Rapid population ageing in Slovakia poses fiscal challenges and threatens long-term growth

Slovakia’s immediate priority must be raising a low vaccination rate, while in the medium to long term, an ageing population will be the country’s biggest challenge.

Over the medium to longer term, Slovakia needs to implement pension, labour and health care reforms in order to offset the pressures of an ageing population, according to a new Organisation for Economic Co-operation and Development (OECD) report looking at the Slovak economy.

The latest OECD Economic Survey of the Slovak Republic also says that, with less than half of the population fully vaccinated, the immediate priority must be to overcome vaccine hesitancy and raise the vaccination rate.

Targeted and flexible policy support should be maintained for households and firms that need it, the survey says, while boosting productivity will be crucial to sustaining living standards as Slovakia is ageing rapidly and faces one of the fastest future declines in the working-age population in the OECD.

“The immediate policy priority for Slovakia is to get more people vaccinated,” OECD Secretary-General Mathias Cormann said, presenting the survey alongside Slovak Prime Minister Eduard Heger in Bratislava.

“Once beyond the crisis, addressing the challenges of population ageing will be critically important. Ageing-related spending is set to rise rapidly in the years ahead, which will add to the fiscal burden from the pandemic, while a shrinking workforce will be a drag on future growth. Extending working lives and boosting workforce participation through pension, health and long-term care reforms while helping more mothers, low-skilled, Roma and older workers integrate into the labour market, increasing labour productivity will help to mitigate these pressures.”

Covid-19 disruptions

The Covid-19 crisis disrupted a steady rise in living standards in Slovakia. Over the period since 2000 Slovakia consistently ranked among the fastest-growing OECD economies. Real per capita income doubled over those two decades. While the pandemic hit the Slovak economy hard, timely policy support, including job retention schemes, limited the impact on employment.

Global supply chain disruptions from the pandemic have affected industry, particularly car production. More recently, this has also slowed the recovery. The survey projects Slovakia’s GDP growing by five per cent in 2022 and 4.8 per cent in 2023, after 3.2 per cent in 2021. Consumer price inflation is expected to pick up further to about 5.5 per cent in 2022, before moderating to around 2.5 per cent in 2023.

The government’s plan to invest EU recovery funds in education, healthcare, research and a greener, more digitalised economy would help to foster a strong and sustainable recovery.

However, the impact on growth and living standards will depend on timely and effective implementation of the proposed reforms to support the impact of those investments. Improving the education of all children, ensuring adequate skills development for workers of all ages in a digital economy, helping firms to adopt new technologies, raising research and development spending and enhancing the business environment would help to strengthen Slovakia’s capacity to innovate and benefit from the digital transformation.

It is also vital to attract highly skilled workers from abroad, including attracting back those Slovaks who have emigrated for their studies, the report suggests.

A shrinking workforce

And yet it is Slovakia’s ageing population, a consequence of rising life expectancy and declining fertility rates, that is the country’s greatest concern.

Slovakia’s working-age population is expected to shrink by about 20 per cent between 2021 and 2050, and OECD projections suggest that without measures to contain ageing-related costs, notably spending on pensions, health and long-term care, Slovakia’s public debt will rise significantly by 2050.

The OECD survey recommends designing a medium-term fiscal consolidation strategy aimed to address mounting spending pressures.

Reforms should be undertaken to prolong working lives, help more mothers, Roma, and other underemployed groups move into the labour force, improve old-age health, and reduce spending inefficiencies.

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