The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
OECD Economic Surveys: Slovenia 2020
OECD Economic Surveys: Slovenia
1. Key policy insights
The COVID-19 pandemic threatens gains in well-being made over the past half-decade. The outbreak interrupted a five-year long expansion, which had yielded higher employment rates and real wage increases and underpinned income convergence vis-à-vis richer OECD countries. The small open economy increased its integration into international supply chains, reflecting an ability to adapt to changes in external demand and move up the value-added chain in production. A key challenge ahead is to return to a strong growth path that can sustain and accelerate these achievements.
Prior to the pandemic, signs of capacity constraints were emerging (Table 1.1). Combined with a workforce that is becoming older and smaller, this indicated that maintaining sustained progress in real income gains and the income convergence process vis-à-vis richer OECD countries would require higher productivity growth (Figure 1.1). Looking ahead, this points to a need for better training and reallocation of workers to get the best out of digitalisation and other new technologies in a globalised world. An additional challenge is to enhance the inclusiveness of the labour market to integrate long-term, low-skilled and older job-seekers.
Figure 1.1. Income convergence is picking up
GDP per capita gaps to the upper half of OECD countries. Upper half is weighted by the population.
Source: OECD Going for Growth.
The coronavirus led to a health crisis as well as an unprecedented economic crisis. The health crisis is waning and containment measures are being withdrawn, while the immediate economic impact was softened by measures to support jobs and incomes. With the planned phase-out of these measures, a short-term challenge is how to best support a fragile recovery to avoid unnecessary scaring of future growth. Once the recovery has become self-sustained, attention should be turned to the challenges associated with population ageing, which by 2055 will have doubled the old-age dependency ratio to 60% (Figure 1.2). Also, the share of the population above 80 is projected to rise sharply. Consequently, ageing-related spending pressures are increasing in areas such as pensions, health and long-term care. If these pressures are not contained or offset, fiscal sustainability is at risk.
Figure 1.2. The population is ageing
Note: In Panel B, the old-age dependency ratio is share of the population older than 65 over the working age population (20-64 years) and the shaded area denotes the 25th to 75th percentile range of available data for OECD countries.
Source: United Nations (2019), World Population Prospects: The 2019 Revision, Online Edition.
Looking ahead, the main fiscal sustainability challenges are to ensure appropriate incomes and healthy lives for the growing number of retirees. Short contributions periods, often combined with low incomes, lead to relatively low pension benefits. Moreover, the health and long-term care sectors are poorly prepared for the changes an older population will demand. Thus, behavioural and policy adjustments are needed to face these challenges. Furthermore, the ageing and declining labour force means that growth will be increasingly dependent on bolstering the productivity of available labour resources. Another important facet of more healthy lives for all is to reduce the environmental impact of economic activity and the population’s exposure to pollution.
Against this background, the key messages of this Survey are:
Support the economy until the recovery has become self-sustained. Thereafter, maintaining and strengthening economic growth will require that fiscal sustainability be secured and productivity growth be faster.
Spending on pension and health will soon start to accelerate. Policies should be formulated and implemented early to deflect pressures on public finances and secure good outcomes in terms of healthy retirements with sufficient incomes.
Labour market institutions need to adapt to an older and smaller workforce with reforms of lifelong learning, health care and mobility.
Box 1.1. Slovenia’s key policies to prepare for the future
The two long-term development strategies are:
The Slovenian Development Strategy 2030 to pursue the UN’s sustainable development goals.
The Active Ageing Strategy to address ageing related challenges.
There are several medium-term strategies in place, including:
National Health Care Plan 2016-2025
The National Health and Safety at Work Programme 2018-2027 and the Economic Migration Strategy 2020-2030 to extend working lives and address labour shortages.
The Skills Strategy Implementation Guidance for Slovenia to improve life-long learning.
The Strategy for the Development of Infrastructure for Alternative Sources of Energy for electric vehicles and their charging infrastructure and the Transport Development Strategy to 2030 to develop all parts of the transport system.
The Strategic Framework for Climate Change Adaptation
A new coalition government took over in February 2020 and had to immediately formulate emergency policy measures to contain the coronavirus crisis and support the economy (box 1.2). Once this crisis management is completed, the new government is expected to present its key priority areas and policies. The new government’s key priorities include securing a swift economic recovery and stable growth over the longer term.
The economy still needs policy support
The first COVID-19 case was confirmed in early March and a lockdown was imposed in mid‑March. Containment measures contributed to limiting the spread of the coronavirus epidemic, with relatively few cases and fatalities compared with other countries (Figure 1.3). Containment measures were gradually eased between the last week of April and the beginning of June. The epidemic has been mostly concentrated in the capital and the eastern part of the country. The health care system dealt effectively with the pandemic. Looking ahead, however, a low and uneven density of general practitioners contributes to a high number of referrals to specialists and emergency units. Moreover, the ratio of intensive care beds to population is relatively low. This may raise capacity concerns, constraining the ability to manage new outbreaks or to maintain the continuity of care for other conditions.
Figure 1.3. The outbreak was quickly contained but led to a sharp contraction
Notes: Panel A depicts the ratio between mobility to workplace at all points in time and the level during the baseline period (7-day moving average). The shaded area represent the range between the OECD’s 90th and 10th percentile. The level during the baseline period was established based on the median value of the volume of visits for each day of the week during the period January 3–February 6, 2020.
Source: OECD calculations based on Google Community Mobility Report and on Ourworldindata; OECD Economic Outlook 107 database; and Statistical Office of Slovenia.
The economic impact of the coronavirus outbreak and associated containment measures has been a historical decline in activity (Figure 1.3; (Table 1.1; Figure 1.4, Panel A). The abrupt slowing of economic activity in March-April 2020 led to a large drop in consumer confidence and business sentiment, which only recently have begun to recover (Figure 1.5, Panel B). The initial collapse reflected the effects of the containment measures on domestic activity and the sudden drop in international demand. In the first month of containment, the volume of retail trade contracted by 15% (y-o-y). Worst affected was the tourism sector. Road transport was also hit hard, with a 20% decline (y-o-y) in domestic freight transport on motorways and twice as much for international freight. Manufacturing has been strongly affected, notably with production ceasing in the automotive sector.
Table 1.1. Macroeconomic indicators and projections
1. Contribution to changes in real GDP.
2. As a percentage of GDP.
Source: OECD Economic Outlook 107 database.
Private consumption contracted severely in the first quarter of 2020, while investment continued to expand, reflecting favourable financing conditions and high capacity utilisation. Construction also expanded, benefitting from public investment and EU funds as well as stronger private investment in new commercial real estate (Figure 1.5 and Figure 1.4, Panel A). Investment in residential housing bounced back after being held back by a lack of issued building permits, contributing to the fastest house price increases in the euro area (Bank of Slovenia, 2019a).
The shock to international demand translated into a contraction in both exports and imports, as all main trading partners were hit by the pandemic (Figure 1.6). Nonetheless, export market gains continued. In recent years, these have mostly reflected deeper penetration in existing markets rather than the development of new markets, as global demand shifted away from Slovenian products (IMAD, 2019b). Both services and the service content of manufactured goods have continued to increase (OECD, 2017a). For example, export of tourism services has expanded faster than elsewhere (European Travel Commission, 2018). More generally, there has been no recent increase in the participation in global value chains, reflecting a low stock of foreign direct investment. The smaller contraction of imports ensured a lower current account surplus (Figure 1.4, Panel D).
Figure 1.4. The economic recovery was slowing before the pandemic
Source: OECD Economic Outlook 107 database; and Thomson Reuters.
Figure 1.5. Consumer confidence and business sentiment collapsed
1. Business confidence is calculated as an unweighted average confidence indicators for manufacturing, construction, retail trade and services excluding retail trade.
Source: OECD Main Economic Indicators database; and Eurostat.
Figure 1.6. Slovenia mainly trades with European countries
In per cent, 2018
Source: OECD International Trade by Commodity Statistics database.
The increase in registered unemployment in the first months of the crisis was relatively modest, reflecting broad government measures to support jobs, which included wage compensation for affected workers and tax deferrals for companies (Box 1.2). Prior to the crisis, strong job creation in the public and private sectors had reduced the unemployment rate to nearly 4% - the lowest since the onset of the international financial crisis in 2008 (Figure 1.7) (IMAD, 2019a). Further increases in unemployment are expected as the full economic impact of the coronavirus pandemic hits the labour market.
Figure 1.7. Higher participation has so far offset the effect of ageing on the labour force
Change in 1 000 persons
Source: OECD Employment and Labour Market Statistics database.
If the economy recovers quickly, newly unemployed workers are expected to be rapidly reintegrated into the labour market while, as in the past, bringing to work those with weak attachment to the labour market, including older, low-skilled and long-term unemployed persons will remain a challenge. Until now, the labour force has expanded slowly, as negative ageing effects were offset by higher participation. This was insufficient to avoid a tightening of the labour market, which manifested itself in labour shortages, particularly of qualified and experienced workers. Faced with these constraints and with few easy-to-employ job seekers left, firms increasingly hired immigrants and cross-border commuters, especially from former Yugoslav countries – which by end-2019 accounted for nearly three-quarters of new hires (Bank of Slovenia, 2019d). Looking ahead, this labour resource is likely to dry up as ageing-related labour shortages (particularly of skilled workers) continue to materialise in richer European OECD countries.
Wage growth was pushed up to 4.3% in 2019 by the tighter labour market, but is expected to recede as labour market slack builds up. Also during 2019, public wages began to increase faster than private wages. Another wage driver is the increase in the minimum wage by a combined 10% in 2019 and 2020. Real wages have been increasing faster than labour productivity, pushing up unit labour costs and eroding external competitiveness, although wages in other central and eastern European countries (CEEC) increased faster (Figure 1.8 and Figure 1.9). Consumer price inflation doubled during 2019 to above 2%, driven by higher service prices (Figure 1.10). In spring 2020, falling energy prices drove headline inflation temporarily into negative territory, while core inflation experienced a more moderate decline. Looking ahead, headline inflation will slow due to the weaker labour market.
Figure 1.8. Productivity has failed to catch up
Real GDP per person employed, in USD thousand, constant prices, 2015 PPPs¹
1. PPPs: purchasing power parities.
2. The EU28 aggregate includes all 28 member countries of the EU in all figures.
3. CEEC is the unweighted average of Czech Republic, Hungary, Poland and Slovak Republic in all figures.
Source: OECD Productivity database.
Figure 1.9. Wage levels in Slovenia are well above other CEEC countries
Source: OECD Employment and Labour Market Statistics database; OECD Economic Outlook 107 database; and OECD National Accounts Statistics database.
Figure 1.10. Inflationary pressures are easing
Year-on-year percentage change¹
1. Core inflation excludes energy and food. Three-month moving average for hourly earnings.
Source: OECD Main Economic Indicators database.
With the onset of the coronavirus, the government implemented a series of fiscal measures to support jobs, income and businesses (Box 1.2).The measures added to an already expansionary fiscal policy stance, arising mainly from higher spending on public employment and wages, social transfers and pensions. As growth recovers, the temporary measures should be withdrawn as planned. At the same time, the economy may need a fiscal kick-start to avoid scarring the economy’s growth potential, calling for a rapid and easy-to-implement temporary fiscal stimulus, such as time-limited tax reductions or one-off income transfers. Once growth has become self-sustained, the supportive fiscal policy stance should be moderated to prepare for upcoming challenges associated with population ageing (Chapter 2). Monetary conditions are expected to remain supportive.
Box 1.2. Main fiscal measures to mitigate the coronavirus pandemic
The new government quickly adopted crisis-related fiscal measures amounting to nearly 4½ per cent of GDP.
A key objective of the fiscal measures was to preserve jobs and the economy’s production potential. Measures were implemented to provide income support for employees working in companies that have partially or fully suspended their operations, by, for example, paying wages (up to 80%) and social security contribution compensations for temporary lay-offs and workers with pandemic related inability to come to work, and the pension insurance contribution for employees remaining in their workplaces (except in the financial sector). Furthermore, those continuing working became entitle to an allowance of EUR 200 paid by the employer.
Additional income support was extended for workers who lost their jobs during the epidemic and were not entitled to unemployment insurance by making them entitled to compensation from the first day of unemployment. Moreover, self‑employed, farmers and religious workers have been guaranteed a monthly basic income equivalent to half net minimum wage in March and the full amount the following two months. In addition, their social security contributions were paid by the state. In addition, one-off income bonuses (ranging from EUR 130 to EUR 300) for low-income pensioners and EUR 150 for students, foster parents, recipients of parental allowances and other vulnerable groups were introduced. There was also a EUR 100 increase in the allowance for families with three children and a EUR 200 increase for families with more children. The allowance for lower income families with one or two children was increased by EUR 30 each child.
Firms and self-employed are supported by a 24‑month deferral of tax liabilities and accelerated payments for public procurements. Additional tax measures include a lowering of companies’ administrative burden in the area of taxation and the possibility of deferring advance tax payments. In addition, banks have to defer liabilities by 12 months for crisis‑affected solvent businesses if requested, while the government has adopted a quota for guarantees of up to EUR 2.2 billion (4½ per cent of GDP) to banks. Also, state guarantees and credit lines have been expanded by 1¾ percent of GDP. Moreover, the public health insurance covers the first 30 days of sick absence rather than employers. In addition, issuance of construction and environmental permits was simplified and accelerated to support investments.
Effective from 1 June, the government is implementing measures to stimulate the economy, amounting to one per cent of GDP, which includes the issuance of tourist vouchers to all Slovenians, the extension of wage subsidies for temporary lay-offs and subsidies for short-time work. At the end of June, another package of measures was adopted by the government with the main measures included prolonging wage subsidies, providing financial support to nursing homes and rerouting wage compensation payments for the quarantine period from employers to the government.
Prospects and risks
If no new COVID-19 outbreak materialises, the economy will start to recover along with the lifting of containment measures (the single-hit scenario in Table 1.1). This will release pent‑up demand, particularly of durable consumption goods and business investments, leading to a sharp rise of economic growth in the remainder of 2020. Nonetheless, economic activity is projected to contract by 7.8% for the year. After the initial boost to demand, the economy is projected to enter a more stable growth path, reflecting that in some sectors, such as in tourism and automotive industry, demand will remain subdued for longer. Following the initial labour market shock, unemployment is expected to gradually recede towards pre‑crisis levels. If an outbreak returns at end‑2020, assuming half the size of the initial shock, then the initial economic rebound will be followed by a second contraction, leading to a decline in economic activity of 9.1% in 2020. This implies higher long‑term unemployment and more bankruptcies, holding back the economy’s growth potential. As a result, there will be large shares of underutilised resources 2021.
The main upside risks to both scenarios are a faster-than-projected rebound in foreign demand, for example arising from rapid restoring of international supply chains. Similarly, a faster-than-expected recovery of business sentiment could lead to stronger business investment growth. On the downside, larger‑than‑expected numbers of bankruptcies and job losses would reduce the economy’s ability to bounce back. Likewise, prolonged trade tensions or a slowdown in European economies could both further reduce export market growth. The automobile sector, although smaller than in other Central and Eastern European countries in terms of contribution to manufacturing value added, could be negatively impacted by a slower-than-expected restoration of international supply chains. Besides these risks, the economy is exposed to some potential vulnerabilities, which have low probabilities, but potential large impacts on the economy (Table 1.2).
Table 1.2. Potential vulnerabilities to the Slovenian economy
Achievements in inclusiveness should be preserved
Slovenia has defied the rise in income inequalities that was observed in many countries over the past couple of decades. In particular, the wage share of GDP has remained constant in contrast with a declining OECD average. This reflects that the female employment rate has risen to be well above peers and the EU average. Also, the employment rate of low-skilled workers has increased but less than in peer countries and remains below the EU average. Despite increases, the employment rate of older workers remains relatively low (Figure 1.11). Combined with a compressed wage distribution and redistributive tax and benefit systems, the higher employment rates have secured a more equal income distribution than elsewhere (Figure 1.12). However, the current labour market weakening may reverse these gains, particularly if long-term unemployment among low-skilled and older workers increases, potentially leading to higher inequalities.
Figure 1.11. Employment rates of women, low-skilled and older workers have risen
In per cent
1. Data refer to the population aged 20-64.
2. Low skilled refer to those with less than primary, primary and lower secondary education (ISCED levels 0-2).
Source: Eurostat database; and OECD Labour Statistics database.
Figure 1.12. Inequalities are low
Changes in the Gini coefficient due to taxation and transfers, working age population, 2017 or latest year¹
1. The Gini coefficient has a range from zero (when everybody has identical incomes) to one (when all income goes to only one person). An increasing Gini coefficient indicates higher inequality in the income distribution. 2018 data for Australia and Israel. 2017 data for Slovenia.
Source: OECD Income Distribution database.
Another positive inclusiveness development is a low gender income gap, which arises from a combination of small gender wage gaps, high female employment rates, limited use of part-time employment, and only small income losses during maternity (Figure 1.13) (OECD, 2019b) (OECD, 2018a). On the other hand, a significant gender employment gap between the public and private sectors reflects that women are often educated in fields (such as health and education) relevant for public employment (Figure 1.14) (Moorhouse, 2017). Women are also attracted by the public sector’s higher degree of job security, longer vacations and higher number of days with paid absence due to personal circumstances, which facilitate raising children and improve work-life balance (OECD, 2018c). The downside is that public sector jobs generally pay less than similar private sector jobs, while offering lower earnings gains and career progression opportunities (Roter, Lindic and Vodopivec, 2017). The rigid education and seniority-based public pay system should be reformed to better reward efforts and attract high-skilled workers. Such a reform could also counter gender employment sorting. This could be combined with measures in schools to address gender stereotypes and norms, including career guidance and mentoring programmes.
Figure 1.13. Gender pay gaps are increasing with education and skills requirements
As a percentage of mean hourly earnings of men, 2014
Note: Gender pay gap is the mean gender difference of hourly earnings relative to mean hourly male earnings.
Source: Eurostat Gender Equality database.
A concern, though, is low income mobility, with most high- and low-income earners staying in their income categories over time, implying that income mobility plays a relatively small role in reducing inequality (OECD, 2018a). The low mobility is a reflection of long job tenures and job-to-job changes with little impact on incomes (Chapter 3). The persistence of low-income is related to long-term unemployment. Indeed, the transition into employment is associated with relatively low-income gains. Other concerns are generally low pension benefits and a relatively high old-age poverty rate of 12½ per cent. This reflects a combination of low income bases, career interruptions and redistribution in the public pension system.
Figure 1.14. The majority of civil servants are women
Share of employment filled by women, 2015, %
Source: OECD Government at a Glance, (OECD, 2017g).
The environmental performance is mixed
Slovenia has recorded improvements in many environmental areas in recent years. Importantly, notwithstanding the temporary crisis-related reduction in road transport, Slovenia has been expected to meet its 2020 greenhouse gas (GHG) emission reduction target (+4% relative to 2005). An important factor behind this development is the growing share of renewable energy, reflecting the continued expansion of hydro-power plants, although other sources of renewable energy remain underdeveloped (Figure 1.15, Panel B) (European Commission, 2017). Looking ahead, however, the low oil prices are likely to persist with the weak international outlook, which will hamper the move towards alternative energy resources. This reinforces the need for a comprehensive strategy to complement EU initiatives, such as the emissions trading system, to reach the 2030 EU target (-15% relative to 2005). Such a strategy would, among others, focus on reducing the fragmentation of the responsibilities regarding environmental objectives across ministries and the adoption of a national environmental strategy (Figure 1.15, Panel A) (European Commission, 2018a) (CAN Europe, 2018). A particular concern is rising emissions from the transport sector, up by nearly 50% (European Commission, 2017; Chapter 3). This reflects increasing road transport, including the extensive use of cars for commuting purposes and rising transit traffic (European Commission, 2018a) (Odyssee-Mure, 2018).
The reliance on environmental taxes is relatively high, reflecting higher fuel taxes than in neighbouring countries, except Italy (Figure 1.15, Panel F) (OECD/ITF, 2019). In transport, environmental CO2 objectives could be better pursued by replacing the annual flat-rate motorway tax with comprehensive distance-based road charges. However, such technology remains to be developed and until then Slovenia could consider implementing congestion charges. Likewise, fuel taxation should be aligned with fuels’ carbon content, requiring higher diesel taxes, which would reduce emissions from road transport. The use of biofuels could be promoted by raising the exemption from excise duties for distributors supplying fuels containing biofuel (Eurostat, 2016). In addition, car taxation could promote cleaner cars by focussing more on environmental factors. Other measures to promote alternative fuels should align abatement costs across renewable technologies and ensure that effective tax rates on energy sources reflect their environmental damages, as recommended in earlier surveys.
Increasing road transport has also contributed to higher increasing emissions of small particles, although the main driver is heating with old wood and oil boilers (Figure 1.15, Panel D) (Slovenian Environmental Agency, 2018). As a result, a large share of the population is exposed to high concentration of particles, particularly during winter peaks (Figure 1.15, Panel C) (IMAD, 2019b). The cost in terms of premature deaths is estimated to be nearly 4% of GDP in 2017 (OECD, 2016a) (OECD, 2017b). The government is offering replacement subsidies for old woodstoves of 50-60% (and 100% for low-income households) (IMAD, 2019b). The low take-up could be bolstered by regulatory requirements and financial sanctions
Table 1.3. Past recommendations for achieving green growth
Figure 1.15. Green growth indicators are mostly improving
1. Total Suspended Particles (TPS). Biomass combustion for heating corresponds to emission of TSP from the combustion of biomass in small installations for production of heat and energy.
Source: OECD Green Growth Indicators and Environment Statistics database; OECD National Accounts database; IEA World Energy Statistics and Balances database; OECD Exposure to air pollution database; OECD Municipal waste database; OECD (2019), Environmental policy: Environmental policy instruments dataset; and Ministry of the Environment and Spatial Planning, Slovenian Environment Agency.
Risks to financial stability are low, but capital markets remain underdeveloped
The financial sector has increased its reserves, which should help to withstand negative financial spillovers from the crisis Banks have increased their liquid assets to a third of total assets, securing a liquidity coverage ratio well above Basel III requirements and contributing to banks passing national and international stress tests (European Central Bank, 2019b; Bank of Slovenia, 2019c). Also lower leverage and a relatively high average capital adequacy ratio have strengthened the capacity to withstand adverse shocks. However, the central bank considers that fast house price increases (an accumulated 25% since 2016) and a possible reversal constitute a medium-risk to financial stability. In 2018, bank profitability in the Return-On-Equity ratio (ROE) increased to 11.1%, mainly driven by one-off effects of releasing impairments and provisions for loans repayments, higher interest and non-interest income and falling funding costs. Further efforts to improve profitability are needed, as operating costs remain higher than elsewhere (OECD, 2019c; Bank of Slovenia, 2019b).
In the five years before the crisis, banks’ portfolio credit quality had improved markedly. This together with the government guarantees to banks should help cushion the sector against negative credit effects from the crisis. The improved credit quality reflects a continued decline in the share of non-performing loans (NPLs), achieved through a combination of repayments, write-offs and the sale of claims to the Bank Asset Management Company (BAMC) – a government entity similar to a bad bank. Nonetheless, the share of NPLs remains relatively high in the corporate sector and particularly for SMEs. An increase in household consumer loans has led banks to create associated credit risk allowances and the Bank of Slovenia to extend macro prudential measures for such loans to a maximum maturity of 7 years and a debt service-to-income ratio of maximum 50% for lower incomes and 67% for others (applicable for consumer and housing loans) (Bank of Slovenia, 2019a).
Banks’ lending activity is shifting away from the non-financial corporate sector as the overall loan-to-GDP ratio has declined by 2 percentage points to 20.5% between 2016 and 2018 (Bank of Slovenia, 2019a; European Central Bank, 2019a; IMAD, 2019b). Instead, firms are relying more on internal resources, short-term operating liabilities to suppliers and financing from the rest of the world via trade credits or borrowing from affiliated foreign firms, often benefiting SMEs (Figure 1.17) (Bank of Slovenia, 2019a; European Investment Fund, 2019).
Figure 1.16. Banks’ credit portfolio quality has improved
Note: Data refer to domestic banking groups and stand-alone banks.
Source: ECB Consolidated Banking database.
Figure 1.17. Businesses are increasingly using foreign-finance sources
Non-financial corporations' loan structure, in per cent
Source: Bank of Slovenia.
The increased use of foreign capital has reduced corporate financing through the issuance of equity (stocks, bonds or debt securities), hampering the development of capital markets. If anything, financial market developments in terms of debt, access and efficiency have deteriorated in recent years (Figure 1.18). Indeed, credit to the private sector has not recovered since the 2013 crisis, while stock market capitalisation remains around 12%-14% as compared with an (increasing) EU average of 70% in 2017 (IMF, 2019). Moreover, trade in the Ljubljana Stock Exchange is highly concentrated in a few shares (Bank of Slovenia, 2019a).
Figure 1.18. Financial development is lagging behind
IMF Financial Development Index
Note: The Financial Development Index summarises how developed financial institutions and financial markets are in terms of their depth (size and liquidity) and efficiency (ability of institutions to provide financial services at low cost and with sustainable revenues and level of activity of capital markets).
Source: IMF Financial Development Index database.
Coming out of the crisis, the stock market could be promoted through financial education and encouraging a shareholder culture by accelerating privatisation and reserving parts of government share sales for households, as for example done in France (World Economic Forum 2016). Also employee share purchase plans could stimulate a shareholder culture (Aubert, 2008). Pension funds would be encouraged to invest in equity if the minimum rate of return requirement was abolished (Chapter 2). In 2016, the Ljubljana stock market was acquired by the Zagreb Stock Exchange. A merger with other stock markets, such as the Central and Eastern Europe Stock Exchange Group, could increase liquidity of traded shares, volumes and investor base, while reducing transaction costs (Charles et al., 2014).
Households could also be encouraged to diversify their savings with the introduction of new financial instruments. For example, issuance of covered bonds (by banks, real estate investment trusts etc.) and the development of associated secondary markets could provide safe, liquid and higher yield savings instruments. Banks have strong incentives to issue covered bonds as this can reduce their reliance on short-maturity deposits and their associated maturity mismatches (Staric-Strainer, 2005).
The development of alternative financing instruments, such as Fintechs, crowdfunding or green bonds, is lagging other countries. In 2019, only three organisations were active in the field of Fintech, while crowdfunding has begun to develop with 300 SMEs obtaining funds from a single platform in recent years (Bank of Slovenia, 2019a) (European Commission, 2018b). Similarly, only two firms have issued green bonds (Climate Bonds Initiatives, 2019). Developing these alternatives is hindered by a lack of appropriate regulation as well as practical issues, such as sufficient defences against cyberattacks and fraud (Bank of Slovenia, 2019a).
Privatisation in the banking sector has continued with the sale of shares in the largest bank (NLB). This was a requirement from the European Commission to avoid having previous financial support classified as state aid. After the sale, the government remains the largest shareholder with 25% and 1 share, limiting private investors’ ability to restructure. The shares were sold to institutional investors at a below-market price. So far, the privatisation of state-owned banks and received profits have recovered about 70% of the financial support provided during the 2013 banking crisis, although the sale of assets transferred to the BAMC could increase the recovery rate further.
Table 1.4. Past recommendations on financial stability
Fighting money laundering and corruption
The financial sector has seen few money laundering cases, with a single large case in 2017, and Slovenia is considered a low-risk country (Basel Institute of Governance, 2019). In 2017, the legal framework for combatting money laundering was found to be in line with the international Financial Action Task Force standards, although only scoring well in international cooperation (Figure 1.20; MONEYVAL, 2017). The government should ensure faster progress in areas like sanctions and countering terrorist financing (MONEYVAL, 2018).
Money laundering is closely associated with corruption, where the perceived level is relatively high. This mostly refers to the perception that public power is exercised for private gains (Figure 1.19, Panel A; Figure 1.20, Panel B). Most Slovenians believe corruption to be common, although few report having had actual experience with corruption (Eurobarometer, 2017) (IMAD, 2018b). The public anti-corruption authority considers that the main problems are related to system-wide corruption in areas such as public procurement, corporate governance of state-owned companies and banks, and administrative procedures (Commission for the Prevention of Corruption, 2019). Similarly, perceived legislative corruption is high (Figure 1.19, Panel D). The anti-corruption authority points to problems of inadequate resources, insufficient responses by decision-makers and an absence of a systemic approach to prevent and prosecute corruption (Commission for the Prevention of Corruption, 2018; Stefanec, 2019). Also, the OECD recognises an urgent need for enhancing independence, resources, powers and procedures of the anti-corruption authority (OECD, 2016c).
Figure 1.19. Corruption indicators
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: World Bank; Transparency International; Varieties of Democracy Institute; Universities of Gothenburg, and Notre Dame.
The origins of the high perceived corruption in public procurement, despite the extensive online availability of procurement process information since 2018, is that a high ratio of such contracts are negotiated without calls for tender and many are awarded with negotiated procedures (European Commission, 2019a OECD, 2019d). This reflects a lack of independent oversight with insufficient legal safeguards against external pressure or interference. Recent measures to reduce corruption risks include centralised contracting in health care and training of public procurement officials. Additional measures should include strengthening ex-ante and ex-post oversight, introducing more dissuasive sanctions and enabling larger procurement contracts through international cooperation (Ecorys, 2017). In addition, prosecution procedures and powers need strengthening (OECD, 2019d).
Figure 1.20. Policy frameworks
Note: Panel A summarises the overall assessment on the exchange of information by the Global Forum on Transparency and Exchange of Information for Tax Purposes, assessing member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. Panel B shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes, OECD, and Financial Action Task Force (FATF).
A more competitive environment would help to accelerate the recovery
As emphasised in the previous Survey, a competitive environment drives income convergence vis-à-vis richer OECD countries by fostering competitive and innovative firms that are globally integrated. Such firms would also be the backbone of a faster recovery. However, little regulatory progress has been made in stimulating competition. At the overall level, regulatory barriers are at par with the OECD average (Figure 1.21). However, in no area is Slovenia close to best OECD practise (OECD, 2020). There are few direct barriers to trade and investment. But the combination of high barriers in service and network sectors and widespread public ownership has contributed to one of the lowest stock of foreign direct investment in the OECD area (Figure 1.22). This lack of foreign investment hampers the international transfers of new production and management technologies to Slovenia. Such a development would make markets more competitive, benefiting productivity growth and thus economic expansion as well as consumers through lower prices and greater choice. As recommended in the last Survey, reducing regulatory barriers could be achieved by continuing to strengthen inter-agency co-ordination and regulatory impact assessments (OECD, 2017f).
A particular concern is the wide scope of the numerous - often vertically and horizontally integrated - state-owned enterprises (SOEs). The creation of a holding company for most SOEs strengthened the corporate governance of SOEs. Nonetheless, there is a need to further strengthen SOE governance by directing them to focus on core activities, often requiring vertical and horizontal separation, and measures to secure non-discriminatory third-party access to networks, as recommended in the last Survey. Additional measures include greater management pay flexibility and stronger supervisory boards. Over the past couple of years, privatisation has progressed slowly and the holding company maintains controlling shares in most SOEs. State–ownership is particularly high in network sectors, but also in inherently competitive sectors (EBRD, 2019). For example, the state owns about 40% of hotels. The government should widen the scope for privatisation by narrowing the group of SOEs that are considered important or strategic (thus require controlling or majority government share holdings) and follow through with privatisation.
Figure 1.21. There is scope to ease entry and strengthen competition
Product market regulation indicators, from 0 (best practice) to 6 (most stringent), 2018
Note: The Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable. Scores range from 0 to 6 and increase with restrictiveness.
Source: OECD Product Market Regulation database.
Figure 1.22. Slovenia has a low stock of inward FDI
Per cent of GDP, 2018
Source: UNCTAD; and OECD Economic Outlook 107 database.
In terms of enforcement of competition rules, the competition authority has received additional financial resources in recent years with some additional staff, although the level remains lower than in similar-sized countries, such as Estonia and Latvia (OECD, 2019n; OECD, 2018g). Corporate governance of the competition authority has been weakened, as the director will now report to the Ministry of Economic Development and Technology instead of the parliament. Furthermore, the agriculture act was amended with a turnover limit for presumed significant market power. Unfortunately, the amendment is not applied to cooperatives and their members. Moreover, fines are limited to 0.25% of annual domestic turnover in contrast with 10% of worldwide turnover in other sectors. The authority is issuing higher fines, but continues to struggle with getting its decisions confirmed in court, leading to lengthy cases and the involvement of several court levels. As recommended in the last Survey, the independence of the competition authority should be assured, for example through financing via a standalone line in the state budget, and it should have adequate resources and staff expertise. In addition, there is a need to simplify judicial proceedings. A step in this direction would be to introduce a single-step procedure that allows the authority to impose a fine in the administrative procedure, dispersing with the current need to initiate a separate minor offence procedure.
Fiscal policy faces long-term challenges
The crisis-related fiscal measures, increasing spending by 4½% of GDP, further loosened the fiscal stance. In 2020, this will turn the public budget balance from surplus to a deficit 8% of GDP in the single hit scenario and close to 9% of GDP in the double hit scenario, before coming down in both scenarios. In 2021, the public debt-to-GDP ratio will increase to nearly 80% in the single hit scenario and 87.5% in the double hit scenario (despite 2019 privatisation proceeds of 1.3% of GDP) (Table 1.5; Figure 1.23; Box 1.3). The pre-crisis supportive fiscal stance reflected increases in social transfers and the public wage bill, a process that will continue in 2020 and 2021. In addition, the 10% increase over 2019-20 in the minimum wage also impacts the public sector wage bill (as well as increase the revenue contribution base). Moreover, the recently-decided increase of pension replacement rates was not accompanied by financing measures (see below). Additional loosening on the revenue side comes from an increase in tax allowances on annual leave payments (IMAD, 2019c). Revenue growth could slow further, as the negative revenue effect from lower personal income taxation (mostly for low-to-middle incomes) will not be offset by a planned increase in property taxation, partly due to the lack of a housing valuation system (Chapter 3). However, other measures, such as the introduction of a minimum corporate tax rate of 7%, could suffice to maintain revenue growth.
Table 1.5. Fiscal Indicators
Per cent of GDP
1. OECD estimates unless otherwise stated.
2. National Accounts definition includes state guarantees, among other items.
Source: OECD Economic Outlook 107 database.
Figure 1.23. Despite faster economic growth the public deficit will remain large in 2021
As a percentage of GDP
Note: The shaded area indicates that data are projections.
Source: OECD Economic Outlook 107 database.
The public debt-to-GDP ratio is projected to remain relatively low by international standards (Figure 1.25). This means that there is fiscal space to kick-start the economy if needed to avoid scarring of long-term growth prospects. Indeed, such scarring would reduce fiscal space over the medium- to long term. A parsimonious approach should be used as additional fiscal measures may be needed if the pandemic returns. Such an approach implies that the current temporary fiscal measures should be withdrawn as planned, while a fiscal kick-start should focus on rapid and easy-to-implement fiscal stimulus, such as reduced taxes or fiscal transfers to households. The stimulus should stop when growth becomes self-sustaining. Over the medium term, the fiscal stance will need to be moderated and more focussed on growth enhancing investments to prepare public finances for ageing-related spending pressures.
The government could also support the recovery by making the tax-mix more growth friendly, shifting the burden from labour to property and indirect taxes. Additional measures in this direction should focus on lowering the high labour taxation, which leads to large tax wedges that reduce work incentives (Figure 1.24). Social security contribution rates are high, particularly for employees, and personal income tax rates increase steeply, but generous allowances lead to low revenues. OECD research shows that personal income tax rates could be lowered by 5 percentage points without loss of revenues just by reducing tax allowances by 5% (OECD, 2018b). The same research shows that, within a revenue neutral framework, aligning the low property taxes with best OECD practise could finance a more than 5 percentage points reduction in social security contribution rates. Further reductions in labour taxation could be financed by bolstering indirect taxes. The standard VAT rate is 22%, but a reduced rate of 9.5% is applied to a wide range of goods and services, leading to foregone VAT revenues in the order of 13% of total indirect taxes without clear distributional effects (OECD, 2018b). The corporate tax rate remains at a still relatively low 19% compared with the OECD average. However, other countries in the region are lowering their rates, which can put Slovenia at a disadvantage in terms of attracting foreign direct investment.
Figure 1.24. The tax system is reliant on labour taxes
Tax revenue as % of GDP, 2018
Source: OECD Tax Revenue Statistics database.
Figure 1.25. The government debt-to-GDP ratio is relatively low
As a percentage of GDP
Note: 2018 instead of 2019 for Estonia, Ireland, Latvia, Switzerland and the United Kingdom; 2017 instead of 2019 for Japan, Korea, and the OECD aggregate; and 2016 instead of 2019 for Turkey.
Source: OECD Economic Outlook 107 database.
A structural concern, though, is the renewed increase in the debt-to-GDP ratio, which is high enough to make it a vulnerability for the small open economy in case of another severe economic downswing and well above the 60% upper limit in the Stability and Growth Pact. Over the longer term, the current underlying fiscal position will lead to rapid increases in public debt if some of the largest ageing-related spending pressures (6% of GDP by 2060) in the OECD are not contained (Figure 1.26, Baseline scenario). Moreover, ageing-related spending pressures could easily be higher, leading to even faster debt increases (Figure 1.26, Risk scenario). On the other hand, observing the medium-term budget objective suffices to keep the debt-to-GDP on a downwards path, but implies a sustained substantial fiscal consolidation effort (Figure 1.26. Consolidation scenario).
Reaching the medium-term budget objective requires measures to contain ageing-related spending. The least costly approach would be to focus on double-dividend measures that reduce spending and expand revenues simultaneously. For example, OECD calculations show that increasing the statutory retirement age by 2 years could secure a total fiscal effect of 2.3% of GDP (Box 1.3). Tighter eligibility criteria in the disability pension and unemployment benefit systems that increases the employment rate of older workers (+50) to the EU average would yield an effect of 1% of GDP. The remaining financing gap of 3% of GDP could be eliminated by a 10% cut across the board in all non-ageing related spending. Closing the gap through higher taxes in the least distortive manner could be achieved by aligning property taxation with best OECD practise and broadening the personal income tax base by reducing tax allowances by 25%, which would boost revenues by 2% of GDP and nearly 1% of GDP, respectively.
Figure 1.26. More fiscal consolidation effort is needed to reduce public debt
General government debt, Maastricht definition, as a percentage of GDP¹
1. The baseline scenario assumes that increased spending on health and pensions will add an additional 6.6 percentage point of GDP to annual government spending by 2070, in line with European Commission (2018). The consolidation scenario assumes a primary deficit of 0.25% of GDP by 2050, complying with the MTO from the Stability Programme, which is subject to change. The risk scenario assumes that higher-than-projected increases in life-expectancy (+2years) will bolster spending on health and pensions by an additional 2.6 percentage point of GDP by 2050.
Source: Adapted from OECD (2018), OECD Economic Outlook: Statistics and Projections (database), June; Guillemette, Y. and D. Turner (2018), "The Long View: Scenarios for the World Economy to 2060", OECD Economic Policy Paper No. 22., OECD Publishing, Paris; and European Commission (2018c), "The 2018 Ageing Report - Economic and budgetary projections for the 28 EU Member States (2016-2070)" Directorate-General for Economic and Financial Affairs.
The fiscal impacts of ageing are projected to be larger than elsewhere
Population ageing will increase the old-age dependency ratio until the mid-2050s, as the number of older people (+65) increases by a third and the working age population contracts by one-fifth. This creates the double challenge of addressing ageing-related spending pressures as the funding base contracts (European Commission, 2018c).
The window of opportunity for implementing reform is closing. The pension system is already running a deficit of 2½ per cent of GDP and ageing-related spending is projected to increase by 1½ per cent of GDP over the next decade. Thirty years later, the increase amounts to 6 per cent of GDP (Table 1.7).
This increase is more than in almost all other European countries (Figure 1.27). Moreover, OECD work suggests that ageing-related spending increases could be twice as high if additional cost pressures materialise, such as the tendency for service sector wages to increase faster than productivity and the implementation of more costly technologies in the health sector (Guillemette and Turner, 2018).
Table 1.6. Past recommendations on fiscal policy
Table 1.7. Ageing-related expenditure projections
As a percentage of GDP
Source: European Commission (2018c), "The 2018 Ageing Report - Economic & Budgetary Projections for the 28 EU Member States (2016-2070)", Directorate-General for Economic and Financial Affairs, Institutional Paper 079, Luxembourg.
Figure 1.27. Old-age spending increases in European countries
Change in ageing cost between 2020 and 2060 in percentage points of GDP
Note: Ageing Working Group (AWG) reference scenario.
Source: European Commission (2018c), "The 2018 Ageing Report - Economic & Budgetary Projections for the 28 EU Member States (2016-2070)", Directorate-General for Economic and Financial Affairs, Institutional Paper 079, May, Luxembourg.
The pension system has a widening deficit and provides low benefits
The main pay-as-you-go public pension system was reformed in 2013 with the aim of increasing working lives by raising and aligning the statutory pension age to 65 for men and women, and increasing the minimum retirement age to 60 for workers with a full 40 years contribution period. This was combined with a bonus/malus system and increased possibilities for combining pension and work. Despite increases in the effective retirement age, it remains among the lowest in the OECD, leaving Slovenians with longer retirements than elsewhere (Figure 1.28) (Pension and Disability Insurance Institute of Slovenia, 2019).
The deficit in the pension system is projected to reach 6% of GDP by 2050, requiring larger inter-generational transfers from younger to older generations to sustain the pension system (European Commission, 2018c). OECD micro simulations show that this reflects that the majority of workers contribute less over their work life than they will receive in pension benefits during their retirement. This reflects a general lack of actuarial fairness in the pension system, which combined with the higher old-age dependency ratio leads to large intergenerational transfers.
In late 2019, parliament adopted an increase in replacement rates for men and women to a unified 63.5% and stronger incentives for continued work for workers who are eligible for full pensions. No financing mechanisms were adopted. OECD microsimulations show that the higher replacement rates lead to a 20% increase in intergenerational transfers. Appropriate financing mechanisms are urgently required to close the current financing gap as well as address the fiscal consequences of the higher replacement rates, this requires lengthening working lives by 5 years and moving to price indexation of pension benefits.
Figure 1.28. The effective retirement ages are among the lowest in the OECD
2018
Source: OECD (2019l), Pensions at a Glance 2019: OECD and G20 Indicators, OECD Publishing, Paris.
Part of the transfer in the pension system from men to women arise from the longer female life expectancy. The other part will be reduced with the alignment of female and male accrual rates. Nevertheless, there is also a need to phase-out special early retirement rules for child caring, currently allowing up to four years of earlier retirement and additional accruals. The unemployed, like in many other countries, receive a transfer through the public employment service’s payment of their pension contributions. Unlike in other countries, the older unemployed are treated favourably as benefit duration increases with age and they have their contributions paid longer. Such age specific rules should be evaluated and curtailed to secure equal and fair treatment and stronger work incentives.
Nearly two-thirds of all employees are enrolled in second pillar pension plans. However, accumulated savings are among the lowest in the OECD. This reflects that contributions are low as contributors benefit from relatively generous tax advantages up to a relatively low contribution ceiling. Enrolment and savings could be encouraged by introducing automatic features, such as automatic membership, and increasing contributions over time while preserving choice by allowing opt-outs (OECD, 2018d). In addition, higher contributions could be encouraged by reducing the tax advantages while applying them to higher contributions. Higher participation of low-income workers could be encouraged through matching contributions from the state contributions within a neutral tax expenditure framework.
The health and long-term care systems are poorly prepared for ageing
The health care system addressed the health crisis rapidly and effectively. Moreover, its efficiency compares favourably with peers, for example with lower spending compared with countries with similar outcome. Nonetheless, structural problems in the sector raise cost, quality and safety concerns. For example, there are long waiting times and other signs of insufficient capacity (Figure 1.29). Moreover, health care spending as a share of GDP is relatively high compared with peers in the region and with similar income levels, financing a health care system that provides broad coverage in terms of services and insurance of the population. Population ageing will increase and change the demand for health services. Consequently, health care spending is set to increase faster than GDP (Table 1.7). Containing these cost pressures will rely on reforms that promote efficiency, effectiveness and satisfy changing health demands. In many cases, such reforms can rely on making existing economic instruments effective.
The public health insurance system covers a very broad range of services with demand contained through relatively high co-payments. However, the widespread use of complementary health insurance means that the price signal in co-payments is not effective in regulating demand. Cost-efficiency should be pursued by establishing an explicit positive list for services covered by the national health insurance fund that exclude non-core and out-of-date procedures while allowing for lower co-payments. Moreover, the fund should be allowed to enter selective contracting, using performance-oriented contracts based on evidence-based clinical pathways and treatments (Panteli et al., 2015). Complementary health insurance could play a greater role in cost containment by allowing insurance companies to compete and offer insurance packages that correspond to individual needs, providing incentives to reduce health spending. This should be complemented with an improved risk equalisation mechanism.
In primary care, the general practitioners-to-population ratio is relatively low, leading to high number of visits to emergency units (40% of the total) and an over-referral to specialists (National Institute for Public Health, 2019). GPs are remunerated through non-cost-reflective capitation (payment for each patient registered with the GP) and fees-for-services. Making remuneration cost-reflective would enhance GPs’ incentives for accepting more care-intensive patients, expand their service provision and make it more attractive to become a GP or for them to move to under-served areas (OECD/European Observatory on Health Systems and Policies, 2017).
Figure 1.29. Waiting lists lead to unmet needs
1. 2019 for Austria, Denmark, Finland, Hungary, Latvia and Poland.
Source: OECD Health Statistics database; and Eurostat EU SILC database.
The many (government-owned) smaller general hospitals offer a wide range of services, creating a risk of too infrequent interventions to secure efficiency, care quality and patient safety (Panteli et al., 2015) (OECD, 2017e). Signs of inefficiency include low bed occupancy rates, long stays for some common interventions, low levels of day case surgeries and few MRI and CT scans per capita (OECD/EU, 2018) (European Commission, 2019b). Moreover, hospitals have little autonomy to adjust their supply of services, contributing to waiting lists. Overcapacity should be addressed by establishing national guidelines for the required minimum number of interventions to maintain a service and give management greater responsibilities for service supply decisions. Cost-reflective payments for hospitals’ in-patient treatments would help supply decision-making. This requires regular updating of the diagnosis related groups (DRGs) (OECD/European Observatory on Health Systems and Policies, 2017). Budget targets for individual hospitals would enable them to respond to the output and efficiency incentives in the DRGs (OECD/EU, 2018). In addition, doctors should have a salary system with competitive wages and transparent performance incentives.
The under-developed long-term care sector (LTC) has many different providers, each with their own (and often overlapping) legislation, eligibility criteria and financing, leading to uneven access (Figure 1.30) (European Commission, 2019b) (IMAD, 2018a) (Nolte et al., 2016) (European Commission, 2019b) (Normand, 2016). Particularly, home care is underdeveloped compared with other countries, and there is little rehabilitation to enable older people to stay in or return to their home (OECD, 2019e). A unified framework for long-term care based on common legislation and eligibility criteria is needed (European Commission, 2019b). Financing should be centred on health insurance for medical long-term care, while home care elements could be financed through means-tested user fees and vouchers for low-income recipients. Moreover, there is a need to integrate regulation and provision of community nursing and home help. The supply of LTC could be expanded by encouraging entry of new and innovative providers by making public tenders for institutional and home care outcome-focussed.
Figure 1.30. Public long-term care spending is relatively low
Public long-term care spending as % of GDP, 2016
Source: European Commission (2018c), "The 2018 Ageing Report - Economic & Budgetary Projections for the 28 EU Member States (2016-2070)", Directorate-General for Economic and Financial Affairs, Institutional Paper 079, Luxembourg.
Table 1.8. Past recommendations on pension, health and long term care systems
If the main reforms presented above are adopted, the fiscal impact would be large and positive, creating fiscal space over the medium-term that could be used to support growth (Box 1.3). The space could, for example, be used for growth-enhancing infrastructure investments, such as public transport. Another approach could be to lower taxes to stimulate labour supply and provide stronger business investment incentives. Alternatively, the savings could be used to reduce public debt, which would create fiscal space in the future to finance increasing ageing-related spending.
Box 1.3. Quantifying the impact of selected policy recommendations
Table 1.9 presents estimates of the fiscal effects of some of the recommended reforms. The quantification is merely indicative and does not allow for behavioural responses. Table 1.10 quantifies the impact on growth of the main reforms recommended in this Survey.
Table 1.9. Illustrative fiscal impact of recommended reforms
Fiscal savings (+) and costs (-) after 10 years
Note: Pension reform calculations are based on OECD’s micro-model of the Slovenian public pension system.
Source: Balázs and Gal (2016), "The quantification of structural reforms in OECD countries: A new framework", OECD Journal: Economic Studies, Vol. 2016/1, Balázs (2017), “The quantification of structural reforms: taking stock of the results for OECD and non-OECD countries”, OECD Economics Department Working Papers, and OECD’s microsimulation model of the Slovenian pension system.
Table 1.10. Illustrative impact on GDP per capita from structural reforms
Difference in GDP per capita level from the baseline 10 years after the reforms, %
Pension reform calculations OECD calculations based on Balázs and Gal (2016), "The quantification of structural reforms in OECD countries: A new framework", OECD Journal: Economic Studies, Vol. 2016/1, Balázs (2017), “The quantification of structural reforms: taking stock of the results for OECD and non-OECD countries”, OECD Economics Department Working Papers, and OECD’s microsimulation model of the Slovenian pension system.
The dynamics of the labour market are changing
The current crisis is temporarily increasing the number of job seekers, which is likely to increase the risk of long-term unemployment. However, over the longer term, population ageing is leading to a smaller and older labour force and, hence, more permanent labour shortages. Consequently, growth will increasingly have to rely on improving labour utilisation and on workers having the necessary education and training to benefit from new technologies, especially digital technologies, in a globalised world. The short-term challenge is to avert protracted scarring effects in the workforce, including by bringing low-skilled and hard-to-employ job seekers into employment, while the longer-term challenge is to secure labour market institutions that promote labour mobility (across firms, occupations and regions) and improve human capital formation.
Prior to the crisis, older workers were increasingly using social security systems, such as unemployment benefits, disability and social assistance, as pathways to early retirement (Figure 1.31). This trend could be accelerated in the currently weaker labour market. It reflects the social security systems’ favourable rules for older workers (+55), such as twice as long benefit duration as younger recipients. Likewise, older workers can qualify for permanent full disability pensions even if they retain some work capacity. Access is relatively lenient as eligibility assessments only focus on current employment and there is no mandatory occupational rehabilitation. Reforms should focus on removing age-based regulation, extending disability eligibility assessments to other occupations and increasing the very low enrolment in occupational rehabilitation. In addition, unemployment benefit (UB) duration for workers above 60 could be reduced (severance pay is a legal requirement), complementing the recent lengthening of the qualifying period to gain UB eligibility for older workers.
Figure 1.31. The number of older unemployed persons (+60) is increasing
Breakdown of registered unemployment by age group, annual average
Note: The annual average for 2020 refers to the months from January to May.
Source: Employment Service of Slovenia (ESS).
The relatively low spending on labour market programmes has a focus on short-term measures, such as employment subsidies and direct job creation, which still benefit easy-to-integrate unemployed persons. Redirecting the bulk of employment and training subsidies to job-seekers with high assistance needs would better exploit the job opportunities presented by the strong labour market. The planned statistical profiling of job seekers will improve identification of difficult cases and direct resources to their best use. This could be combined with stronger work incentives in the tax-benefit system by reducing tax and social security contribution rates through base broadening and tapering off benefit withdrawal (Vodopivec et al., 2015). This should be complemented with in-work benefits linked to hours worked (Hoynes and Blundell, 2013).
Improving labour reallocation to support the recovery and long-term growth
The scope for differential wage developments is reduced by administrative extensions (which ensure agreements cover the whole sector), and the limited use of derogations and opt-out clauses (OECD, 2017f). Consequently, workers tend to receive similar wage increases within a very compressed wage structure, disconnecting individual productivity and wage developments. The disconnect between wages and productivity limits incentives for job-change, increased efforts and training. Indeed, participation in lifelong training is lower than elsewhere (Chapter 3; Figure 1.34). More decentralised wage determination where wages are negotiated at the firm level and framework conditions (such as vacation and pension issues) are negotiated centrally could better support growth and incomes, as in Denmark for example. This could be combined with measures (as in France and Spain) to further restrict the use of administrative extensions.
Other legal requirements in the wage formation process hinder a more efficient labour utilisation and allocation. These include seniority bonuses, which hamper the alignment of wages with experience-based productivity increases. Likewise, one of the highest minimum wage relative to the median wage increases unemployment risks for low-skilled workers, reduces wage flexibility at the lower end of the wage scale, and risks reducing training incentives, leading to low skilled workers being locked in low-paying jobs (OECD, 2017f). Reform options include keeping minimum wage increases lower than median wages over time or let social partners determine the appropriate level of minimum wage and experience-based bonuses. Introducing a reduced minimum wage for new labour market entrants could be a possibility, for example, through step-wise increases with age as done in Australia, the Netherlands and the United Kingdom. Another reduced minimum wage could be introduced for long-term unemployed persons as done in Germany (Kalenkoski, 2016; OECD, 2015a).
A more flexible wage setting would provide better information about changing skills needs. Failure for workers to realise their training needs lowers productivity, occupational mobility and increases unemployment risk (Adalet McGowan and Andrews, 2015) (OECD, 2016d). This particularly affects older workers, who often lack basic skills (Chapter 3). The trend over the past two decades has been that the skills demanded in the labour market are moving from middle-skill to high-skill and, to a lesser extent, low-skill jobs, while the share of middle-pay jobs is increasing more than elsewhere (Figure 1.32). This process is likely to continue as OECD research suggests that large shares of advanced economies’ workforces will see significant change in their jobs due to automation, mostly due to major changes in tasks for existing occupations rather than the disappearance of professions (Nedelkoska and Quintini, 2018).
Figure 1.32. Job polarisation is increasing
Note: In Panel A: High-skill occupations are: managers, professionals and technicians and associate professionals; medium-skilled occupations are clerical support workers, skilled agricultural, forestry and fishery workers, craft and related trades workers and plant and machine operators and assemblers; low-skilled occupations are service and sales workers, and elementary occupations. The armed forces and non-responses are not shown. In Panel B low-paid jobs are those paying less than two thirds of the median wage, while high-paid jobs are those paying more than 1.5 times the median wage. The OECD average is the unweighted average generally for 2006-16.
Source: Eurostat; and OECD (2019h), OECD Employment Outlook 2019.
Adequate skills are important for the ability to adopt digital technologies – a key to improve firm performance and reduce unemployment risks (Sorbe et al., 2019). However, harnessing the possibilities of new information technology requires workers with better digital skills that are upgraded throughout working lives (Figure 1.33; Andrews, et al, 2018; OECD, 2019f). In Slovenia, investment in adult training and the share of firms receiving subsidies or tax incentives for training purposes are low. When provided, training is rarely considered useful (OECD,2019i). Furthermore, mostly better-educated and younger workers participate in life-long learning, while few low-skilled workers enrol (Figure 1.34). More flexible wage setting would provide better signals about training and education needs and bolster lifelong learning incentives. In addition, other OECD countries have introduced training funds (Italy), income-contingent loans (Finland) or individual learning accounts (France) (Chapter 3; OECD, 2019i).
Figure 1.33. Adults’ digital skills are low
Share of the population with more than basic skills, 2019
Source: Eurostat Digital Skills database.
Figure 1.34. Participation in life-long learning can be raised further
Note: Includes formal as well as non-formal education and training. The reference period for the participation is the four weeks prior to the interview. Low educational attainment refers to below upper secondary education (ISCED 0-2) and high refers to tertiary education (ISCED 5-8). In Panel D, multiple responses are allowed.
Source: Eurostat, Education and Training database.
The government could raise the awareness of the need for digital skills by increasing its own use of digital technologies. For example, government websites are used relatively little and only rarely for direct interaction (Figure 1.35). The government could also support the digital transformation by expanding electronic interaction with the private sector (OECD, 2019g). The effect of such measures are likely to raise public sector productivity, the quality of services and promote private sector adoption of digital technologies (Andrews et al., 2018).
The supply of the education system is slow in adjusting to new labour market demand. Over the past couple of decades, employment growth for high-skilled workers has been relatively high and the supply of university graduates has increased. Today, nearly 60% of the population aged 20 is enrolled in tertiary education as compared with the OECD average of 40%. Moreover, tertiary output is focussed mostly on social sciences and humanities rather than technical skills (OECD, 2015b). In 2019, tertiary graduates’ employment growth slowed. This reflects that in the current economic recovery, occupations most in demand have been those that require low- to medium skills level (Bank of Slovenia, 2019d). As recommended in the last Survey, employer surveys should be used to identify skills needs and be combined with better information about private rates of return on education investment. Such information should be used for improved career guidance before and during educational enrolment (OECD, 2017f). Moreover, all vocational training programmes should have a higher work content with strong links to firms (OECD, 2017f). An additional measure would be to reduce the number of regulated professions, especially for occupations in shortage, to encourage students entering such fields.
Figure 1.35. Digital government is less advanced in some respects
Use of digital government services by individuals, 2019
Source: OECD ICT Access and Usage by Households database.
Geographical mobility is low, hindering workers’ adjustment to changing circumstances such as the introduction of new technologies and contributing to low labour market turnover (Figure 1.36; OECD, 2019h). The main factor behind low geographical mobility is the dominance of a rigid owner-occupied housing market with large regional price difference, which creates affordability issues and credit hurdles. (Caldera Sánchez and Andrews, 2011; Causa and Woloszko, 2019). Also, low property taxes, arising from low rates and the use of non-market based valuation, reduces the costs of holding vacant land and property (Petrović and Mežnar, 2015). Tax favouring of owning houses relative to other assets is another contributing factor for the high ownership rate (OECD, 2018e). Real estate should be taxed in line with other assets to remove investment bias. The small private rental market is dominated by short fixed-term contracts. Regulation that better balances the interest of tenants and landlords is needed, and should include better possibilities for terminating long-term contracts, clear rules for deposits, maintenance responsibilities and transparent and predictable rent adjustments (Petrović and Mežnar, 2015).
Figure 1.36. Labour market turnover is relatively low
Job separation rate, in per cent, 2018
Note: 2017 for Australia and Iceland. Data refer to the difference between the hiring rate and the net employment change.
Source: OECD Employment and Labour Market Statistics database.
Table 1.11. Past recommendations on labour market institutions
Table 1.12. KPI recommendations
References
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