The economy is performing well with strong economic growth and a tightening labour market. The near-term outlook remains positive but risks and uncertainty are high. On the other hand, population ageing will lead to a smaller and older work force, which means that sustaining economic growth and income convergence will increasingly rely on improving labour allocation, raising human capital and facilitating the adoption of new technologies, and in particular digitalisation. In addition, rising ageing-related public spending pressures threaten fiscal sustainability, while problems of access and adequacy issues need to be addressed in the health and pension systems.
OECD Economic Surveys: Slovenia 2022
OECD Economic Surveys: Slovenia
1. Key Policy Insights
Abstract
The recovery continues but is subject to high uncertainty
The war in Ukraine interrupted the strong post-pandemic recovery, although headwinds in the form of international supply chain bottlenecks and higher energy prices were building up. Until then, economic activity surpassed its pre-pandemic levels in 2021. The labour market performance was strong with historically high employment and a low unemployment rate (Figure 1.1). At the beginning of 2022, wage growth slowed, reflecting the withdrawal of pandemic-related one-off government measures. Nonetheless, the tight labour market is expected to put pressures on wages throughout 2022 and 2023. Together with high food and energy prices, this will keep headline inflation elevated. The pace and strength of the recovery remain subject to considerable uncertainty, related to the impacts of the war in Ukraine. The conflict could create an energy crisis, which together with stronger wage growth could fuel a further rise in inflation expectations.
Figure 1.1. The COVID-19 pandemic had severe health and economic impacts
Source: OECD calculations based on Ourworldindata; and OECD Economic Outlook: Statistics and Projections database.
Income continued to converge towards richer OECD members (Figure 1.2). This reflected mostly strong employment increases, whereas the contribution from higher real wages was lower than in other Central and Eastern European economies. Growth was initially supported by faster productivity growth in 2016-2018, but productivity growth slowed prior to the pandemic. Vacancies were mostly filled through migration while potential domestic labour resources remained underutilised as reflected in the low labour force participation of people older than 60.
The COVID-19 pandemic has entailed large social costs, whose effects are still unfolding, as the pandemic has assumed a syndemic relevance, through the impact on social, economic, and psychological aspects of people’s lives. According to the regularly conducted COVID-19 survey of the National Institute of Public Health, young people experienced a particularly large deterioration in their financial situation, likely related to the increase in youth unemployment (see below) (NIJZ, 2021[1]). More generally, financial security was among the most negatively affected areas during the pandemic. Those reporting a worse financial situation were also more likely to report mental health issues, with the share of persons reporting symptoms of anxiety and depression being highest among the 18-29 age group (NIJZ, 2021[2]).
Figure 1.2. Incomes are catching up
GDP per capita gaps to the upper half of OECD countries. Upper half is weighted by the population, % difference
Source: OECD National Accounts database; OECD Economic Outlook: Statistics and Projections database; and OECD calculations.
In 2020, the overall share of people at risk of poverty or social exclusion increased. This was particularly observed for the most disadvantaged groups, such as those with lower education, one-member households and retired women, but also, to a lesser extent, for people with tertiary education and households with more than one income (SURS, 2021[3]) (EAPN, 2021[4]). The pandemic also affected women’s employment, given their high presence in the sectors most impacted by the crisis, such as health care (due to the over-exploitation of a limited workforce capacity), elderly home-care (due to high shares of women’s unpaid work at home) and food and tourism (due to job losses) (Figure 1.3, Panel C) (EAPN, 2020[5]). Another area of concern is education, where results of the national knowledge assessments (NPZ) for 9-grade students for 2020-21 were lower than the average results in 2015-2019 in mathematics, although the number of tested students was too low to derive conclusions on average student performance (RIC, 2021[6]). The pandemic has also entailed a surge in domestic violence, especially against women and children. Police records show that such cases increased by almost 24% by mid-2021 – four times higher than the increases observed in the previous two years in the same period (Figure 1.3, Panel B) (EAPN, 2021[4]) (UNODC, 2021[7]).
Looking ahead, public authorities should not underestimate the long-term consequences of the COVID-19 pandemic on the population’s health and well-being. The National Institute of Public Health expects increasing pressure on the health sector due to mental health problems and a possible rise in chronic non-communicable diseases related to the pandemic (see below). Moreover, social disparities may increase as the social effects of the pandemic have affected groups with weaker socio-economic backgrounds (NIJZ, 2021[8]).
Sustaining recent gains in employment and incomes in the face of an older and smaller workforce requires markedly improved productivity growth. Looking ahead, a key structural challenge is to improve the employment prospects of low-income and older workers through better incentives for life-long learning and improved mobility. Such efforts should be complemented by measures to shift to cleaner energy and new technologies, and accelerate the digital transformation of the economy. These policies should be implemented alongside measures to prepare public finances for the fiscal challenges associated with population ageing.
Figure 1.3. The social costs of the pandemic are still unfolding
Note: In Panel B, data refer to the first 7 months of the year.
Source: NIJZ, Results of the COVID-19 Survey (SI-PANDA); EAPN (2021), Report on monitoring poverty and social exclusion in Slovenia; and OECD Gender database.
Against this background, the Survey has three main messages:
Fiscal consolidation is needed to reduce demand pressures. This does not rule out additional support for most affected households by the energy crisis. But additional support will have to be financed by cuts to other government recurrent spending. Such efforts should be implemented alongside structural reforms to prepare public finances for the fiscal challenges associated with population ageing. This will require first and foremost measures to promote later retirement and longer working lives.
Promoting productivity growth entails measures to raise investment in new technologies, particularly to foster the digital transformation of the economy. Such efforts need to be complemented by measures to improve the employment prospects of low-income and older workers.
Greener growth necessitates further efforts to reduce emissions in a cost-efficient manner by realigning incentives embodied in environmental policies. This calls for the introduction of carbon taxes in non-ETS sectors, notably the residential, commercial and industrial sectors, and the phasing out of exemptions from excise duties.
The pandemic strained the health system
The vaccination rollout in early 2021 initially progressed fast but slowed down by summer 2021 (see below). This contributed to severe fourth and fifth waves in late 2021 and early 2022 (Figure 1.4). The reallocation of health resources to the treatment of COVID patients reduced outpatient and inpatient treatments (Figure 1.5, Panel A). For instance, 51% and 70% fewer patients were referred to inpatient care during the first wave of the pandemic in March and April 2020, respectively (Kuhar, Gabrovec and Albreht, 2021[9]). A consequence was a substantial increase in waiting times for elective surgeries, such as heart problems (Panel B). This suggests a reduced capacity to detect symptoms for many illnesses, such as cardiovascular problems. A concern is that foregone early treatments may potentially lead to more costly treatments in the future and higher mortality, putting additional strains on the health sector. Looking ahead, capacity constraints in hospitals should be addressed by enhancing outpatient care as was discussed in the last Survey (OECD, 2020[10]).
Figure 1.4. The healthcare situation worsened in late stages of the pandemic
Note: In Panel D, the index is a composite measure based on nine response indicators including school closures, workplace closures, and travel bans, rescaled to a value from 0 to 100 (100 = strictest). Unweighted averages for OECD aggregate in Panels A, B and C. In Panel F, the EU aggregate includes all 27 member economies with the exception of Ireland.
Source: Oxford Coronavirus government response tracker; OurWorldinData; Eurostat Demography and Migration database; and OECD calculations.
Figure 1.5. Capacity reallocation may increase mortality from other causes in the future
Source: National Institute of Public Health (NIJZ); and OECD Heath Statistics database.
The pandemic limited physical activity, which potentially compounded the health effects of a general increase in unhealthy lifestyle choices and reduced prevention. The increase in consumption of tobacco, alcohol and unhealthy food was notably high for young people. Looking ahead, such changes are major risk factors for non-communicable diseases (NCDs), such as cardiovascular disease, cancer, diabetes and chronic lung disease (responsible for nearly three-quarter all deaths) (WHO, 2020[11]). Such potential negative long-term health effects are compounded by the decline in health promotion and prevention during the pandemic. For example, in early 2021, nearly 40% of the surveyed population refrained from visiting the doctor due to problems unrelated to COVID-19 (Figure 1.3, Panel A) (NIJZ, 2021[2]) (OECD, 2017[12]). A recent European study on cancer treatment disruptions during the pandemic shows that large numbers of patients were affected by treatment delays (European Cancer Organisation, 2021[13]). While specific data on untreated cancers are not yet available for Slovenia, evidence shows that patients’ waiting times for selected elective surgeries (unrelated to cancer) picked up by almost four months in 2020, reaching some of the highest levels in the OECD (OECD, 2021[14]).
The pandemic had relatively severe health implications as Slovenia registered comparatively high excess mortality, leading to at least one year of lower life expectancy (Figure 1.6) (OECD, 2021[15]). Looking ahead, there are signs that the pandemic is becoming endemic (World Health Organization, 2022[16]), with seasonal COVID-19 outbursts, similar to the flu. According to the World Health Organisation, the best way to treat an endemic disease is to raise vaccination uptake among the population (World Health Organization, 2022[17]). However, vaccine hesitancy is high: only 60% of the population was fully vaccinated by March 2022. Moreover, vaccine scepticism goes beyond COVID-19 as illustrated by low flu vaccination rates and low confidence in vaccination already before the pandemic (OECD, 2022[18]). Better preparedness for future mass vaccinations calls for greater flexibility of the healthcare system. A way forward is to incentivise general practitioners to raise vaccination rates. In the United Kingdom, for instance, the National Health Service provides higher temporary reimbursement rates for COVID vaccinations to general practitioners during peak seasons. Efforts to increase the vaccination rate should be continued.
Figure 1.6. Excess mortality has been high
Excess mortality 2020-2021, %
Note: Excess mortality is calculated by dividing the actual number of deaths by the average number of deaths over 2015-19.
Source: OECD Health Statistics database.
Economic prospects remain good despite elevated risks
The war in Ukraine is having negative impacts on economic activity. The conflict adds to the already high inflation through higher energy and food prices, putting pressure on the outlook for private consumption and investment. Until the outbreak of the war, the economy had experienced a strong recovery. Economic activity surpassed its pre-pandemic level by mid-2021 (Figure 1.7). The economic recovery benefitted from strong private consumption, reflecting fiscal support to households such as pandemic-related wage bonuses in the public sector and the government’s short-time work and furlough schemes. Public consumption also contributed to growth as the government raised pension benefits. Together with stronger international demand, the rebound in domestic demand benefited manufacturing and many service sectors, leaving tourism as the most negatively affected sector. The demand recovery, together with increasing capacity constraints, bolstered investment. Imports grew stronger on the back of buoyant domestic demand, leading to a negative contribution of net exports to growth and a declining current account surplus.
The pandemic caused a number of supply-chain bottlenecks. Nonetheless, industrial production bounced back and by early 2021, output was already higher than before the onset of the pandemic (Figure 1.8, Panel A). Since then, industrial output continued to rise on the back of buoyant demand. Business confidence rose to an all-time high in summer 2021, but has been volatile since then, reflecting prolonged supply-chain disruptions. Consumer confidence continued to recover until summer 2021, when higher inflation started to dampen confidence (Panel B). The war in Ukraine is a key source of uncertainty. Direct trade with Russia and Ukraine is low, although nearly 100% of gas and 17% of oil and petroleum imports come from Russia (Figure 1.9, Panel A). Higher energy prices and disruptions to supply-chains are already weighing on consumer and business confidence. There might be more indirect effects, such as a further rise in energy costs and continued disruptions to international supply chains in the important automotive sector (Panel B). To ensure gas supplies in the event of a stop of Russian gas flows, the government is in contact with other foreign suppliers and is taking steps to secure LNG capacity in neighbouring countries. The war in Ukraine has also led to an inflow of about 18 000 Ukrainian refugees to Slovenia by May 2022. This is significantly less than in other Central European countries such as Poland, Hungary or the Slovak Republic (United Nations High Commissioner for Refugees, 2022[19]). Nevertheless, the government expressed its willingness to host more refugees and granted Ukrainian refugees immediate residence and working permits (Government of Slovenia, 2022[20]; Euractiv, 2022[21]).
Figure 1.7. Economic activity surpassed its pre-pandemic level
Source: OECD Economic Outlook: Statistics and Projections database; and OECD calculations.
Figure 1.8. Production and business confidence bounced back before the war in Ukraine
Note: In Panel A, manufacturing and construction refer to seasonally adjusted production indices, while exports of goods and services are expressed in real terms.
Source: OECD Economic Outlook: Statistics and Projections database; and OECD Main Economic Indicators database.
Figure 1.9. Exports are well diversified
Exports of goods and services, % of total, 2019
Note: In Panel A, the CEEC (Central and Eastern Europe Countries) aggregate includes Czech Republic, Hungary, Poland and Slovak Republic. In Panel B, the category "Machinery and other transport equipment" includes "Other transport equipment" (i.e. "Railway vehicles & associated equipment", "Aircraft & associated equipment; spacecraft, etc." and "Ships, boats & floating structures") and "Machinery" (i.e. "Power generating machinery and equipment", "Specialised machinery", "Metal working machinery", "Other industrial machinery and parts", "Office machines and automatic data processing machines", "Telecommunication and sound recording apparatus", and "Electrical machinery, apparatus and appliances, n.e.s."), in line with the Standard International Trade Classification (SITC) Revision 3, https://unctadstat.unctad.org/en/Classifications/DimSitcRev3Products_Official_Hierarchy.pdf. In Panel A and B, exports to Switzerland are less important once re-export of chemicals and related products are taken into account (only around 1.3% in 2019) (Bank of Slovenia, 2022[22]).
Source: OECD International Trade by Commodity Statistics (ITCS) database; OECD International Balanced Trade Statistics database; and OECD calculations.
Bankruptcies remain below their pre-pandemic levels, reflecting generous COVID-19 related business support, a loan payment moratorium and the temporary halt of insolvency proceedings in 2020 and 2021 (Figure 1.10). Looking ahead, bankruptcies are expected to rise as government support has been withdrawn and the loan repayment moratorium has expired. This will affect in particular the hospitality sector, where non-performing loans have been rising since mid-2021. In addition, bankruptcies may rise in response to higher raw material and energy prices, leading to increasing producer prices. Given the current tight labour market, such a development can free up labour resources for the benefit of firms facing labour shortages. For this to happen, more efficient bankruptcy rules are needed to facilitate the transfer of under-utilised resources back into the productive part of the economy as well as a decentralised wage-setting process that improves the allocative efficiency of the labour market (see below).
Government measures, including the short-time work and the furlough schemes, kept workers in employment during the first waves in 2020 and 2021. This kept the increase in the unemployment rate to only 1 percentage point between early 2020 and early 2021, or nearly 2 percentage points lower than during the similarly sized financial crisis. Another contributing factor was that the public health sector expanded employment (Figure 1.11). Thereafter, strong foreign demand and reduced restrictions allowed the labour market to return to its favourable pre-pandemic situation. Employment growth was broad-based with the exception of tourism. The labour market is very tight. By the end of 2021, employment reached a historic height, while the unemployment rate returned to its pre-pandemic level. The tight labour market is also reflected in rising labour shortages (Figure 1.12) (see below).
Figure 1.10. Government support averted bankruptcies
Number
Source: IMAD, Productivity Report 2021.
Figure 1.11. Employment growth is broad-based
Source: Statistical Office of Slovenia.
Figure 1.12. The labour market is tight
Note: Data are seasonally adjusted.
Source: OECD Main Economic Indicators database; OECD Labour Statistics database; OECD National Accounts database; and OECD calculations.
The inflow of mainly low- and medium-skilled immigrants was reduced in 2020 as the pandemic led the government to close the border (Figure 1.13). Thereafter, the inflow of foreign workers rose sharply again to levels seen before the pandemic as COVID-related restrictions were eased and labour demand grew strongly. Given the shortage of domestic labour, immigrants and cross-border commuters accounted for more than 50 per cent of new hires in 2021 (Statistical Office of Slovenia, 2022[23]). However, the inflow of low- and medium-skilled workers from neighbouring ex-Yugoslavian economies is not sufficient to meet strong labour demand, especially in the construction and tourism sectors. Looking ahead, Slovenia will face stronger competition for foreign workers as labour shortages continue to materialise in richer OECD countries.
Figure 1.13. The number of foreign workers is rising again
Source: Statistical Office of Slovenia; and OECD calculations.
The crisis interrupted strong nominal wage growth 2020, which resumed again in 2021, reflecting the pandemic-related short-time work and furlough schemes as well as wage supplements in the public sector (Bank of Slovenia, 2022[24]). Wage growth slowed in early 2022 as these one-off measures were withdrawn before picking up again in spring 2022 on the back of higher wage growth in the private sector. The tightening labour market is expected to contribute to higher wage inflation in 2022 and 2023. Another driver of wage pressures is the minimum wage increase of 5% in early 2022, which affected 15% of all workers (Tax Administration of the Republic of Slovenia, 2021[25]). Earlier increases in the minimum wage relative to other wages reduced the job prospects of mainly low-skilled young unemployed (Laporšek, Vodopivec and Vodopivec, 2019[26]; Laporšek et al., 2019[27]) (OECD, 2020[10]). The strong minimum wage hike may have contributed to keeping their unemployment high during the post-pandemic labour market upswing as well (Figure 1.14). Yet real wage growth turned negative by end-2021 as consumer price inflation reached a 20-year high (Figure 1.15) (see below). Until then, real wage growth had outpaced labour productivity growth since 2019, reducing the sustainability of continued rapid wage increases (Figure 1.15). Other emerging Central and Eastern European economies had similar price dynamics, helping to preserve external competitiveness. On the other hand, dynamic wage and price developments could fuel a wage-price spiral. Such a development would erode external competitiveness.
Figure 1.14. Youth unemployment has been slow to come down
Source: OECD Labour Statistics database.
Figure 1.15. Wage growth outpaced productivity improvements
Wages and productivity, y-o-y % changes
Note: Labour productivity refers to real GDP (2019 prices) per total hours worked. Real average wages refers to the national-accounts-based total wage bill divided by the number of hours worked in the total economy, deflated by a price deflator for private final consumption expenditures in 2019 prices. Real minimum wages refers to the hourly minimum wage deflated by the consumer price index taking 2019 as the base year.
Source: OECD National Accounts database; OECD Labour Statistics database; and OECD calculations.
Inflation has remained consistently above the ECB’s 2% target since summer 2021 and reached with 8.7% a 20-year high in spring 2022 (Figure 1.16). Initially, the increase in inflation reflected mostly higher energy prices in early 2021. Inflation has continued to increase as domestic price pressures have been rising sharply since mid-2021. Goods price inflation began to accelerate as consumer demand shifted from services to consumer goods and was fuelled further by global supply chain problems. This was followed by a sharp acceleration of service price inflation since end-2021. The tight labour market is expected to contribute to wage pressures and thus service price inflation throughout 2022 and 2023. The depreciation in the effective exchange rate in early 2022 further added to higher inflation by raising import prices. Since February 2022, the war in Ukraine has accelerated inflationary pressures stemming from higher energy prices. Energy price increases were dampened by the introduction of a temporary cap on fuel prices between mid-March and end-April 2022, before energy prices continued to rise. The price cap is set to increase contingent liabilities from state-owned energy companies by up to 0.2% of GDP. A better targeted measure is direct income support for low-income households, as introduced in April 2022 (OECD, 2022[28]).
Figure 1.16. Inflation pressures remain high
Note: Core inflation excludes food, energy, tobacco, alcohol.
Source: OECD Main Economic Indicators database.
GDP growth is projected to moderate in 2022 and 2023, mostly reflecting the negative impact from the war in Ukraine (Table 1.1). The conflict will add to the already high inflation through higher energy and food prices, putting pressure on private consumption and investment. Nonetheless, economic activity will continue to expand and is projected to close the output gap in 2022. Economic growth will mostly be driven by private demand. Private consumption will benefit from real income increases on the back of a tight labour market. Investment will continue to expand on the back of inflows of EU funds. The labour market is expected to remain tight, with historically high employment and low unemployment rates continuing to put pressure on wages. Together with high and rising fuel and food prices, this will lead to higher headline inflation. The projections are based on the assumption that the Ukraine war will last a year. Additional support to households should be financed by spending cuts elsewhere as the current expansionary fiscal stance risks prolonging demand pressures. On the other hand, a short-lived conflict would remove the need for additional fiscal stimulus.
Table 1.1. Macroeconomic indicators and projections
1. OECD estimates.
2. Contribution to changes in real GDP.
3. Index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook 111 database.
A major downside risk is that a combination of stronger wage growth and the energy price shock could further de-anchor inflation expectations and lead to a wage-price spiral. Another important risk is an embargo on Russian gas supply. On the upside, faster digitalisation, higher-than-expected productivity increases, and better labour utilisation could raise growth prospects. A more intensive use of labour resources and increased immigration could help to reduce wage pressures.
Table 1.2. Events that could lead to major changes in the outlook
Monetary conditions remain accommodative
Monetary conditions have been accommodative with low interest rates on business loans and low spreads over German 10-year government bonds until early 2022, when long-term interest rates started to increase (Figure 1.17). The ECB’s accommodative monetary policy stance was appropriate for Slovenia, as inflationary pressures were low and the economy still recovering. However, strong growth since mid-2021 and a labour market showing signs of overheating suggest that the monetary policy stance fell short of anchoring Slovenian inflation expectations. Indeed, inflation has remained consistently above the ECB’s target since summer 2021. The initial increase in inflation reflected external factors, such as higher energy prices, which were believed to be transitory. However, inflation has continued to increase as domestic inflation pressures, particularly service prices, have continued to rise. Another contributing factor to rising inflation was the depreciation in the real effective exchange rate since the end of 2021, followed by the strong rise in commodity prices resulting from the Ukraine war in early 2022. This supports the notion that inflation expectations have increased and that a price-wage spiral could be emerging, which eventually would lead to a steeper yield curve.
Figure 1.17. Monetary conditions remain accommodative despite inflationary pressures
Note: In Panel A, data refer to loans other than revolving loans and overdrafts, convenience and extended credit card debt.
Source: European Central Bank (ECB) database; Refinitiv Datastream; World Government Bonds.
Looking forward, the European Central Bank is set to raise its policy rate in response to high European inflation. However, Slovenian core inflation is already above the Euro level. Should monetary conditions remain too loose, tighter fiscal would help to contain inflation expectations and avoid higher long-term interest rates with negative consequences for public finances, while also laying the ground for securing fiscal sustainability.
A deeper capital market can support digitalisation
Financial risks in the banking sector are low. Banks remain well capitalised with an average capital adequacy ratio of 18.5%, above national and international regulatory requirements. The sector has been able to continue to provide credit to the private sector in spite of the COVID crisis (Figure 1.18, Panel A and B). Nevertheless, the pandemic has had an impact as the downward trend in the share of non-performing loans slowed since mid-2021, reflecting lower creditworthiness in the heavily affected hospitality sector (Panel C). At the same time, the quality of banks’ loan portfolio declined, as the share of loans with higher default risk began to rise in the professional services and entertainment sectors. There is also a higher default risk of loans that were under the loan repayment moratoria in 2020 and 2021. Another risk to the quality of banks’ loan portfolio stems from rising raw material and energy prices that might lead to a rise in bankruptcies. An additional concern for banks is that increasing interest rates could lead to higher defaults in the housing sector. So far, banks have not reacted by increasing provisions (Bank of Slovenia, 2022[29]). Looking ahead, banks should prepare for the likely increase in loan losses.
More structurally, the overreliance of businesses on bank credit remains a concern for securing financing for new and innovative firms, particularly in the service sector, which is key for faster digitalisation (Figure 1.18, Panel D). The traditional banking sector is not well suited to provide credit to new and riskier digital start-ups with innovative business models but little collateral (Chapter 2). Moreover, banks are also unlikely to step up lending for riskier activities given their declining profitability, which reflects high operating costs and low digitalisation (Bank of Slovenia, 2021[30]) (Panel E).
Public ownership may affect efficiency in the banking sector. For example, the number of commercial bank branches per population remains high (Figure 1.18, Panel F). Currently, the government continues to be the largest shareholder in the biggest bank. State involvement limits private investors’ ability to restructure the bank’s operations. Remaining public shareholdings in the largest bank should be re-examined.
Underdeveloped capital markets hold back digitalisation. Stock market capitalisation remains among the lowest in the EU and the OECD (World Bank, 2022[31]). A factor behind low capital market investment is the limited role of institutional investors, notably insurance companies. In contrast to most other OECD countries, the insurance sector is dominated by state-owned companies, although it is not obvious which market failures are addressed by state-ownership. Moreover, state-owned insurers are less active as institutional investors compared to their privately owned peers in Slovenia. Their investment portfolios consist mostly of low-risk government bonds, leaving investment in equity below levels of insurance sectors in most other OECD countries in 2021 (European Commission, 2019[32]; OECD, 2021[33]). To bolster capital market investment, privatisation efforts should go beyond banks into other areas of the financial sector, notably the insurance sector. This requires reviewing public ownership in the insurance sector to identify which areas can be privatised and following up by developing a privatisation programme for the insurance sector. Other sectors without obvious market failures that would justify state-ownership include tourism (see below).
Figure 1.18. Bank lending is strong but capital markets remain underdeveloped
Note: In Panel B, regulatory capital to risk-weighted assets ratio is calculated using total regulatory capital as the numerator and risk-weighted assets as the denominator. It measures the capital adequacy of deposit takers. Capital adequacy and availability ultimately determine the degree of robustness of financial institutions to withstand shocks to their balance sheets.
Source: Bank of Slovenia; IMF, Financial Soundness Indicators (FSIs) database; Eurostat Financial Balance Sheets database; European Central Bank (ECB) database; and World Bank database.
Financial innovation remains low
Financial innovation is lagging other countries and new market entry by FinTech start-ups is low (Figure 1.19). A concern is the limited progress in reducing entry barriers. For instance, efforts by the central bank to stimulate market entry in Fintech via regulatory waivers have had limited success (Bank of Slovenia, 2019[34]). The Bank of Slovenia established an Innovation Hub, which is dedicated to sharing knowledge and experiences among financial regulators and companies. Other countries have taken a much more proactive stance to favour entry of Fintech companies. In Lithuania, for instance, Fintech start-ups can apply for a Special Purpose Bank licence with lower capital requirements, which allows them to offer basic banking services. The Bank of Lithuania ensures a smooth licencing process not exceeding twelve months, and applications can be submitted in English (Invest Lithuania, 2022[35]). To bolster financial innovation, the regulatory burden, including the lowering of entry barriers, should be evaluated.
Figure 1.19. FinTech development is slow
Number of start-ups per million population, 2021
Note: Based on search “FinTech” in the field “description keywords”.
Source: Crunchbase (database), https://www.crunchbase.com, accessed on 17 March 2022; OECD Demographic Statistics database; and OECD calculations.
The government has taken only some action to accommodate latest FinTech developments (IFLR, 2020[36]). For instance, the government plan to make Slovenia a “Blockchain Hub”, which includes a 2018 action plan to implement blockchain technology and to create a regulatory framework for cryptocurrencies, has remained largely unimplemented. Cryptocurrencies remain unregulated and a specific regulatory framework for Initial Coin Offerings does not exist. A draft law was adopted by the government in spring 2022 that introduced the taxation of capital gains from cryptocurrency assets by five per cent starting at EUR 10 000 (once transferred in a Slovenian bank account), but the objective is to increase fiscal gains rather than to promote a regulatory framework conducive to innovation. To ease the regulatory burden on FinTech companies, a regulatory sandbox could be introduced at the central bank, as done in many other OECD countries (ESAS, 2022[37]). Such a regulatory sandbox allows the supervisor to waive certain financial regulations to ease market entry and strengthen innovation. Regulatory sandboxes can be effective in spurring innovation. In the United Kingdom, for instance, FinTech start-ups entering the regulatory sandbox saw a 15 percent increase in their capital raised after they entered the sandbox, relative to FinTech firms that did not enter the sandbox (Cornelli et al., 2020[38]).
At the international level, Estonia, Latvia and Lithuania harmonised their regulations regarding e-money and payment licenses in 2018 to facilitate market entry of new financial players. Since then, the number of new Fintech start-ups entering the market grew by 70% (Laidroo et al., 2022[39]; Swedbank, 2021[40]; Invest Lithuania, 2022[41]). Regional integration efforts should also go beyond FinTech markets, including more traditional financial instruments such as covered bonds. An example of successful regional integration is again the Baltic area, which led to the creation of a pan-Baltic capital market for covered bonds with a volume of 20% of regional GDP in 2018 (EBRD, 2020[42]; Scope Ratings, 2018[43]). A closer alignment of FinTech regulations with Central European countries would help bolster financial innovation. More generally, the Survey recommended a stronger regional integration of financial markets as another way to strengthen financial innovation (OECD, 2020[10]). So far, however, progress has been slow since 2016 when the Zagreb stock exchange acquired the Ljubljana stock exchange.
Green financing also remains underdeveloped (OECD, 2021[44]). A factor behind the low green investment is the lack of transparency about the criteria necessary to obtain green investment status. To strengthen green financing, regulation is needed to improve the financial disclosure of climate-change related risks. A first step forward is to align the rules for the financial disclosure of environmental costs with the European classification on green investment. Going beyond European legislation in this area could further promote green financing, for example by giving the central bank the regulatory power to verify climate-related risks in ’ the financial statements of financial institutions as in the United Kingdom.
Table 1.3. Past recommendations on easing competition in the financial sector
Adopting a forward-looking fiscal policy
Fiscal policy is becoming pro-cyclical
Fiscal policy has been expansionary since the onset of the pandemic. In 2020, the government implemented a comprehensive fiscal stimulus package of around 5% of GDP to support economic activity and protect people and firms. Adding the effects of automatic stabilisers, the budget balance turned negative and deteriorated by 8 percentage points, leading to a budget deficit of 7.8% of GDP in 2020 (Table 1.4). The bulk of the fiscal expansion was COVID-related and consisted of wage support and direct subsidies to businesses, while discretionary spending on health was less sizeable. On the revenue side, tax deferrals and the exemption of employers’ social security contributions reduced government revenues on a cash basis by nearly 1% of GDP.
In 2021, the composition of the fiscal stimulus changed. COVID-related discretionary spending was scaled back while there was a structural expansion of public investment and consumption. The latter reflected higher pension benefits due to a higher pension indexation and replacement rates, which were not financed by revenue-raising measures or cuts to government spending (see below). As a result, the budget deficit fell only marginally in 2021, reflecting discretionary budgetary measures of 5% of GDP and the continued operation of automatic stabilisers.
The composition of fiscal support changed again in 2022. The fiscal expansion now reflects a large increase in public investment in infrastructure, health and the green transition, which has a limited impact on the structural deficit. However, expansionary fiscal policy is also linked to an expansion of public transfers, which raised the structural deficit. Public transfers are set to increase in spite of lower spending on unemployment benefits. This reflects an increase in pension benefits due to a higher pension indexation and higher replacement rates. Additional temporary public transfers include targeted subsidies to households and businesses to mitigate the effects of increasing energy prices. These measures are expected to maintain the budget deficit at -3.5% in 2022, implying a fiscal consolidation of about ½ % of GDP.
A concern in the current situation is that the labour market shows signs of overheating (see above). This suggests that there is a need for policy measures to contain demand pressures. A faster fiscal consolidation should be implemented to contain demand pressures and prepare public finances for expected ageing-related spending increases. This does not rule out additional support for households most vulnerable to high food and energy prices. But additional support should be financed by cuts to other government spending. Prioritisation can be helped by government spending reviews as done in the United Kingdom for example.
Table 1.4. Fiscal indicators
Per cent of GDP
1. OECD estimates unless otherwise stated.
2. As a percentage of potential GDP.
3. National Accounts definition includes state guarantees, among other items.
Source: OECD Economic Outlook 111 database.
The structural deficit is high. This reflects the above-mentioned increase in pension benefits. In addition, the government passed a labour tax reform in spring 2022 to lower labour costs, which will see an increase in personal income tax allowances and lower personal income taxation for the highest income tax bracket (see below). Plans to raise the currently low property taxation to compensate the associated revenue loss were abandoned. Lower labour taxes are welcome as they will raise the labour force participation and support growth, especially since the tax burden is relatively high compared to other Central European economies (Figure 1.20). Moreover, the tax structure is heavily skewed towards social security contributions (Figure 1.21). However, lower labour taxes also lead to a rise in the structural deficit by 0.7 percentage point in 2022, which eventually will have to be financed.
Figure 1.20. The tax burden is relatively high
Total tax revenue, as % of GDP, 2020 or latest available year
Source: OECD Revenue Statistics database.
Figure 1.21. Revenues from social security contributions are the highest in the OECD
Tax revenue from social security contributions, as % of GDP, 2020
Note: Data for Japan refers to 2019.
Source: OECD Revenue Statistics database.
The labour tax burden is high for all income groups, which discourages moving into employment and up the income ladder (Figure 1.22, Panel A and B). About 87% of additional gross earnings are lost to higher taxes and lower social benefits when a jobless single person takes up employment, which is 11 percentage point higher than the OECD average (OECD, 2018[45]). This means that unemployed workers have fewer incentives to move into employment than elsewhere. Further reducing the high taxes on labour will strengthen work incentives (see above).
High labour taxation also affects the mobility of high-skilled workers. The average tax rates on higher incomes is high, although reforms in 2022 saw the reduction of the tax rate in the top tax bracket from 50% to 45%. Nonetheless, the high tax burden erodes wage gains for high-income workers, making it more difficult to attract and retain high-skilled workers (Figure 1.22, Panel C). In fact, immigration of high-skilled workers is low (see above). To attract foreign talent and Slovenians living abroad, the government could provide a lower, time-limited flat income tax for qualified workers starting from a certain income threshold, as in Denmark, the Netherlands or Spain. For instance, Denmark introduced in 1992 a flat income tax rate of 32% for high-earning foreigners (with monthly earnings above a EUR 9 356 in 2022), limited to seven years. Absent the special tax scheme, workers with earnings above the threshold would face a marginal tax rate of up to 52%. The scheme was very successful in attracting high-skilled foreign workers, with the number of foreigners paid above the eligibility threshold doubling relative to the number of foreigners paid slightly below the threshold after the scheme was introduced (Kleven et al., 2013[46]). Other options to attract foreign talent include easing immigration rules for high-skilled workers from outside the European Union. For example, residence and work permissions could be granted immediately for high-skilled workers (Chapter 2).
Making the tax mix more growth-friendly through further reducing labour taxes, including lower social security contribution rates, and implementing the announced property tax rise would help reduce the structural deficit and secure fiscal sustainability. Such a revenue-neutral reform could be implemented without hurting the poor by having a minimum threshold below which houses are not taxed. This would be relatively straightforward to implement as Slovenia has a system in place to value immovable property using market values. Other options to finance the cuts to labour taxes include raising indirect taxation and removing income tax exemptions. Currently, the standard VAT rate is 22%, although reduced rates of 5% and 9.5% apply for a wide range of goods and services, leading to an effective average VAT rate of 17%. Similarly, the personal income tax base is narrow, reflecting many exemptions and special tax provisions. In total, applying the standard VAT rate to all goods and services to achieve a broader-based VAT rate, and broadening the personal income tax base by reducing personal income tax allowances by 25% could finance an additional 10-percentage point reduction in social security contributions (OECD, 2018[47]).
The relatively high and growing wage bill in the public sector is another concern for the sustainability of public finances (Figure 1.23). This reflects a general lack of a structural approach to wage setting. Austerity measures after the financial crisis led to pay freezes for public sector employees. Then came strong wage hikes as public finances improved on the back of stronger economic growth in the mid-2010s. The government continued to increase public wages in the health sector throughout the pandemic, which might result in a structural expansion of public consumption if wages in other parts of the public sector catch up as foreseen by the unitary public pay system (see below). The result of this stop-and-go approach is that public wage policy has become pro-cyclical. A more structural approach to managing public wages would be to make public wage increases subject to private sector developments and sound budget constraints to moderate the growth of the wage bill as a share of GDP. This could be achieved through cash limits for the overall public wage bill as done, for instance, in the United Kingdom.
Figure 1.22. The labour tax wedge is high
Average tax wedge, for a single person (no child), as a % of labour cost, 2021
Note: The tax wedge is the sum of personal income tax and employee plus employer social security contributions together with any payroll tax less cash transfers.
Source: OECD Taxing Wages database.
Figure 1.23. The wage bill is comparatively high
Compensation of government employees, as % of GDP, 2020 or latest available year
Source: OECD National Accounts database; and OECD calculations.
The uniform public sector pay system is too rigid as pay rises in one sector trigger pay rises in all other sectors. For instance, public wages increased due to large COVID-related bonuses in the health sector in 2021 (see below). Higher wages in the health sector will help keep the sector competitive. However, this may have an impact on public finances by leading to strong wage increases in other public sectors (Fiscal Council of the Republic of Slovenia, 2022[48]). A more differentiated approach to public wages would allow to raise wages for occupations with recruitment problems such as in health and IT. In the United Kingdom, for instance, government departments can set higher wages for occupations with recruitment and retention problems such as in IT or health while overall wage negotiations remain subject to departmental spending limits set out by the Treasury (OECD, 2021[49]). Another approach is to link payment to performance as in France, as discussed in the last Survey (OECD, 2020[10]).
EU funds are providing an important economic stimulus. Additional money from the Recovery and Resilience Facility funds will finance investment in areas that the Survey identified as important for growth, notably in the green and digitalisation transformations, boosting the inflow of total EU funds to an average of 2.2% of GDP per year over 2021-26 (Box 1.1). However, a concern is that insufficient strategic planning, the fragmentation of public sector bodies, and weak inter-ministerial coordination are slowing down the implementation of key legislation, which is a pre-condition for the transfer of EU funds (OECD, 2018[50]; IMAD, 2021[51]) (see Chapter).
To secure the best use of EU funds, spending efficiency should be strengthened. In this respect, an issue is the top-down approach in allocating EU funds. First, priorities are identified at the EU level. Then, the government develops programmes to qualify for EU funding. In practical terms, this means that the government focuses on qualifying for EU funding, and subsequently identifies which areas to focus on. An example for such a top-down approach is the government’s digitalisation strategy, which relies heavily on financing from the EU’s Recovery and Resilience Facility funds to raise investment in ICT. However, relatively little efforts have been put into identifying market failures and other explanations for why firms are investing comparatively little in ICT. For instance, support is provided to both large firms and SMEs that have a digital strategy in place. In contrast, business surveys point to skill shortages as well as burdensome product market regulations as barriers to investment (European Investment Bank, 2022[52]). Better cost-benefit analysis will help make most out of EU funds, along the lines of the different social and economic needs as set out in the government’s digital strategy. To raise spending efficiency, project planning and selection should be improved. A way forward could be the use of input and output benchmarking to identify areas of relative weakness (see Chapter).
Table 1.5. Past recommendations on fiscal policy
Box 1.1. EU funds will support the green and digital transitions
During the 2021-2027 programming period, Slovenia will receive European structural funds amounting to EUR 5.1 billion (6.4% of 2021 GDP). Nearly two-thirds of the funds are from the Cohesion Policy allocations, encompassing the European Regional Development Fund, the European Social Fund, the Cohesion Fund (for countries with a gross national income per capita below 90% EU-27 average), Just Transition Funds and the smaller European Interregional Fund, while the rest is related to the Common Agricultural Policy (European Commission, 2020[53]).
In addition, the NextGenerationEU temporary instruments will provide EUR 2.8 billion to boost the recovery from the pandemic’s social and economic damages as well as facilitate the green and digital transformation. The key component of the NextGenerationEU is the Recovery and Resilience Facility (RRF) which will provide EUR 2.5 billion, of which EUR 1.8 billion are grants and EUR 0.7 billion loans (Figure 1.24). Slovenia will also receive EUR 0.3 billion from the NextGenerationEU’s REACT programme (Recovery Assistance for Cohesion and the Territories of Europe) (Government of Slovenia, 2020[54]). The government plans to utilise the RRF in four priority areas: 1) the green transition, 2) the digital transformation, 3) the smart, sustainable and inclusive growth and 4) the health and welfare area, including investments and reforms in long-term care and social housing (Government of Slovenia, 2020[55]).
Nearly half of the funds will be allocated to the green transition (divided into grants and loans in equal proportions). Half of this will be used to secure a clean and safe environment. This includes investments to reduce environmental-related disasters, improve water infrastructure and services and strengthen the long-term resilience of forests to climate change. Funds will also be used to invest in sustainable mobility, by enhancing public transport infrastructures and increasing the use of alternative transport fuels, as well as improve energy efficiency and reduce greenhouse emissions, by raising the share of renewable energy sources. The rest of the funds will be used to improve energy efficiency in public buildings and support the circular economy.
Figure 1.24. EU resilience funds support many activities
Note: The Recovery and Resilience Facility (EUR 2.5 billion) consists of grants (EUR 1.8 billion) and loans (EUR 0.7 billion).
Source: Government of Slovenia; and European Commission.
A third of allocated funds (mostly as grants) goes to the development of smart, sustainable and inclusive growth. Resources will be devoted to investments in R&D and innovation, boost productivity and improve the business environment conditions to attract investments, as well as support structural reforms in the labour market and pension schemes to respond to challenges posed by the ageing population. Moreover, funds will also be used to reform the education system and vocational training to improve the future workforce’s competences in digitalisation and sustainable development. In addition, resources will be allocated to education and research infrastructures. Investments in the tourism sector and cultural heritage protection are also foreseen in this fund category.
Resources allocated to the health and welfare sector account for 15% of the RRF (mostly as grants). This will primarily focus on measures to support the digital transformation of the health system, improve skills of the healthcare personnel and ensure quality of care. Funds will also be used to strengthen long-term care and make it more accessible and inclusive. The plan also foresees investments in social housing to foster housing mobility and support disadvantaged social groups, such as deprived individuals and the young population.
The digital transformation will be entirely funded through grants (13% of the total RRF plan), including the digital transformation of the public sector and the economy. At the beginning of 2022, the government adopted the Digital Strategy for 2030 (Chapter 2) which was a pre-condition for the disbursement of the EU’s RRF funds.
As argued above, improvements in EU funds spending efficiency are necessary to ensure a full absorption of the allocations. For example, at the beginning of 2022 the ratio of spent over planned EU funds (i.e., Cohesion Policy funds allocated over the 2014-2020 programming period) ranged between 70 and 80% (depending on the type of funds) (European Commission, 2022[56]).
Long-term fiscal challenges need to be addressed
Reducing public debt is a primary concern for many governments. Public debt increased after the financial crisis and again after the COVID crisis. Since 2019, public debt has increased by more than 10 percentage points of GDP. Fiscal consolidation that can lead to a reduction in public debt, and thus to more fiscal space, has only started in 2022. More importantly, there is no medium-term plan to address ageing-related fiscal spending increases, although the Resilience and Recovery Fund Plan set milestones for health and pension reforms to be adopted in the medium term. A faster fiscal consolidation will be needed to prepare for rising pension spending, and restore fiscal space to respond to future crises. Much more decisive and timely action is needed in face of ageing-related spending pressures (see below).
The public debt-to-GDP ratio will only increase moderately over the next decade, before rising considerably if some of the largest ageing-related spending pressures in the OECD are not contained (see below) (Figure 1.25, Baseline scenario). Compared with the last Survey, the public debt-to-GDP ratio is projected to worsen by more than 50 percentage points as a result of recent pension reforms that provided unfunded increases in pension benefit generosity (Baseline 2020 scenario) (OECD, 2020[10]; European Commission, 2021[57]). Public debt could be even higher in case long-term growth is lower than expected (Figure 1.25, Risk scenario).
Structural reforms are needed to secure fiscal sustainability. This includes the containment of projected ageing-related spending of around 7% of GDP by 2050, and which requires an improvement in the structural budget deficit of 3.7% of GDP by 2024, and thereafter a balanced primary balance (Figure 1.25, Consolidation scenario). Such a large fiscal challenge requires measures to sustain growth and reduce ageing-related spending, notably measures to incentivise longer working lives. In addition to increasing the statutory retirement age by 5 years, the tightening of eligibility criteria in unemployment benefit systems would raise the employment rate of older workers (+50) to the EU average, reducing fiscal spending by 3.5% of GDP as discussed in the last Survey (OECD, 2020[10]; OECD, 2022[58]). This would suffice to cover the projected increase in pension spending. However, additional efforts are needed to finance future health-related spending increases.
The recommended reforms in this Survey would substantially strengthen economic growth. The reforms would expand the tax base, creating fiscal space over the medium-term as structural fiscal gains amount to 5.1% of GDP (Box 1.2). For instance, aligning property taxation with the OECD average and broadening the VAT tax base by reducing exemptions would raise revenues by 1.2% of GDP and 1.8% of GDP, respectively. In addition, broadening the personal income tax base by reducing tax allowances by 25% could boost revenues by 0.8% of GDP (OECD, 2018[47]). The resulting fiscal space could be used to strengthen growth through lower labour taxes, or to counter the fiscal challenges associated with population ageing.
Figure 1.25. Spending pressures related to population ageing need to be addressed
General government debt, Maastricht definition, as % of GDP
Note: The baseline scenario assumes that increased spending on health and pensions will add an additional 8.2 percentage point of GDP to annual government spending by 2070, in line with European Commission (2021). The consolidation scenario assumes a primary balance of 0% of GDP from 2024, complying with medium-term objective from the government's Convergence Programme, which is subject to change. The risk scenario assumes that real GDP growth is 1 percentage point lower than currently projected for the entire simulation period, for example if structural reforms fail to raise productivity growth.
Source: Adapted from OECD (2021), 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 (2018), "The 2018 Ageing Report - Economic and Budgetary Projections for the 28 EU Member States (2016-2070)" Directorate-General for Economic and Financial Affairs.
Box 1.2. The impact of selected policy recommendations
Table 1.6 presents estimates of the fiscal impact of selected recommended reforms based on the OECD Economics Department Long-term Model. The results are merely indicative and do not allow for behavioural responses. Table 1.6 quantifies the impact on growth of the main reforms recommended in this Survey.
Table 1.6. Illustrative fiscal impact of recommended reforms
Fiscal savings (+) and costs (-) after 10 years
Source: Simulations based on the OECD Economics Department Long-term Model and (OECD, 2018[47]).
Table 1.7. Illustrative impact on GDP per capita from structural reforms
Difference in GDP per capita level from the baseline 10 years after the reforms, %
Source: Simulations based on the OECD Economics Department Long-term Model.
Pension reforms are needed to secure fiscal sustainability
Population ageing is leading to a smaller and older workforce with negative impacts on the sustainability of the pension system. By 2050, the already relatively high median age of the population will further increase to around 50 years, implying that a larger share of the population will have reached 50 years than almost anywhere else in the OECD (Figure 1.26, Panel A).
A key challenge is one of the lowest effective retirement ages in the EU despite recent increases, leaving Slovenians with longer retirement spans than elsewhere. The employment rate for the age cohort 60-64 remains only half the OECD average while almost no member of the age cohort 65-69 continues to work (Figure 1.26, Panel B). This reflects a retirement age of 60 for workers with a full 40 years contribution period (OECD, 2021[15]). Longer retirement spans combined with the higher old-age dependency ratio will feed into higher spending pressures in both the pension and health systems. Indeed, the projected pension and health-related spending is already among the highest in the OECD and is expected to reach 16% of GDP by 2050 (European Commission, 2021[57]). Only a rise in the labour participation of older workers can bring the pensions system back on a sustainable track. This requires measures to work past the age of 65, including increasing the statutory retirement age and linking it to gains in life expectancy, raising the minimum years of contributions required to retire, and using lifetime incomes to determine pension benefits as opposed to the currently best 24 consecutive years of contributions as discussed in the last Survey (OECD, 2020[10]). In addition, there are other options to finance future pension spending increases, such as higher contribution rates, but such a measure might have negative impacts on labour supply (OECD, 2022[58]).
In addition, many older workers are using unemployment as pathway to early retirement as discussed in the last Survey (OECD, 2020[10]).Unlike in other OECD countries, the older unemployed are treated favourably as their benefit duration increases with age and they have their pension contributions paid longer than younger unemployed, reducing work incentives. Since 2020, older unemployed workers (58+) with an accumulated 28 years of contribution can receive unemployment benefits for 25 months, compared to 12 months for other workers with equal contributions. In order to strengthen work incentives for older workers, the last Survey recommended removing these pathways (OECD, 2020[10]). So far, however, no substantial measures have been taken (Table 1.8). In Austria and Germany, for instance, lower unemployment benefits duration for older unemployed persons led to higher transition rates to employment as discussed in the last Survey (OECD, 2020[10]). Curtailing age specific rules for unemployed would contain ageing-related spending pressures and would help align the employment rate of older workers with the OECD average. Such efforts should be implemented alongside measures to raise labour demand for older workers, including the abolition of seniority bonuses (see below).
Higher pension costs stem mainly from the generous annual pension indexation, which links pensions to 40 percent wage inflation and 60 percent price inflation, and allows for annual discretionary allowances as happened in 2021. As a result, the deficit in the pension system is projected to reach 2.3 percent of GDP in 2022, before doubling by 2030 (European Commission, 2021[57]). To reduce the need for intergenerational transfers, the government should link pension benefits entirely to price developments and eliminate annual discretionary allowances, as recommended in the last Survey.
The deficit of the pension system also reflects that most workers contribute less over their work lives than they receive in pension benefits. As a result, low-and middle-income groups contribute much less than they receive in pension benefits, leading to large transfers in the system, and reducing working and saving incentives (OECD, 2020[10]). This reflects policy measures such as a minimum pension. In consequence, low-income earners with a full career receive a very high net replacement rate of 95% compared with an OECD average of 69% (OECD, 2022[58]). To reduce the deficit, lowering the minimum reference wage is one option to be considered.
Figure 1.26. The median age is high while employment rates among older people remain low
Source: United Nations, World Population Prospects 2019; OECD Labour Statistics database.
Table 1.8. Past recommendations on the pension system
Preparing the health and long-term care systems for ageing-related challenges
Addressing structural issues in the health sector is key to fiscal sustainability. This includes ensuring competitive wages in the health sector. Moreover, public long-term care spending as a share of GDP is relatively low (Figure 1.27). Ageing will lead to different and higher demand for health and long-term care services. Providing needed services while containing cost pressures will require reforms that promote efficiency and satisfy changing health demands.
Figure 1.27. Public long-term care spending is relatively low
Public long-term care spending as % of GDP, 2019
Source: European Commission (2021), The 2021 Ageing Report: Economic and Budgetary Projections for the EU Member States (2019-2070), Directorate-General for Economic and Financial Affairs, Institutional Paper 079, Luxembourg.
Wages in the healthcare sector wages experienced a rise in 2021 due to large COVID-related bonuses. Keeping wages in the health care sector competitive is necessary to avoid health care specialists leaving for better paying jobs elsewhere. However, the rigid and uniform public pay system foresees that the strong wage hike in the health sector may have an impact on public finances by leading to strong wage increases in other public sectors (Fiscal Council of the Republic of Slovenia, 2022[48]). As argued above, a more flexible approach is needed to wage setting in the public sector. This entails wage increases for occupations with recruitment problems such as health. To keep the public wage bill from spiralling out, overall public sector wage increases be subject to sound budget constraints as argued above.
The long-term care system is underdeveloped and fragmented. There are many different providers with their own eligibility criteria and financing, leading to uneven access (IMAD, 2018[59]). Home care is underdeveloped and there is little rehabilitation to enable people to stay in or return to their home (Oliveira Hashiguchi and Llena-Nozal, 2020[60]). To create a level playing field and allow people to organise their own care, the parliament passed a Long-Term Care Act in 2021 that provides a unified framework for long-term care, including a single point of access with common eligibility criteria. A new insurance will come into force in 2025 with pooled funding from the health and pension insurance. However, transfers from the state budget will be necessary to bridge funding gaps for long-term care. Instead, the system should be based on sustainable long-term funding. This entails strengthening health insurance for long-term care. In addition, equal access for all should be secured. This could entail complementing health insurance with vouchers for low-income individuals, as done in Germany.
Table 1.9. Past recommendations on health care
Promoting more environmentally sustainable growth
Many environmental indicators have improved in recent years. The CO2 intensity of the economy has continued to fall. This is despite a failure to expand the share of renewable energy in energy production since the mid-2010s. Only in 2020 – a low energy consumption year – did the share increase, although not enough to reach the EU target of 20% (Figure 1.28, Panel A). On the other hand, a positive effect came from a relatively high share of environmentally related taxes, although this to a large extent reflects relatively high transport fuel consumption (Figure 1.28, Panel A and B). Another positive development has been a stabilisation in the emissions of greenhouse gases (GHG) per capita (Figure 1.29). The pandemic saw a temporary fall in GHG emissions per capita, which will likely reverse on the back of strong post-pandemic growth. On the other hand, little progress has been made in reducing the high share of the population exposed to fine particles (Figure 1.28, Panel C). Looking ahead, reaching the government’s emission objectives in 2030 and 2050 requires an acceleration in the rate of emission reductions (Figure 1.29). Over the past couple of years, relatively few changes have been made to environmental policies, reflecting the policy focus on the pandemic. This contrasts with developments in the 2000s, which saw environmental policy stringency increase more than in most other OECD countries (Kruse et al., 2022[61]). Consequently, only few changes have been made to the most important environmental policy parameters since the last Survey (OECD, 2020[10]). Looking ahead, achieving the emissions objectives requires significantly lower carbon intensity, which means that substantial additional policy measures are needed.
Figure 1.28. Growth has become less CO2-intensive
Source: OECD Environment database; and OECD Green Growth database.
Figure 1.29. Greenhouse gas emissions reductions must accelerate
Net greenhouse gases emissions, tonnes of CO₂ equivalent per capita
Note: The greenhouse gas (GHG) emissions include those from the land use/land use change and forestry sector (LULUCF).
Source: OECD Environment database; OECD Population database; and OECD calculations.
The main emitters of greenhouse gas emissions are the transport and energy sectors
Since the mid-2000s, GHG emissions have increased by a third in the transport sector. In contrast, nearly all other sectors have reduced their emissions. As a result, the transport sector accounts for a larger share of GHG emissions than the OECD average (Figure 1.30). In addition, energy industries (mainly electricity and heating production) account for a relatively large share of emissions despite the increasing share of renewables. This can be linked to the expansion of coal- (lignite-) based power production since 2016. Achieving environmental objectives will require all sectors to contribute, and can only be reached with significant emission reductions in the transport and energy sectors.
Figure 1.30. Transportation and energy account for a large share of greenhouse gas emissions
Greenhouse gas emissions shares, %, 2020
Note: The greenhouse gas (GHG) emissions exclude those from the land use/land use change and forestry sector (LULUCF).
Source: OECD Environment database; OECD Population database; and OECD calculations.
The government’s strategy for achieving environmental objectives is outlined in the Long-Term Climate Strategy (LCS) and the 2020 National Energy and Climate Plan (NECP), which is planned to be revised in 2024. The focus is on supporting environmentally friendly investments and green tax and budgetary policies with an increased use of market-based instruments. These include phasing out the 50% and 70% reimbursements of excise duties on liquid fuels to businesses and agriculture. Moreover, taxes on air pollution (essentially GHG emissions) will be increased so they are harmonised with the price on emission permits, the so-called ETS price, as part of a more general move towards using taxes to a greater extent to promote climate action (Box 1.3). Furthermore, state aid to the business sector is to be conditioned on low-carbon transitions, while promoting the use of private financing. Public procurement is to be subject to stricter regulation to promote green public procurements.
Green budgetary policies take environmental factors and risks into account in annual budgets and medium-term fiscal plans. Such an approach would replace individual measures to promote the green transition in the public sector that have typically reflected initiatives in specific areas rather than a concerted approach. Greening budgetary and planning policies in a consistent manner can be achieved by introducing an internal carbon price to be used in all aspects of public budgeting, planning, procurement and cost benefit analysis for projects with a carbon impact (OECD, 2018[62]). In the UK, for example, all government projects and regulatory changes with carbon impacts include are subject to analyses with an internal carbon price. Such a policy instrument would ensure an alignment of abatement costs across government programmes, allowing better identification and implementation of cost-efficient measures.
Box 1.3. The EU Emissions Trading Scheme and Market Stability Reserve
The EU Emissions Trading Scheme has operated since 2005, covering CO2, N2O and PFC emissions from electricity generation, industry and intra-EEA flights in 23 European countries, amounting to about 40% of total EU emissions. Large emitters are required to hold permits equal to the quantity of their emissions. Currently, a bit more than a third of Slovenian greenhouse gas emissions are covered in the ETS. Until recently, an over-supply of emission allowances, free allocation and low carbon prices led to a limited effect on low-carbon investments in Slovenia.
The Market Stability Reserve from 2019 withdraws permits from the market if thresholds for the number of permits in circulation are exceeded and, from 2023 onwards, can trigger cancellation of permits. This aims to stabilise permit prices and reduce the “waterbed” effect, where additional abatement in one country allows an increase in emissions elsewhere. Together with the more ambitious emission reduction target of at least 55% by 2030, this has contributed to higher ETS prices since autumn 2020. In March 2022, the ETS price reached more than EUR 70/tonnes, surpassing the average taxation of CO2 in Slovenia.
The intermediate 2030 emission objective is to reduce emissions from sectors not covered by the EU’s ETS system by at least 20% compared with 2005. Part of the strategy to meet this objective is to phase out coal in electricity generation by 2033 (only affecting one state-owned power station operating since 2014 and one state-owned coal mine). Currently, practically all gas imports come from Russia. Thus, if coal is to be replaced by natural gas, the associated diversification to other importers could delay the decommissioning. Presently, the coal power station generates a third of all electricity production, using highly polluting lignite. Emissions from the transport sector will increase further in the medium term compared with 2005, before they would have to reach a 2050 net zero emission objective.
Effective carbon taxes vary across sectors and activities
Reducing emissions from non-ETS sectors has relied on a relatively high average pricing of carbon (Figure 1.31). This reflects a reliance on taxation in road transport, although this is well below best performance in the OECD (Figure 1.32, Panel A). However, half of all emissions are subject to low carbon prices, such as those from the residential, commercial and industrial sectors (Figure 1.32, Panel B). This reflects partly that a part of these emissions comes from ETS sectors, but also a prevalence of tax exceptions and reduced tax rates. In total, nearly a fifth of energy use is not subject to any effective carbon price at all, i.e. no ETS price or carbon tax. Moreover, half of all energy use is subject to an effective carbon price that is less than a quarter of an ETS price of EUR 60 – a level that the World Bank considers to be a mid-range 2020 benchmark and a low-end 2030 benchmark for effective carbon reductions (World Bank, 2017[67]). The large differences in effective carbon prices across sectors and activities lead to a substantial variation in abatement costs, increasing the cost of emission reductions (Figure 1.32, Panel B).
For non-ETS sectors, there is a carbon tax of EUR 17.2 per tonnes of CO2 in place - a quarter of the level of ETS prices in spring 2022. NECP foresees an increase in the carbon tax to EUR 30 per tonnes of CO2 by 2030 and that over time the tax should be realigned with the ETS price. This implies that current plans foresee a slow alignment of the carbon tax with ETS prices, entailing a prolonged period with different abatement costs. In contrast, OECD calculations indicates that to reach the government’s 2030 emission reduction target would require an average effective carbon rate of EUR 120/tonnes and twice that level to reach the 2050 net zero emission objective (OECD, 2021[68]). An additional measure in the NECP is the planned abolishment of reimbursements of excise duties on energy products in transport by 2025 and in industry by 2030, or be conditioned on the implementation of emission reduction measures. Alignment of abatement costs across sectors and activities requires a faster increase in the carbon tax in the non-ETS sectors to the level of the ETS price and a phasing out of special treatments. The additional revenues could be used to support population groups that are most vulnerable to higher carbon taxes.
Figure 1.31. Carbon taxation in non-ETS sectors is relatively high
Carbon pricing score at EUR 60 per tonne CO₂, excluding emissions from the combustion of biomass, %, 2018
Note: The OECD aggregate is an unweighted average.
Source: OECD Tax and Climate database.
Figure 1.32. Exemptions reduce effective carbon rates
Note: In Panel A, the total effective carbon rate (ECR) corresponds to the average of the six sectors' ECRs weighted for the sectors' emissions.
Source: OECD (2021), Effective Carbon Rates 2021: Pricing Carbon Emissions through Taxes and Emissions Trading, OECD Publishing, Paris, https://doi.org/10.1787/0e8e24f5-en.
Emission reduction incentives in passenger transport have weakened
The policy for decarbonising the car fleet has been updated over the past half-decade to promote the use of electric vehicles (see below). The objective is to reduce emissions from private cars by gradually lowering the permitted emissions, so that after 2030 new cars are only allowed to emit less than 50 grams of CO2/km. However, the car fleet has become less environmentally friendly with an ageing fleet with a higher share of cars with diesel engines (Figure 1.33, Panels A and B). A contributing factor to this development was a relatively low taxation of transport fuels. In addition, the difference in tax treatment of gasoline and diesel did not reflect the 14 % higher carbon content in diesel until 2021, when transport fuel taxation was lowered, but more so for petrol taxes, leaving them 4.1% below that of diesel (Figure 1.33, Panel C). This lasted until early 2022, when excise taxes on transport fuel were lowered temporarily, and particularly for diesel, in response to increasing energy prices, reverting back to relatively low taxes on diesel. Moreover, the vehicle taxation that is partly based on CO2 emissions has not been effective in promoting a cleaner fleet. To reverse the increasing emissions from transport, the government should, once the temporary excise tax reductions expire, increase taxation of transport fuels and relatively more so for diesel to reflect its higher environmental harm. In addition, the government could consider basing the annual road usage fee on environmental factors, although a distance- and congestion-based road pricing system would have larger environmental effects. This could be combined with more ambitious regulatory measures, such as the EU’s proposed zero limit for emissions from 2035 or bans on diesel engines and the halt to sale of combustion engines earlier than 2035.
Figure 1.33. An aging car fleet is increasingly based on diesel
Source: Eurostat; and European Environment Agency.
Incentives for passenger road transport have increased. In 2021, the fixed value commuting allowance (equal to the price of public transportation) was replaced with a tax free reimbursement rate of EUR 0.18 for each kilometre of commuting (or a fixed sum of EUR 140/month), greatly reducing commuting costs. The reimbursement rate can differ in the private sector, depending on the relevant labour market agreement. The reimbursement rate per litre of transport fuel for a car with average energy efficiency was higher than the price of transport fuels in early 2022. Moreover, the allowance is about 50 times higher than the CO2 tax, nullifying the tax’s emission reducing effects. In addition, the new allowance reduces incentives for using public transport, countering the government’s strategy. In addition to expanding passenger train services, this includes a roughly 20% increase in regional public bus services and the introduction of more attractive ticketing schemes and better integrated planning and management of regional bus and train services. The increasing average age of cars means that the composition of the car fleet only changes slowly, so for road transport to contribute significantly to emission reductions, the government should envisage a relatively fast phasing out of the commuting allowance. This should be combined with distance and congestion-based road pricing to capture other non-climate change-related negative external effects from road transport, such as congestion and local air pollution, among other things, as recommended in the last Survey (OECD, 2020[10]).
The sale of electric vehicles is supported by a special low purchase tax rate of zero and direct subsidies up to EUR 4 500 – similar to measures in many other European countries (European Automobile Manufactures Association, 2020[69]). In addition, newer measures include linking vehicle taxation only to emissions, reducing taxation of private usage of company electricity cars to zero, and full VAT deduction for purchases of electric company cars. Nonetheless, the share of electric vehicles remains relatively low at ½ % of the total car fleet, although sales account for a larger share of new registrations. This may be linked to the fact that Slovenia has relatively fewer charging location than other European countries (Electromaps, 2022[70]). Moreover, the stations tend to be clustered around larger cities (particularly Ljubljana and Maribor) and other population and traffic centres, leaving smaller towns and remote areas relatively underserved (Prah, 2022[71]). Looking ahead, increasing the use of electric vehicles should be supported by higher taxation of transport fuels and a better developed network of charging stations. An annual road fee that is based on environmental factors could also help in this respect.
Public train transportation has on average lower total CO2 emissions per passenger kilometre than other types of passenger transport, reflecting electrification of trains and the high share of renewables in power generation (Table 1.10). However, the average CO2 emissions cover a very broad range of emissions from different train services, reflecting that public train transportation serves multiple public service objectives, including serving remote and thinly populated areas, providing services outside rush hours, etc. An improved mapping of emissions from various types of passenger train services, such as rush hour, remote areas, weekend and evening services, could together with an internal carbon price help to make public transport more environmentally friendly – an important consideration with the planned expansion of train transportation.
Table 1.10. Emissions from passenger transport
Note: include indirect emissions from electricity generation
Source: Ministry of Environment
Regulation could be supported by economic instruments
In the housing sector, the NECP prohibits the sale and installation of new oil boilers from 2023 onwards. A first key step in this direction should be to implement this measure and broaden it to all fossil-based boilers, including gas boilers. Moreover, a relatively large share of the population is exposed to fine particle pollution, arising from the continued use of older wood boilers and as recommended in the last Survey, the replacement subsidy should be combined with regulatory requirements and financial sanctions (OECD, 2020[10]).
The sectors covered by the ETS system are subject to complementary emission reduction regulatory measures, such as supporting the development of combined-heat-and-power installations and renewable energy systems as well as for investments in energy efficiency and best available technologies from an environmental perspective. A more coherent and market-based approach would be to complement the ETS system with a carbon levy on emissions. The levy should only become effective if the ETS price falls below a certain level to secure more sustained emission reduction incentives. Such a system is in place in the Netherlands, where the floor price is increasing over time to ensure a gradual increase in effective carbon pricing, allowing firms a sufficiently long time horizon to adapt gradually their production technology towards zero net emissions while preserving their external competitiveness.
Investments in renewable energy are supported through a number of national and EU funds as well as a system of feed-in tariffs, which varies across technologies. Eligible beneficiaries are limited by their maximum capacity of 50 MW for wind mills, 20 MW for combined heating and power (CHP) and 10 MW for other renewable energy sources (RES). The technology bias in the feed-in tariff should be removed as recommended in the 2017 Survey (OECD, 2017[72]). The system of feed-in tariffs has evolved so all new beneficiaries are selected through an auction (via a competitive tender). Moreover, for RES and CHP plants, the aid comes in the form of feed-in premiums. Smaller operators can chose between tariffs and premiums. To enable Slovenia to comply with the EU objective of 20% share of energy consumption coming from renewable energy, the support system should evolve further. This could be, for example, by replacing all feed-in tariffs with a standardised feed-in premium as recently introduced in Greece, which would be a more market based instrument that could help reduce public support costs (OECD, 2020[73]). For larger renewable projects, the focus should be on using auctions, which in recent years have led to the instalment of renewable energy projects without the need for public money in a number of countries, including Denmark, the Netherlands, the UK, and the US to mention a few.
The cost-effectiveness of non-market instruments varies considerably. For example, the low use of landfills reflects that the authorities are gradually closing down landfills to achieve an EU target that landfills should only constitute 10 per cent of total municipal waste treatment by 2035 – a target was reached already in the mid-2010s. The reliance on regulation also means that little attention has been paid to raising the very low landfill tariffs (Figure 1.34). Looking ahead, there is a need for putting the limited landfill capacity to best use. This can be achieved by increasing landfill tariffs to at least reflect total costs of landfill management. This would observe the polluter-pays-principle and ensure that the remaining scarce landfill capacity is only used for difficult to treat and recycle waste. Likewise, the very low tariffs for waste and wastewater treatments should be adjusted upwards to reflect associated costs (Figure 1.35).
Figure 1.34. Landfill taxes are low
Landfill tax, Euro per tonne, situation as of 20th August 2021
Note: Data for BEL refer to Flanders; data for FRA refer to the average rates for waste in ‘authorized’ landfills with 75% energy recovery from captured biogas, in ‘authorized’ bioreactor landfill cells with biogas recovery and other ‘authorized’ landfills; data for ITA refer to the maximum tax allowed from national legislation (rates vary from region to region); data for SVK refer to the average of the different progressive rates; data for ESP refer to the average of the different regional rates; data for CHE refer to the average of rates for inert waste, stabilized waste, bottom ash, construction waste and underground landfill in a foreign country. Detailed information is available at the following link: https://www.cewep.eu/wp-content/uploads/2017/12/Landfill-taxes-and-bans-overview.pdf https://www.cewep.eu/landfill-taxes-and-bans/.
Source: Confederation of European Waste-to-Energy Plants (CEWEP).
Figure 1.35. Tariffs for water and wastewater services are low
Tariff for water and wastewater services, USD per m³, 2017 or latest available year
Note: Data for GBR1 refer to Scotland, while data for GBR2 refer to England and Wales.
Source: OECD (2018), OECD Environmental Performance Reviews: Hungary 2018, OECD Environmental Performance Reviews, OECD Publishing, Paris, https://doi.org/10.1787/9789264298613-en.
Table 1.11. Past recommendations on green growth
Stronger business dynamics is crucial for productivity growth
Productivity growth has been weak since the financial crisis. An exception was a short-lived acceleration between 2016 and 2018 on the back of a cyclical upswing in investment (Figure 1.36, Panels A and B). Sustaining income convergence with richer OECD countries in the face of an ageing and smaller workforce requires a markedly better productivity performance, especially among SMEs. However, productivity growth is hampered by low business dynamics, which reflects weak competitive pressures (Figure 1.37, Panel A and B). This is also slowing down digitalisation. Indeed, among SMEs, those that are integrated in global value chains have stronger incentives to invest in new digital solutions in order to remain competitive as they face international competition. In contrast, firms that are focused on less competitive domestic markets are increasingly lagging behind their export-oriented peers in terms of productivity and digitalisation (Panel C and D).
Figure 1.36. Strong investment drove productivity growth before the crisis
Source: OECD Productivity database; OECD Economic Outlook: Statistics and Projections database; and OECD National Accounts database.
Figure 1.37. Business dynamics are low
Note: In Panel A and Panel B, data refer to the business economy except activities of holding companies. The entry rate refers to the birth rate defined as the number of enterprise births in the reference period (t) divided by the number of enterprises active in t. The exit rate refers to the death rate defined as the number of enterprise deaths in the reference period (t) divided by the number of enterprises active in t. The CEEC (Central and Eastern Europe Countries) aggregate includes Czech Republic, Hungary, Poland, and the Slovak Republic.
In Panel C and D, export-oriented firms are those that generate at least 35 percent of their revenues from exports.
In Panel C, labour productivity is measured as value added per employee.
Source: Eurostat Business demography by size class database; and OECD calculations based on business balance sheet and business survey data from the Statistical Office of Slovenia.
A particular concern is low ICT investment among the many domestically-oriented SMEs as these firms account for more than two-thirds of employment and value added in Slovenia, holding back productivity growth and digitalisation of the economy. A factor behind the low investment may be difficulties for these firms to access finance as traditional bank lending is not well suited for ICT investment, risk capital is not easily available and the stock market remains underdeveloped (see above). Easing access to finance can help raise ICT investment, which in turn can lead to significant productivity benefits according to an OECD firm-level analysis carried out for this Survey (Figure 1.38). Productivity benefits of ICT investment became apparent during the COVID-19 crisis, as many SMEs had to rapidly step up their IT capacities and introduce telework to continue operating. Indeed, firms that had invested relatively more in ICT already before the pandemic were able to grow stronger in terms of productivity and employment in comparison to their non-ICT intensive peers (Borowiecki, Giovannelli and Høj, 2022[74]).
Figure 1.38. ICT investment leads to higher labour productivity growth
Annual effect on firm-level productivity growth from an increase in ICT investment and digital adoption, %
Note: Labour productivity is calculated as value added divided by the number of employees. ICT investment is the logarithm of investment in ICT and includes hardware and software, e-commerce is the share of turnover from e-commerce in total turnover, and the adoption of each digital technology is measured through dummy variables indicating whether the firm has adopted the technology or not, including broadband (>100Mbit/s), a website for ordering and booking, cloud computing, social media, and industrial robots. Workers with internet access denote the share of employees with internet access for business purposes in total employees, workers with laptop or smartphone the share of employees with a laptop, tablet or smartphone that gives access to the internet (for business purposes), and ICT training is measured through a dummy variables indicating whether the firm has provided ICT training for its employees or not. A difference-in-difference model was estimated using the COVID-19 shock as natural experiment. Firm-level productivity growth is regressed on the interaction term between the 2020 dummy (capturing the COVID-19 shock) and the ICT investment and digital variables shown above. This interaction term measures whether firms that were more digitalised before the pandemic experienced a greater increase in labour productivity during the pandemic. Controls include capital per employee, exports, age, size, sector and year fixed effects and the digital and intangible variables shown above. Vertical spikes correspond to the 95% confidence interval. Data cover the years 2016-2020. Standard errors are clustered at sector levels.
Source: OECD calculations based on business survey data from the Statistical Office of Slovenia; and Borowiecki et. al (2022, forthcoming).
State-ownership holds back business dynamism
Low business dynamism reflects widespread state-ownership. Despite the privatisation of state-owned assets worth 1% of GDP since 2019, state-owned enterprises (SOEs) account for a larger share of employment than almost anywhere else in the OECD, including in sectors that are inherently competitive such as banking, insurance and tourism (see above) (SSH, 2021[75]) (Figure 1.39, Panel A to C). The share of employment in firms with state-ownership decreased in 2016 and 2017 due to privatisations, before the employment share in SOEs returned to about 11% between 2018 and 2020, according to Business Registry and Annual Accounts information of the Slovenian Statistical Office. Some estimates suggest that SOEs account for up to 20% of non-financial employment once ownership by local governments and cross-ownership are taken into account (Ivanc, Marinšek and Domadenik, 2018[76]). Furthermore, state-ownership has increased in the tourism sector, reversing previous privatisation efforts (see below). The rationale for state-ownership in sectors such as banking, insurance and tourism is not clear as there are no market failures. State-ownership is also a concern for the digital transformation as SOEs lag behind their private peers when it comes to the uptake of new digital solutions, such as e-commerce (Figure 1.39, Panel D). Other barriers to business dynamics include burdensome bureaucracy and rigid labour market regulations.
To bolster more competitive markets and digitalisation, the government should strengthen privatisation efforts particularly in inherently competitive sectors such as tourism. At the same time, privatisation efforts in the banking sector should be completed and considered in the insurance sector (see above). This requires narrowing the group of SOEs that are considered important or strategic based on clear objectives, such as national defence and economic efficiency grounds. An alternative to privatisation is improving the governance of SOEs (see below).
Figure 1.39. State-ownership remains high
Source: EBRD (2020), "Economic performance of state-owned enterprises in emerging economies"; OECD calculations based on business survey data from the Statistical Office of Slovenia; and OECD calculations based on OECD National Accounts database and OECD (2017), The Size and Sectoral Distribution of State-Owned Enterprises, OECD Publishing, Paris, https://doi.org/10.1787/9789264280663-en.
Public ownership expanded in the tourism sector in 2022 as the state asset management company (SSH) and the public pension fund (KAD) purchased a 43.2% stake in SAVA – a major tourism provider – from an international investment group, bringing public ownership to 90% (SDH, 2022[77]). The government considers tourism as a strategic sector and owns already 70% of total hotel capacity (Ministrstvo za gospodarski razvoj in tehnologijo, 2021[78]). In this respect, it is noticeable that tourism in Slovenia remains focussed on cultural heritage. Indeed, the government’s objective is to become the European leader in digitalisation of cultural heritage (Tourism 4.0 (Arctur d.o.o.), 2021[79]). In contrast, modern tourism is increasingly connecting services to create experience-based tourism (OECD, 2019[80]). However, linking cultural heritage and other tourism services is hampered by a lack apps, websites, reservation systems and platforms that can connect tourism services. Developing such individual digital services often depend on nimble actors wanting to develop emerging market opportunities. This suggests that reducing public ownership in the tourism sector would improve the sector’s growth prospects.
The State also owns other assets apart from SOEs, including 14% of agricultural land in Slovenia. About half of this state-owned agricultural land is used for other purposes than agriculture such as gardening for private purposes (Statistical Office of Slovenia, 2015[81]) (Bank of Slovenia, 2021[30]). This reflects that the state does not manage these assets with a view to generate revenues. For instance, rents for state-owned land are regulated below market prices (Table 1.12). The lack of market mechanism leads to a misallocation of state-owned land despite high and growing housing demand (Farmland and Forest Fund of the Republic of Slovenia, 2021[82]). Rents should follow market prices to ensure returns on assets for the state. Moreover, there are no clear rules for converting agricultural state-owned land into urban, buildable land. Having clear rules for selling state-owned land can help housing supply adjust faster to growing demand (see below).
Table 1.12. Regulated versus market rents
2021, in EUR
Note: Agricultural land rent refers to the annual lease for arable land. Non-agricultural land refers to land near residential buildings such as yards and parking lots. Market-based rents for non-agricultural use based on rents for housing in 2020.
Source: Eurostat (2020[83]) and Farmland and Forest Fund of the Republic of Slovenia (2021[82]).
Overall, regulatory barriers are in line with the OECD average. However, in no area is Slovenia close to best OECD practice (Figure 1.40, Panel A). Stronger business dynamics to support faster income convergence requires a regulatory environment that is on par with dynamic market economies in the OECD. This could be furthered by making all new regulations subject to regulatory impact assessments, including on competition (Panel B). Other measures to strengthen competition include bolstering the resources and independence of the competition authority, for example through financing via a standalone line in the state budget as recommended in the previous Survey (OECD, 2020[10]).
Figure 1.40. There is scope to ease market exit and strengthen competition
Note: In Panel A, 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 (data refer to 2018 an 2019). The Stringency of insolvency includes time to discharge, pre-insolvency regimes and the possibility of new financing and cram-down on dissenting creditors. Scores range from 0 to 1 and increase with stringency (data refer to 2016).
In Panel B, the more regulatory practices as advocated in the OECD Recommendation on Regulatory Policy and Governance a country has implemented, the higher its iREG score. The indicators on stakeholder engagement and RIA for primary laws only cover those initiated by the executive, 90% of all primary laws in Slovenia (data refer to 2021).
Source: OECD Product Market Regulation database; Adalet-McGowan et al. (2017), "Insolvency regimes, zombie firms and capital reallocation", OECD Economics Department Working Papers, No. 1399; and OECD Indicators of Regulatory Policy and Governance Surveys 2017 and 2021.
Overly complex insolvency procedures delay the market exit of unproductive businesses. The involvement of courts in insolvencies is higher than in any other OECD country, leading to additional litigation costs for debtors and creditors, although Slovenia has made progress in this area since 2016 (Adalet McGowan, Andrews and Millot, 2017[84]). Particularly now there is a need to strengthen business dynamics as too many over-indebted firms are kept alive, binding too many resources. Barriers to exit, like barriers to entry, decrease the market disciplining mechanisms of the competitive process. Low market exit is a particular concern in the current situation as generous government support during the crisis contributed to historically low bankruptcy rates, pointing to the survival of many unproductive businesses (IMAD, 2022[85]). Other measures that prevented market exit during the pandemics included the loan repayment moratorium and a temporary halt to many insolvency proceedings in 2020 and 2021.
Ensuring that bankruptcies and restructuring are handled as efficiently as possible would help to accelerate market exits and free resources for more productive enterprises. A way forward is to promote timely out-of-court settlements. Such a development could be encouraged by lowering the share of creditors needed to approve out-of-court settlements from currently two-thirds to a half, as recently done in the Netherlands and the United Kingdom. This would prevent restructuring holdouts by minority shareholders. Other options include establishing legal conditions favouring new financing for distressed firms, promoting pre-insolvency frameworks and adopting specific procedures to facilitate SME debt restructuring (Demmou et al., 2021[86]).
Table 1.13. Past recommendations on the business environment
Corruption and lack of public integrity dampen business dynamics
The government has continued to improve the anti-corruption framework. Nevertheless, the perception of corruption remains relatively high, which as described in the last Survey mostly refers to public power being exercised for private gains (Figure 1.41) (OECD, 2020[10]). A third national anti-corruption strategy (2017-2019) contributed to raising awareness of integrity matters amongst public officials, ensuring a more efficient use of public funds and improving transparency in regulations and procedures (European Commission, 2020[87]). In 2020, an amendment to the Integrity and Prevention of Corruption Act sought to strengthen the institutional and legal anti-corruption framework by reinforcing the independence of the Commission for the Prevention of Corruption (CPC), through more transparent procedures for appointing its leadership, and strengthening rules on lobbying, conflict of interest and asset declarations. The principal measures included stricter rules for public servants taking positions in the private sector, the protection of whistle-blowers and broader asset declaration requirements (European Commission, 2021[88]). The Commission has also seen an increase in funding, but challenges remain. Full staffing is still not reached and restrictions on public spending limit the use of already allocated funds. For example, limited human resources had a negative impact on the effective performance of the Commission’s function of monitoring assets declarations of public officials (European Commission, 2021[88]). As recommended in the last Survey, the government should complement the measures to enhance the commission’s independence with ensuring it has adequate resources, powers and procedures to fight corruption effectively.
A fourth anti-corruption strategy is being prepared. The new strategy is expected to also address outstanding issues from the third strategy, such as the measures related to the implementation of integrity tools for the preparation of efficient management plans of state-owned real estate and the adoption of a harmonised code of ethics for the Slovenian diplomatic corps (Government of Slovenia, 2021[89]). A draft whistle-blower protection law is currently undergoing an inter-ministerial review (Slovenia, 2022[90]). The OECD recommends that, when transposing the Whistleblowing Directive, Slovenia should ensure that public and private sector employees who report suspected acts of foreign bribery continue to be protected from disciplinary or discriminatory action. The authority competent to receive reports should also have sufficient human and financial resources (OECD, 2021[91]). Other challenges remain notably in the judicial system, public procurement, political involvement in SOEs and public integrity. The latter, in particular, is key for improving trust in public institutions. Citizens’ trust in institutions, such as the government, the parliament, juridical courts, the police, and the civil service is relatively low compared to other OECD countries (Figure 1.42) (Slovenian Judiciary, 2020[92]) (OECD, 2021[93]). This may have a negative impact on the functioning of public administration in general. For example, it may be a factor behind the low vaccination rate (European Commission, 2021[94])
Figure 1.41. Perceived corruption is relatively high
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-base10d subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v11.
Figure 1.42. Trust in public institutions is low
Trust in government, the parliament and the civil service, %, 2018
Source: OECD (2021), Government at a Glance 2021, OECD Publishing, Paris, https://doi.org/10.1787/1c258f55-en.
The judiciary system has improved in terms of reducing backlogs and the length of trials, although COVID-19-related increases could be observed in both areas in 2020 (European Commission, 2021[88]) (European Commission, 2021[95]). The Supreme Court has introduced innovative judicial practices to improve communication and preparation of judges and increase trust in the judiciary, such as on-line training for new and senior judges, mentorship programmes for new staff and courts users and other stakeholders workshops (Council of Europe, 2019[96]). These measures contributed to a better functioning judiciary system that can deter anticompetitive practices and strengthen public integrity (OECD, 2013[97]) (European Commission, 2020[98]). However, the OECD has expressed concern over the allegations of political interference in law enforcement agencies tasked with investigating and prosecuting corruption and foreign bribery, as well as in public institutions in charge of preventing corruption and raising awareness among public institutions. Such alleged interference risks undermining efforts in improving the regulatory and judiciary system (OECD, 2021[91]). Moreover, the length of trials in complicated white-collar cases, such as money laundering (Figure 1.43), remains among the highest in the EU, reflecting judges’ lack of economic and financial expertise and a scarcity of prosecutors, due to a lengthy process for their appointment, including the recent delayed nomination of the European Delegated Prosecutors to the European Public Prosecutor’s Office (EPPO) (European Commission, 2021[95]) (Council of Europe, 2018[99]). In this context, the statute of limitation for corruption offences, which is generally 10 years (with some exceptions), may be insufficient to ensure the resolution of this type of cases, given the lengthy judicial proceedings (European Commission, 2021[88]). In this respect, better and more specialised training of judges and prosecutors, and measures to accelerate the process for their appointment while ensuring its transparency and safeguarding their professional independence, are needed to better prosecute economic and financial crimes (OECD, 2021[100]).
The strong legal foundation of public procurement has been supported by measures to improve transparency and bolster competition, for example through the promotion of e-procurement and SMEs participation (European Commission, 2020[87]). The Ministry of Public Administration and the Ministry of Health are investigating measures to further improve public procurement, particularly following allegation of political pressures in the rewarding of procurement contracts for medical ventilators (European Commission, 2021[88]) (OECD, 2021[100]). Nonetheless, competition in public procurement remains relatively low and integrity in ensuring compliance with the rules is perceived to be weak (European Commission, 2020[87]). In 2020, nearly half of all contracts were awarded to single-bidders, which was the second highest in the EU. In recent years, more than 25% of contracts were negotiated without any call for tenders, which was among the largest shares in Europe (European Commission, 2021[101]). In terms of EU-funded public tenders, the European Commission's Anti-Fraud Office (OLAF) has recommended financial recoveries for a relatively high share of payments (European Commission, 2021[102]). These findings contribute to the business sector’s high perception of corruption in public procurement with half of all businesses believing that corruption has prevented their company from winning a public tender or a public procurement contract, compared to the EU average of 30%, and almost all businesses considering corruption to be widespread (European Commission, 2019[103]) (OECD, 2021[100]).
Figure 1.43. There is room to improve the efficient prosecution of anti-money laundering cases
Note: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess 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. The figure shows first round results; a second round is ongoing. 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. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).
Public procurement could be strengthened by developing communities (bringing together civil servants as well as key stakeholders within the procurement system) to share best practice, hence helping to share knowledge, develop expertise, build trust and implement solutions faster across the procurement system. This may reinforce the public procurement system by ensuring that information flows correctly between public oversight groups and institutions, as well as supporting the perception that public procurement rules are respected (OECD, 2020[104]). Moreover, initiatives to promote public tender participation of foreign companies should be envisaged to enhance competition in a small-size country like Slovenia, where the number of bidders is often very limited. For example, despite foreign firms being allowed to participate in tenders, the required application documents have to be submitted in the Slovenian language (CSMR, 2022[105]).
Political influence could be reduced in appointments in SOEs boards. Such appointments may represent a source of possible conflict of interests, which should be discontinued. Moreover, governance of state-owned enterprises was weakened between 2018 and 2020, when the assets of the three largest SOEs were transferred from the Slovenian Sovereign Holding (SSH) back into direct state-ownership (Box 1.4). This is not compliant with the OECD guidelines on corporate governance of SOEs of a clear separation between the state’s ownership function and its role of market regulator or industrial policy-maker to prevent conflicts of interest (OECD, 2015[106]). Furthermore, an unclear separation between the ownership and regulatory role of the state may undermine its credibility and reputation in the eyes of the general public and further weaken trust in institutions. The management of SOEs should be kept under the SSH responsibility also for strategic assets.
Box 1.4. Corporate governance of SOEs
In 2015, the government moved supervision and management of most SOEs to the Slovenian State Holding. The advantage of such a move was to promote an arms-length administration of SOEs to limit political influence, separate the ownership role of the state from its regulatory responsibilities, and focus governance of SOEs on performance (OECD, 2021[100]). In 2020, the holding managed more than 50 SOEs with assets worth about 21% of GDP. This arms-length approach was partly reversed with the transfer of assets of the three largest SOEs back into direct state-ownership between 2018 and 2020 (SSH, 2020[107]). The SOEs operate in the energy, insurance and pharmaceutical sector.
The corporate governance of SOEs relies on improving their financial performance through (negotiated) agreements with the holding. However, this is not combined with performance-related pay for SOEs’ managers. In contrast, their salaries are set by law. Increasing performance-based elements in managers’ remuneration could incentivise better financial performance. Another concern is that many SOEs have a high share of politically affiliated supervisory board members.
Without a strong public integrity system, measures to improve the functioning of the judiciary, better regulate the public procurement system and avoid conflict of interest are not enough to prevent corruption. Furthermore, a strong integrity system has beneficial effects on improving trust in public institutions. The involvement of citizens and civil society organisations can further help to enhance this process, by playing a watchdog role in monitoring the government and promoting an efficient allocation and spending of public funds (OECD, 2017[108]). Good initiatives to enhance the participation of both citizens and the business sector in policy-making exist, such as “E-Democracy”, “Stop.bureaucracy” and “I-suggest-to-the-Government”. Yet, trust and satisfaction with democracy are particularly low in Slovenia compared to other OECD countries (OECD, 2021[93]) (Government of Slovenia, 2022[109]) (Government of Slovenia, 2022[110]) (Government of Slovenia, 2022[111]). Indeed, the Council of Europe’s Group of States against Corruption (GRECO) finds that the government has made only modest progress to create an internal mechanism to promote awareness of integrity matters and recommends Slovenia to implement an overall integrity plan to strengthen the ethical conduct of all public institutions and further raise awareness of integrity challenges (GRECO, 2021[112]).
Table 1.14. Past recommendations on public procurement and corruption
Labour reallocation is key for productivity growth and inclusion
Improving labour reallocation will help ease labour shortages in the short-term. Raising labour mobility is also important in the longer-term as ageing will lead to a smaller and older workforce and, hence, more permanent labour shortages. Furthermore, more efficient labour reallocation will also support productivity growth, and thus income convergence with richer OECD countries as labour resources in underperforming firms are freed up to the benefit of more productive enterprises.
The job-to-job transition rate is similar to the European average. However, raising productivity growth, and thus strengthening income convergence, requires more dynamic job transition rates (Figure 1.44) (Engbom, 2022[113]). The wage setting process ensures that workers receive similar wage increases within a very compressed wage structure, creating a disconnection between individual productivity and wages as discussed in the last Survey (OECD, 2020[10]). This leaves workers with few incentives to change job or invest in training to get a better-paid job. Improving labour mobility requires a more decentralised wage setting process where wages are set at the firm level, allowing firms to pay higher wages to attract productive workers. Framework conditions such as seniority bonuses and minimum wages should continue to be set at the sector level, as discussed in the previous Survey (OECD, 2020[10]).
Figure 1.44. There is scope to raise labour market transitions
Labour market transitions, % of average employment, 2019
Note: Labour market flows for European countries are computed as the number of working-age individuals moving between two statuses from one year to another as a share of average employment between these two years. Job-to-Job flows measure job changes from one job to another. Hirings from non-employment and Separations to non-employment include flows from and to both unemployment and inactivity.
Source: Causa, O., N. Luu and M. Abendschein (2021), "Labour market transitions across OECD countries: Stylised facts", OECD Economics Department Working Papers, No. 1692, OECD Publishing, Paris, https://doi.org/10.1787/62c85872-en.
A large state-owned sector and low mobility from the public to the private sector hamper productivity growth. SOEs account for a larger share of employment than in most other Eastern and central European economies (Borkovic and Tabak, 2020[114]). This reflects slow privatisation efforts (see above). What is more, SOEs bind labour resources that can be used more effectively in the private sector. Accelerating the privatisation process could free labour resources for the benefit of more productive firms, which are experiencing labour shortages (Borowiecki et al., 2022 forthcoming).
Rigid labour contracts in the public sector are holding back the hiring of key ICT personal. Currently, eight out of ten public sector employees are civil servants with secure, permanent contracts (Ministry of Public Administration, 2021[115]). However, high-skilled professionals have few incentives to move to the public sector, as their wages would be lower than in the private sector (IMAD, 2019[116]). The public sector could introduce contracts with better pay but with less security to attract high-skilled workers such as IT talent. This would help attract more IT talent to the public sector and help digitalisation efforts by the government.
The compressed wage structure in itself discourages investment in skills and training as associated gains are not rewarded (Chapter 2). Workers do not have sufficient incentives for upskilling, as their wages do not change when they move to a new job. Especially low-skilled workers that do not realise their training needs also face higher risks of unemployment as digitalisation is increasingly shifting labour demand towards medium- and higher-skilled jobs (Box 1.5). Looking ahead, the digital transition will require stronger incentives for workers to adapt their skill set, particularly low-skilled workers that are most at risk of displacement. A more decentralised wage setting can provide the needed incentives for training and thus help workers to faster relocate to jobs where they can better use their skills. Another factor that discourages training is the lack of life-long learning. To support lifelong learning among younger adults and older workers aged 65 and more, the government adopted in 2022 the National Programme of Adult Education in the Republic of Slovenia 2021-2030. The National Programme establishes a system of quality assurance of adult learning providers.
Box 1.5. The impact of digitalisation on the Slovenian labour market
The impact of digitalisation on the labour market was analysed using administrative and business survey data for the period 2016 to 2020 (Borowiecki, Giovannelli and Høj, 2022[74]; Miho, Borowiecki and Høj, 2022[117]). Results show that firms that invest in ICT and adopt digital technologies are creating jobs. ICT-intensive firms in particular have had stronger employment growth since 2016 relative to less ICT-intensive firms. The COVID-19 shock has accelerated this process. During the pandemic, ICT-intensive firms managed to grow in terms of employment. Only manufacturing firms that use robots to automate tasks registered job losses, although the creation of jobs in other ICT-intensive firms more than compensated for these losses.
A concern is that the rigid wage setting process slows down productivity-enhancing reallocation. This is reflected in the finding that ICT-intensive and productive firms do not pay higher wages than their less productive peers. This may reflect that these firms hire mostly young workers aged 35 or younger (see below). This also stands in contrast to economies with more dynamic and mobile labour markets, where workers relocate faster to jobs where they can get higher wages (Engbom, 2022[113]).
Another concern is that state-involvement reduces labour reallocation. Employment growth in high-productivity firms was lower in sectors with a higher SOE employment share. Thus, privatisation efforts can lead to stronger productivity via the reallocation of labour from SOEs to the private sector.
Digitalisation and inclusiveness
Overall, digital firms (in terms of ICT investment) managed to raise productivity and benefit from higher market demand, allowing them to employ more workers. However, this job growth is not evenly distributed: it benefits high-skilled workers, but not low or medium skilled workers (Figure 1.45). Furthermore, younger workers (35 or less) benefit relatively more from digitalisation than older workers (50+) as ICT-intensive firms increasingly hire younger workers. This may reflect that older workers receive a wage premium for age, irrespective of their skill-level, discouraging employers from hiring older workers in the first place.
Figure 1.45. Employment gains have been concentrated among medium- and high-skilled workers
Note: Panel B shows the effect on employment from a 1 percentage point increase in ICT investment. ICT investment includes investment in ICT equipment, software and data. Skill-intensity is measured as occupational skill intensity. A fixed effects OLS panel model was estimated. Log firm-level employment is regressed on investment in ICT for different skill groups, capital per employee, exports, age, size, sector and year fixed effects. Vertical spikes correspond to the 95% confidence interval. Data cover the years 2016-2020. Standard errors are clustered at sector level.
Source: OECD calculations based on Structure of Earnings Statistics of the Statistical Office of Slovenia; and Miho et. al (2022, forthcoming).
Another sign of a rigid labour market is that relatively few graduates move into employment (Figure 1.46). They also often work in jobs for which they are overqualified (Chapter 2). This reflects that the education system is only slowly adjusting to new labour market needs, leading to mismatches between the skills of graduates and the skills demanded in the labour market. The structure of the economy remains heavily dependent on medium-skilled jobs that require strong technical and vocational skills. In contrast, the vocational education system mainly provides theoretical training with few work-based learning elements (Chapter 2). This reflects that apprenticeships remain limited to a small set of traditional vocational occupations, such as carpenter and tool maker. The government is currently studying the introduction of apprenticeships in technical programmes. Apprenticeships should be extended into technical programmes. At the same time, efforts to encourage companies to provide apprenticeship contracts should be strengthened. Such efforts could entail, for instance, information sharing on costs and benefits to employers as done in Austria, Germany, and Switzerland. Other options include matching of apprentices to SMEs by dedicated sectoral or regional agencies, as happens in Australia.
Geographical mobility is low as less than 0.5% of hirings are filled with people moving from Eastern parts to Western parts of the country, or vice versa (Causa, Luu and Abendschein, 2021[118]). A factor behind low geographical mobility is the rigid housing market with large regional price differences, limiting the options for jobseekers from poorer areas to move to prosperous regions. Meanwhile, supply is only slowly adjusting to high house prices. This reflects stringent zoning rules and lengthy processes for obtaining construction permits, which limit the responsiveness of housing supply to changes in demand as discussed in previous Surveys (OECD, 2017[72]; OECD, 2020[10]). A more flexible housing supply could be encouraged by easing regulatory burden. An additional constraint on housing supply is state-ownership of land (see above). Applying market-based rents for State-owned land and having clear rules for selling state-owned land can help housing supply adjust faster to growing demand.
Figure 1.46. Labour market transitions of students are low
Labour market transitions of students, %, 2019
Note: The transitions of study/training to employment, unemployment, and inactivity between t and t+1 are computed as a share of the total students at the period t. The transition from study to inactivity other than study is not reported for the United Kingdom due to data unavailability.
Source: Causa, O., N. Luu and M. Abendschein (2021), "Labour market transitions across OECD countries: Stylised facts", OECD Economics Department Working Papers, No. 1692, OECD Publishing, Paris, https://doi.org/10.1787/62c85872-en.
Another structural challenge is the lowest transition rate from unemployment into a job among European countries (Figure 1.44). Transitions into employment remain low despite the tight labour market (see above). In fact, most jobs created during the post-pandemic recovery were filled by foreign workers. On the other hand, there were relatively few transitions from unemployment into employment. This means that unemployed workers have fewer incentives to move into employment than elsewhere. This affects in particular older workers. A factor behind their low employment transitions may be automatic seniority bonuses that increase with every year of work experience, increasing their risk of long-term unemployment. Such seniority bonuses also lock older workers into their current job, limiting job-to-job mobility and thus hampering the allocation of workers to jobs with higher productivity as discussed in the last Survey (OECD, 2020[10]). Lower seniority bonuses can be set at the sectoral level. So far, however, only construction and trade do so. This means that most sectors fall back on bonuses as set out by national law. Abolishing seniority bonuses or extending the role of social partners in setting seniority bonuses to all sectors could help improve job prospects of older workers.
A barrier to the transition to employment is the relatively high minimum wage. The minimum wage to the median wage ratio is among the highest in the OECD (Figure 1.47). Minimum wage growth is important for improving incomes of the poorest. However, minimum wage increases that are faster than other wage increases reduce the creation of jobs for low-skilled unemployed and training incentives, leading to low-skilled workers being trapped in low-paying, low-skill jobs. To improve job opportunities, the government is providing wage subsidies for low-skilled workers. For instance, the Employ.me (Zaposli.me) programme offers employers a subsidy to employ older jobseekers from Eastern Slovenia. A more efficient solution are wage agreements that ensure that minimum wage growth does not outpace median wage growth, or letting social partners determine the appropriate level of minimum wages at the sectoral level. Other factors behind the lower employment rate of low-skilled workers include skill mismatches (see above).
Figure 1.47. The minimum wage is relatively high
Minimum relative to median wage of full-time workers, ratio, 2020
Source: OECD Labour Earnings database.
Table 1.15. Past recommendations on labour market policies
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