Fiscal policy

What it means

Fiscal policy is the government's decisions on taxes, contributions and public spending through which it influences the economy and the state of public finances. Its main instrument is the state budget, which sets how much the state collects and what it spends money on.

It differs from monetary policy, which in the euro area is run by the European Central Bank through interest rates. Fiscal policy can stimulate the economy with lower taxes or higher investment, or curb inflation and cut the deficit with higher taxes and savings.

Slovakia has a constitutional act on budgetary responsibility that limits public debt, and it is also bound by EU fiscal rules. When deficits are high, the government consolidates through a mix of tax rises and spending cuts.

How it works in practice

For businesses, fiscal policy shows up as changes in tax rates, new taxes or levies, and support schemes. Recent consolidation measures, for example, raised VAT, introduced a financial transaction tax and brought back a minimum corporate tax.

Sector measures such as the bank levy or special levies in regulated industries affect service prices for all customers. On the other side are support tools such as investment aid, the R&D super-deduction and EU funds.

Businesses should follow the legislative process and plan the impact of changes in advance. A change in the VAT rate means updating prices, tills and invoicing software, and a new tax can change a product's profitability, so it helps to have scenarios ready.

What to watch out for

Frequent changes to tax rules increase uncertainty and implementation costs. In long-term contracts, it is worth agreeing how changes in VAT or new levies will be passed into the price, so the company does not bear the full impact alone.

An amendment with a short lead time can catch accounting and IT systems unprepared. Businesses should agree timely updates with software suppliers and, when rates change, check the first documents issued after the change takes effect.