The Finance Ministry’s proposed tax reform will slow down growth rate of household consumption by 0.7-1.1 percentage points next year. According to a report about the macroeconomic impact of tax reform elaborated by the Finance Ministry, household consumption should increase by only 1.8-2.2 percentage points compared to the originally expected 2.9 percent. Further to this, the drop in aggregate demand should reduce imports. The Finance Ministry expects that an increase in investments by 0.3 percentage points to 6.1 percent should partially compensate for the decrease in household consumption. Thus the tax reform should leave economic growth untouched, while the foreign trade balance should improve.

In the medium and long term, reduced income taxes should bolster investment activities, attract foreign investors to Slovakia, and strengthen productivity of Slovakia’s economy. This should have a positive impact on economic growth and rising employment.

After the tax reform is implemented, the Finance Ministry calculates with economic growth of 4.1 percent for 2004. Average annual inflation should be 8.1 percent and the unemployment rate, calculated on job seekers ready to take up jobs, should stand at 15.4 percent.

The Slovak cabinet agreed to introduce single rate income and value-added taxes (VAT) of 19 percent from the beginning of 2004. Now incomes in Slovakia are taxed at a rate depending on taxable income and on whether the taxpayer is a corporate entity or a private individual, etc. For the time being, Slovakia has two VAT rates of 14 and 20 percent.