The Slovak government’s recently introduced consolidation package, centered on tax increases such as a higher VAT rate and a transaction tax, is expected to weigh heavily on the economy. Rising prices will erode real wages, and an anticipated increase in housing costs will further diminish affordability. Compounding these challenges is Slovakia’s recent credit rating downgrade by Moody’s, which may slow the decline in mortgage interest rates, adding uncertainty to the real estate market and the availability of loans for prospective buyers. Economists broadly criticize the consolidation measures, particularly the VAT hike and transaction tax. While these steps aim to stabilize public finances, their adverse effects on economic growth and consumer purchasing power raise significant concerns. Questions also linger about whether the government can realistically achieve its target of generating €2.7 billion in additional revenues by 2025. Moody’s decision to downgrade Slovakia’s credit rating, the second downgrade since the current government took office in October 2023, underscores these concerns. Fitch Ratings had already lowered Slovakia’s rating in December 2023, citing slowing economic growth. Moody’s further highlighted uncertainties around the government’s fiscal consolidation efforts and potential economic risks in its assessment. “The downgrade by Moody’s signals that, despite fiscal consolidation efforts, Slovakia’s economic trajectory remains uncertain, necessitating caution from investors. Being downgraded to levels not seen since before EU accession in 2003 is a significant setback,” noted Marián Búlik, an analyst at OVB Allfinanz Slovensko. The downgrade has immediate and long-term repercussions. Higher risk premiums on Slovak bonds are anticipated, which will raise borrowing costs for the government. This increase in debt servicing expenses will strain the state budget, potentially necessitating additional fiscal measures to maintain financial stability. “The state will likely face higher interest rates for upcoming bond issuances compared to just a few weeks ago,” Búlik warned. This scenario could exacerbate budget deficits and undermine the government’s ability to meet its fiscal targets for 2026, potentially leading to further tax hikes or public spending cuts. Both outcomes could have additional negative implications for the broader economy. Rising inflation, coupled with higher borrowing costs stemming from the rating downgrade, will dampen affordability in the housing market. Prospective buyers may find it increasingly difficult to secure loans or navigate the fluctuating real estate landscape. Furthermore, a slower-than-expected decline in mortgage interest rates will likely deter homebuyers and stall market activity. The consolidation package’s focus on revenue generation without sufficient consideration of its economic ramifications could lead to a prolonged period of stagnation. Reduced consumer spending power and uncertainty in key sectors such as real estate may undermine the government’s fiscal objectives. The challenges ahead underscore the need for balanced policymaking that addresses fiscal consolidation while safeguarding economic growth and household welfare. Without such measures, Slovakia risks further economic instability and a loss of investor confidence. Source: OVB Allfinanz Slovensko and Trend