the economy will be hit hardest by consolidation in 2026, when its growth will be 0.65 percentage points weaker than expected without consolidation. This will be driven by a significant increase in corporate taxes, which account for more than 40 percent of the total package and will make investment less attractive and the economy less competitive, while hitting the labour market and increasing inflation," explained RRZ. Conversely, the council believes that the positive impact of consolidation, which is an expected lower risk premium on government bonds, will start to become more pronounced in 2027 and 2028. This will help economic growth to accelerate in 2028 in contrast to a situation without consolidation. "The contribution of a permanently lower risk premium for investment activity and the growth potential of the economy will outweigh the losses due to increased corporate taxes in later years. As a result, the economy will grow up to 0.25 percentage points faster than expected without consolidation, and households will be able to maintain their living standards and consumption levels," added RRZ. The council noted that Slovak public finances are in a high-risk zone and that without the consolidation measures, deficits would remain at 5-6 percent of GDP in the next few years. In such a case, the public debt could approach 70 percent of GDP in late 2028. "This situation isn't sustainable, and after years of postponing consolidation, RRZ welcomes the introduction of measures aimed at starting the process of public-finance recovery. Given the scale of consolidation needed, this is only a first step, with further measures, beyond those already presented, to follow in the years ahead," the council noted. In its current assessment, RRZ estimated that the approved package of measures could lead to an improvement in the general government balance by 1.5 percent of GDP, or €2.1 billion, next year. In the following years, the impact of the measures themselves will be slightly reduced to 1.3 percent of GDP in 2028, but along with the positive impact of a 0.2 percent-of-GDP reduction in interest costs, the deficit will improve by 1.5 percent of GDP. The measures adopted will reduce the gross debt in late 2028 by 5.9 percentage points. zel/df