The impact of unexpected inflationary shock in 2022 and 2023 on the welfare of families: The case of Slovakia
- Council for Budget Responsibility, Slovakia
Figures
Inflation rate (HICP) - international comparison in 2022.
Source: Authors’ calculations based on Eurostat data.
Contributions to annual headline inflation rate in Slovakia (CPI), Jan 2020 - Dec 2023.
Source: Authors’ calculations based on OECD data.
Modelling approach applied to assess the net effect of the inflationary shock.
Note: The order of scenarios matters. First macroeconomic adjustments and then government measures, as the eligibility for child credit depends on wages. In 2023, in scenario 2 we model total price increase, in scenario 4 we model price increase after the price cap.
Analytical approach combining HBS data and microsimulation model SIMTASK.
*We assume there is no behavioural reaction of economic agents.
Headline inflation and inflationary shock by COICOP in 2022 and 2023.
Source: Authors’ calculations based on the data of the Statistical Office of the Slovak Republic. Note: Left picture shows the actual inflation rate and the inflation rate expected in June 2021. The picture on the right depicts the inflation rate in 2023 forecasted in June 2021 and Feb 2023. Government measure known as price cap on energy prices cushions the inflation rate in the COICOP category Housing, water, electricity, gas and other fuels.
Ratios of the median wage growth in income deciles to the average wage growth.
Source: Authors’ calculation based on the Social Security Agency data (2014-2022).
The effect of the inflationary shock in 2022 and 2023 - by income deciles (%, p.p.).
Source: Authors’ calculations. Note: Income deciles are based on equivalized monthly family income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the family, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures (expenditures in 2021 when assessing the year 2022 and expenditures in 2022 when assessing the year 2023). The interaction effect origins from the interaction of the change in wage level and the child tax credit (a measure unrelated to the price shock). Although negligible, it has non-zero values.
The effect of the inflationary shock on two-year horizon - by income deciles (%, euros).
Source: Authors’ calculations. Note: Income deciles are based on equivalized monthly family income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the family, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures in 2021. Changes in euros are monthly values and are equivalized. The interaction effect origins from the interaction of the change in wage level and the child tax credit (a measure unrelated to the price shock). Although negligible, it has non-zero values.
Change in purchasing power without the occurrence of the inflationary shock on two-year horizon - by income deciles (%, euros).
Source: Authors’ calculations. Note: Income deciles are based on equivalized monthly family income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the family, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures in 2021. Changes in euros are monthly values and are equivalized.
Total change in purchasing power on two-year horizon - by income deciles (%, euros).
Source: Authors’ calculations. Note: Income deciles are based on equivalized monthly family income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the family, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures in 2021. Changes in euros are monthly values and are equivalized.
The effect of the inflationary shock in 2022 and 2023 – by family types (%, p.p.).
Source: Authors’ calculations. Note: Net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures (expenditures in 2021 when assessing the year 2022 and expenditures in 2022 when assessing the year 2023). The interaction effect origins from the interaction of the change in wage level and the child tax credit (a measure unrelated to the price shock). Although negligible, it has non-zero values.
The effect of the inflationary shock on two-year horizon - by family types (%, euros).
Source: Authors’ calculations. Note: Net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures in 2021. Changes in euros are monthly values and are equivalized. The interaction effect origins from the interaction of the change in wage level and the child tax credit (a measure unrelated to the price shock). Although negligible, it has non-zero values.
Change in purchasing power without the occurrence of inflationary shock on two-year horizon - by family types (%, euros).
Total change in purchasing power on two-year horizon - by family types (%, euros).
The results by income deciles in euros.
Source: Authors’ calculations. Note: Income deciles are based on equivalized monthly family income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the family, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Changes in euros are monthly values and are equivalized. The interaction effect origins from the interaction of the change in wage level and the child tax credit (a measure unrelated to the price shock). Although negligible, it has non-zero values.
The results by family types in euros.
Source: Authors’ calculations. Note: The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Changes in euros are monthly values and are equivalized. The interaction effect origins from the interaction of the change in wage level and the child tax credit (a measure unrelated to the price shock). Although negligible, it has non-zero values.
The results at household level - by income deciles (%, p.p.).
Source: Authors’ calculations. Note: Income deciles are based on equivalized monthly household income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the household, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures (expenditures in 2021 when assessing the year 2022 and expenditures in 2022 when assessing the year 2023). The interaction effect origins from the interaction of the change in wage level and the child tax credit (a measure unrelated to the price shock). Although negligible, it has non-zero values.
Year-on-year change in purchasing power – by income deciles (%, p.p.).
Source: Authors’ calculations. Note: Income deciles are based on equivalized monthly family income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the family, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures (expenditures in 2021 when assessing the year 2022 and expenditures in 2022 when assessing the year 2023).
Year-on-year change in purchasing power – by family types (%, p.p.).
Source: Authors’ calculations. Note: The net effect on purchasing power equals the difference between the contributions of gov. measures, price cap on energy prices, macroeconomic adjustments and the increase of consumption expenditure. Positive net-effect indicates an increase in purchasing power whereas negative net-effect shows a drop in purchasing power. Percentual changes are expressed relatively to the baseline level of expenditures (expenditures in 2021 when assessing the year 2022 and expenditures in 2022 when assessing the year 2023).
Net effect on purchasing power presented in box-plots – two-year horizon by income deciles (%, euros).
Source: Authors’ calculations. Note: Box plots show the five-number summary of a set of data: including the minimum score, first (lower) quartile, median, third (upper) quartile, and maximum score. Income deciles are based on equivalized monthly family income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the family, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). Changes in euros are monthly values and are equivalized.
Net effect on purchasing power presented in box-plots – two-year horizon by family types (%, euros).
Source: Authors’ calculations. Note: Box plots show the five-number summary of a set of data: including the minimum score, first (lower) quartile, median, third (upper) quartile, and maximum score. Changes in euros are monthly values and are equivalized.
Share of families with negative net effect on purchasing power – by income deciles and by family types (%).
Source: Authors’ calculations. Note: Income deciles are based on equivalized monthly family income. OECD-modified equivalence scale is used (assigns a value of 1 to the first adult member of the family, of 0.5 to each additional adult member and of 0.3 to children aged up to 14 years). The graphs show the share of families with negative (lower than -5 €) net effect on purchasing power. Changes in euros are monthly values and are equivalized.
Tables
Categorization of measures adopted by Slovak government (in mil. euros).
| Measure | Targeted | Related to shock | Allocated budget | Incl. in the analysis | ||
|---|---|---|---|---|---|---|
| Total | 2022 | 2023 | ||||
| “Anti-inflation” Package 1 | yes | yes | 101 | 101 | yes | |
| “Anti-inflation” Package 2 | yes | yes | 9 | 9 | yes | |
| Vaccination incentive bonus | yes | no | 278 | 278 | yes | |
| 14th pension benefit | yes | yes | 208 | 208 | yes | |
| Support directed to families with children | ||||||
| Child benefit | yes | no | 462 | 30 | 432 | yes |
| Child Tax Credit | yes | no | 704 | 90 | 614 | yes |
| Energy price cap for households | no | yes | 2 640 | 2 640 | yes | |
| Advance indexation of pensions | yes | yes | 522 | 522 | yes | |
| One-off allowance to pensioners | yes | yes | 440 | 440 | yes | |
| One-off aid to the poorest | yes | yes | 1 | 1 | no | |
| Reduced electricity distribution fee | no | yes | 55 | 55 | no | |
| Energy subsidies for companies, municipalities, and selected groups of vulnerable customers | no | yes | 455 | 455 | no | |
| Measures in resp. to price shock (% GDP) | 1.7% | 0.3% | 3.1% | |||
| Measures in resp. to price shock | 3 921 | 319 | 3 602 | |||
| Targeted measures | 33% | 100% | 27% | |||
| Untargeted measures | 67% | 0% | 73% | |||
| All measures (% GDP) | 2.4% | 0.7% | 4.0% | |||
| All measures | 5 365 | 717 | 4 648 | |||
| Targeted measures | 51% | 100% | 43% | |||
| Untargeted measures | 49% | 0% | 57% | |||
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Source: Authors’ calculations. Note: A table from Sgaravatti et al. (2021) was adjusted so that it considers measures concerning households only. The fiscal effects were adjusted using the most available and accurate information.
Forecasted values of headline inflation.
| 2022 | 2023 | ||||
|---|---|---|---|---|---|
| Jun-21 | inflation rate without the shock | 2.9 | 2.4 | ||
| Feb-23 | inflation rate with the shock | 12.8 | 19.7 | (9.8 with price cap) | |
| Inflationary shock | 9.9 | 17.3 | (7.4 with price cap) | ||
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Source: Authors’ calculation based on the forecasts of the Macroeconomic Forecasting Committee.
Forecasted values of wage growth.
| 2022 | 2023 | ||
|---|---|---|---|
| Jun-21 | wage growth without the shock | 4.1 | 4.9 |
| Feb-23 | wage growth with the shock | 8.1 | 10.5 |
| Inflation-induced wage growth | 4.0 | 5.6 | |
-
Source: Authors’ calculation based on the forecasts of the Macroeconomic Forecasting Committee.
Forecasted values of pensioners’ inflation.
| 2022 | 2023 | ||||
|---|---|---|---|---|---|
| Jun-21 | without the shock | 1.3 | * | 3.0 | |
| Feb-23 | with the shock | 1.3 | 11.8 | ||
| Extra valorisation of pensions | 0.0 | 8.8 | |||
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Source: Authors’ calculation based on the forecasts of the Macroeconomic Forecasting Committee.
-
*
Value in 2021 is fixed the same for both forecasts.
Forecasted values of minimum living income growth.
| 2022 | 2023 | ||
|---|---|---|---|
| Jun-21 | without the shock | 1.5 | 2.9 |
| Feb-23 | with the shock | 1.5 | 7.5 |
| Extra valorisation of social transfers other than pensions | 0 | 4.6 | |
-
Source: Authors’ calculation based on the forecasts of the Macroeconomic Forecasting Committee.
-
*
Value in 2021 is fixed the same for both forecasts.
Anti-inflationary packages in 2022.
| Anti-inflation Package 1 | Date start | Date end | Support in € | Expenditures in mil. € | Targeted |
|---|---|---|---|---|---|
| One-off automatic increase of benefit | |||||
| Child benefit | 6/1/2022 | 6/30/2022 | 74* | 83.01 | Paid to parents, payment per child |
| Foster care allowance | 6/1/2022 | 6/30/2022 | 100 | 0.65 | Paid once to parent providing foster care |
| Material need benefit | 6/1/2022 | 6/30/2022 | 100 | 5.95 | Paid per household |
| Benefit for the personal assistance | 6/1/2022 | 6/30/2022 | 100 | 6.31 | Paid to assistant |
| One-off support on request - for vulnerable groups | |||||
| Personal care assistants | 6/1/2022 | 8/31/2022 | 100 | 5.53 | Paid to personal care assistants |
| Personal assistants | 6/1/2022 | 8/31/2022 | 100 | Paid to personal assistants not receiving the cash benefit for the assistance | |
| Seniors over 62 years | 6/1/2022 | 8/31/2022 | 100 | Paid if person does not receive pension or have labour income | |
| Total | 101.45 | ||||
| Anti-inflation Package 2 | Date start | Date end | Support in € | Expenditures in mil. € | Targeted |
| One-off automatic increase of benefit | |||||
| Child benefit | 11/1/2022 | 11/30/2022 | 70*† | 1.66 | Paid to parents, payment per child - for children born June 2022 - October 2022 |
| Material need benefit | 11/1/2022 | 11/30/2022 | 100 | 1.43 | Paid per household that did not receive support in Package 1 |
| Replacement alimony | 11/1/2022 | 11/30/2022 | 100 | 0.13 | Paid to children not receiving orphan pensions |
| Benefit to compensate for the increased expenditures due to severe disabilities | 11/1/2022 | 11/30/2022 | 100 | 2.94 | Paid to benefit recipient |
| One-off support on request - for vulnerable groups | |||||
| Child support | 10/29/2022 | 12/31/2022 | 100 | 3.33 | Paid to parent of child for whom the alimony has been stated at max amount 150 € |
| Former clients from children’s homes | 10/29/2022 | 12/31/2022 | 100 | Paid to children previously in children’s homes | |
| Foster care conclusion | 10/29/2022 | 12/31/2022 | 100 | Paid to children previously in foster care who became major from April 2020 to October 2022 | |
| Total | 9.49 | ||||
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Note: One-off income support to vulnerable households has been legislatively secured by two Government Regulations and presented to public as anti-inflation packages. The first one, adopted in June 2022, authorized one-off payment of 100 euros. Support was paid automatically by increasing the social transfers like child benefit, material need benefit or foster care allowance in June. In addition, certain vulnerable groups with no regular social transfers were identified – for example seniors over 62 years without pensions or personal assistants of disabled persons not receiving cash benefit and for these groups an income support of 100 euros conditional on submitting a request was established.
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The second anti-inflation package, adopted in October 2022, provided one-off payment 100 euros to those beneficiaries of social transfers and vulnerable groups that did not receive support in June 2022.
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*
Total of 100€ was paid, but regular benefit amount was 25.88€. So, the anti-inflation support in this case is considered as 100-25.88=74.12€.
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†
Total of 100€ was paid, but regular benefit amount was 30€. So, the anti-inflation support in this case is considered as 100-30=70€.
Support directed to families with children in 2022-2023.
| Support directed to families with children | Monthly payment in € | Expenditures in mil. € | |||
| until June 2022 | from July 2022 | from Jan 2023 | 2022 | 2023 | |
| Child benefit | 29.5 | 432 | |||
| Child benefit | 25.88 | 30 | 60 | ||
| Additional Child benefit | 12.14 | 30 | 30 | ||
| Child Tax Credit | 90.2 | 614 | |||
| Tax Credit for child up to 6 years | 47.14 | 70 | 140 | ||
| Tax Credit for child from 6 to 15 years | 43.60 | 70 | 140 | ||
| Tax Credit for child over 15 years | 23.57 | 40 | 140 | ||
| Tax Credit for child over 18 years | 23.57 | 40 | 50 | ||
| Total | 120 | 1 046 | |||
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Note: Income support directed to families with children has been realized through an increase of the child benefit and child tax credit. Initially, the increase of children-related benefits, announced by policy makers, was proposed as to cope with the income poverty of families with children. Later, these measures started to be officially interpreted as government interventions to cushion the effects of high inflation. Child benefit and child tax credit were substantially increased from July 1st, 2022, and in the second step from January 2023. The child benefit is a flat payment per dependent child to parents and the increase is adopted in the legislation as permanent. Working parents with dependent children are eligible to receive child tax credit (only one of the parents can apply). Child tax credit has also been increased from July 2022 and in the second round from January 2023 but, as opposed to the child benefit, this measure is valid temporarily until the end of 2024.
Support directed to pensioners in 2022-2023.
| Support directed to pensioners | Date start | Date end | Support in € | Expend.in mil. € | Targeted |
| Vaccination incentive bonus | Dec 2021 | Jan 2022 | 100-300 | 278 | Seniors over 60 years who got vaccinated against COVID-19 disease, payment depended on number of doses of the vaccine received |
| 14th pension benefit | Dec 2022 | Dec 2022 | 35-210 | 208 | Payment targeted to pensioners receiving old-age, early retirement, disability, widow/er or orphan pension. Those having low pensions could get max amount 210€, support decreased with rising pension. The average payment was 143€. |
| Advance indexation of pensions | July 2023 | 522 | Advance indexation of all types of pensions in July 2023 instead of January 2024. All pensions are increased by 10.6%. | ||
| One-off allowance for pensioners | Dec 2023 | 440 | One-off allowance of 300 euros to all pensioners. | ||
| Total | 1 448 |
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Note: Income support directed to pensioners has been introduced in 2022 through two measures considered in our evaluation framework. Pensioners receiving old-age, early retirement, disability, or survivors’ pensions got the one-off payment in December 2022, the so-called 14th pension (Since pensioners receive the 13th pension regularly every year, this payment is not considered as a special one-off to cope with high inflation.). Based on the amount of the pension, the one-off support, ranging from 35 to 210 euros, has been paid (pensioners with lowest pensions got the highest support). The average payment per pensioner was 143 euros and the total cost of this support reached 208 mil. euros. In addition, in January 2022 senior citizens over 60 years, who got vaccinated against COVID-19 disease, got the so called “vaccination bonus”. The bonus ranged from 100 to 300 euros, was granted by an automatic procedure, and the total expenses reached 278 mil. euros. In 2023 the parliament changed the valorisation rules for all types of pensions. As a result of new legislation and due to the high inflation rate at the beginning of 2023, advance indexation of pensions occurred in July 2023. All types of pensions were increased by 10.6% and the estimated costs of advance indexation are at 522 mil. euros in 2023.
Definitions of scenarios.
| 2022 | 2023 | ||
| Hypothetical scenario without inflationary shock | Database uprate | Using June 2021 forecast (adjusted for complete 2021 numbers) | Using June 2021 forecast (adjusted for complete 2021 numbers) |
| Tax ben. policies | With gov. measures unrelated to shock | With gov. measures unrelated to shock | |
| Tax ben. parameters | According to June 2021 forecast (adjusted for complete 2021 numbers) | According to June 2021 forecast (adjusted for complete 2021 numbers) | |
| Increase in expenditures | Equals to inflation according to June 2021 forecast (by COICOP categories) | Equals to inflation according to June 2021 forecast (by COICOP categories) | |
| Hypothetical scenario with inflationary shock | Database uprate | Using June 2021 forecast (adjusted for complete 2021 numbers) | Using June 2021 forecast (adjusted for complete 2021 numbers) |
| Tax ben. policies | With gov. measures unrelated to shock | With gov. measures unrelated to shock | |
| Tax ben. parameters | According to June 2021 forecast (adjusted for complete 2021 numbers) | According to June 2021 forecast (adjusted for complete 2021 numbers) | |
| Increase in expenditures | Equals to inflation according to Feb 2023 (by COICOP categories) | Equals to inflation according to Feb 2023 (by COICOP categories and without the price cap on energy prices) | |
| Hypothetical scenario with inflationary shock & economic adjustments | Database uprate | Using Feb 2023 forecast | Using Feb 2023 forecast |
| Tax ben. policies | With gov. measures unrelated to shock | With gov. measures unrelated to shock | |
| Tax ben. parameters | According to Feb 2023 forecast | According to Feb 2023 forecast | |
| Increase in expenditures | Equals to inflation according to Feb 2023 (by COICOP categories) | Equals to inflation according to Feb 2023 (by COICOP categories) | |
| Real scenario with inflationary shock & government measures & economic adjustments | Database uprate | Using Feb 2023 forecast | Using Feb 2023 forecast |
| Tax ben. policies | With all gov. measures | With all gov. measures | |
| Tax ben. parameters | According to Feb 2023 forecast | According to Feb 2023 forecast | |
| Increase in expenditures | Equals to inflation according to Feb 2023 (by COICOP categories) | Equals to inflation according to Feb 2023 (by COICOP categories) |
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Note: We do not recalibrate the weights of the databases, only uprating of monetary variables is changed according to respective forecast. We do not assume changes in the statuses (employed/unemployed/inactive).
Data and code availability
In the paper we use a microsimulation model SIMTASK that was developed in the Slovak Council for Budget Responsibility. The model is not publicly available; therefore, we cannot provide source files with the code. The model runs on SK-SILC dataset that is available at Slovak Statistical Office upon request. Unfortunately, we cannot disseminate the dataset to third parties.