Fiscal Adjustment in Slovakia: Findings from a Medium-Scale Econometric Model

Alternative fiscal consolidation strategies are examined in the context of a medium-scale econometric model estimated on Slovak data. The multipliers associated with adjustment on the spending side are generally larger than on the revenue side, which is not uncommon for this class of models. In particular, government spending on wages, goods and services, and investment are associated with strong real-economy consequences. On the revenue side, corporate income tax, social security contributions of employees and personal income tax increases are found to be most harmful for growth. Social contributions and personal income tax adjustments also have the most pronounced effect on employment. The policy implication is that a short-run growth-friendly consolidation strategy should avoid placing too much weight on these budgetary items.