Slovenia

   

Economic Policies

#30
Key Findings
Despite robust growth, Slovenia receives a relatively low overall ranking (rank 30) with regard to economic policies. Its score on this measure has improved by 1.2 points relative to 2014.

Economic growth has been steady and strong, driven by exports and private consumption, and boosted by an improving labor market, rising consumer confidence and low energy prices. EU-funded infrastructure investment has helped pave the way for the return of private investment. An ongoing privatization program has progressed slowly.

Unemployment rates have fallen steadily, reaching 5.2%. Long-term unemployment still represents more than 50% of total unemployment, and employment rates among older and low-skilled workers remain below the EU average. Recent tax reforms have been modest, but the new coalition agreement calls for more substantial reforms.

The budget has reached a point of small surpluses. However, this fiscal adjustment has continued to rely on one-off measures along with ongoing growth. Public debt levels remain comparatively high despite declines, and the country faces a serious long-term sustainability gap. The R&I sector is underdeveloped, but spending is increasing.

Economy

#31

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
6
The Slovenian economy has been growing ever more robustly since 2014, registering an annual GDP growth rate of between 2.3% and 3.2% for the period from 2014 to 2016, and about 5% in 2017 and 2018. While Slovenia’s export performance has remained strong, as evidenced by a current account surplus of about 5% of GDP, the economic recovery has become broader-based as private consumption growth has accelerated thanks to an improving labor market, rising consumer confidence and low energy prices. In addition, public investment in infrastructure projects co-funded by the EU, mostly on the municipal level, have helped to boost growth, and private investment has shown signs of recovery. In 2017 and 2018, the government paved the ground for two major investment projects, the construction of a huge paint shop near Maribor by the Austro-Canadian automotive giant Magna and the construction of a second railway line between Divača and the port of Koper. However, both projects are controversial. While Magna received large subsidies and almost unconditional support from the government for its investment, it failed to exercise transparency in managing the project and to honor initial job promises, and consequently, slowly lost public support. In October 2018, Magna also came into conflict with environmental NGOs over the environmental permit the plant needs to start production in early 2019. The railway project has likewise been criticized for being miscalculated and prone to corruption, and has been delayed because of the need to hold a second referendum on the issue in May 2018. Concerns about the reliability of economic policy have been raised by the limited implementation of the privatization program presented in 2015. The planned sale of 20 companies has progressed slowly. The Cerar government tried to win consent from European Commission and the European Central Bank (ECB) to postpone the sale of the New Ljubljana Bank (NLB) because of inadequate market prices, but failed to gain the support of Brussels or Frankfurt. As a result, the Cerar government handed the controversial topic onto Šarec government, which proceeded with the sale process in late October 2018.

Labor Markets

#26

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
6
As a result of the economic recession, unemployment rates in Slovenia rose between 2009 to 2013. In 2013, the employment rate among those aged 20 to 64 fell below the EU average for the first time. Since 2014, the labor market situation has significantly improved. The unemployment rate dropped from 9.1% in 2015 to 8.1% in 2016 to 6.7% in 2017 and to 5.2% in 2018. In August 2016, the number of registered unemployed persons fell under 100,000 for the first time since 2010. From 83,843 in August 2017, it further declined to 75,920 in August 2018, its lowest level over the past eight years. The improvement in labor market performance has been driven largely by the economic recovery. Despite improvements in recent years, major structural challenges have remained. Long-term unemployment still stands at more than 50% of total unemployment, the employment rates of older and low-skilled workers remain below the EU average and their participation in active labor market policies remains low. While Slovenia has a tradition of labor market policy that dates back to Yugoslav times and participates in a number of EU-funded programs (i.e., EURES), existing programs have suffered from budget cuts introduced in the period 2009 – 2014 and have only slowly regained their effectiveness.

Taxes

#25

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
Slovenia’s tax system was overhauled in the 2004 – 2008 term and has changed only gradually since then. Tax revenues have been relatively high in relation to GDP but have not been enough to prevent high budget deficits from emerging. Tax revenues stem from a broad range of taxes, with a high percentage of about 40% of all tax revenues stemming from social insurance contributions. A progressive income tax with rates of 16%, 27%, 34%, 39% and, since 2013, 50% provides for some vertical equity. As the thresholds are set rather low, however, the majority of middle class citizens fall into the second- or third-highest category. The tax burden for enterprises is below the EU average, but higher than in most other East-Central European countries. Moreover, tax procedures for both individuals and companies are complex.

The Cerar government had announced comprehensive tax reform for 2016. However, the coalition partners eventually reached common ground on relatively modest changes only, focusing on tax relief for the middle class. Beginning in 2017, the tax burden on personal income, including performance and Christmas bonuses, was reduced, in part by introducing a new tax bracket and by replacing the previous 41% tax rate with two rates of 34% and 39%. Contrary to the original proposition of the Ministry of Finance, the top income tax rate of 50% was retained. In order to compensate for the decline in personal income tax revenue, the corporate income tax rate increased from 17% to 19% in 2017. Business associations have complained that this increase added to an already relatively high tax burden on enterprises. The Cerar government’s second minister of finance, Mateja Vraničar Erman, proposed a minor tax reform in 2017, targeting above all taxes paid by small companies, but couldn’t find enough support in the government. Consequently, the changes implemented were very minor and more technical in nature.

One of the reform projects of the Šarec government’s coalition agreement, which provoked substantial opposition from entrepreneurs and opposition parties, was tax reform. Based on a proposal by the Left, the coalition agreement calls for personal income from capital and rents to be subject to the personal income tax. In late October 2018, the National Assembly turned down a proposal from the opposition to lower VAT levels to its pre-crisis levels.

Budgets

#34

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
5
The Cerar government succeeded in bringing the fiscal deficit down from 3.4% of GDP in 2014 to 0.8% in 2017, thus exiting the European Commission’s excessive deficit procedure in June 2016. The budget for 2018 foresaw a small surplus of 0.1% of GDP. As a matter of fact, the surplus turned out to be about four times higher. The improvement in the fiscal stance has largely stemmed from the recovery of the Slovenian economy and a number of one-off measures such as freezes on wages and promotions in the public sector. In part due to the country’s solid economic growth, trade unions were less cooperative in 2017 and 2018 in particular, when they rejected an extension of wage restraints in the public sector, and widespread public sector strikes in February 2018 contributed to the resignation of Cerar government in March 2018. Slovenia’s structural deficit has remained relatively high, the debt-to-GDP ratio, while declining since 2016, still exceeds 70%, and the fiscal pressure associated with an aging population is relatively high. In order to stress its commitment to a sustainable budgetary policy, the National Assembly, in line with the EU’s Fiscal Compact, enshrined a “debt brake” in the constitution in May 2013. However, the corresponding legislation was not adopted until July 2015, and the government and opposition proved unable to reach a consensus on selecting the three members of the Fiscal Council (which is tasked with supervising fiscal developments) until late March 2017. In September 2018, the Fiscal Council warned of a possible double-digit GDP deficit in the next few years, if the coalition agreement of Šarec government is fully implemented.

Research, Innovation and Infrastructure

#30

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
4
Slovenia’s R&I activities have long been of both low quality and quantity. EU funds have declined in some areas of research, as Slovenia has experienced serious administrative difficulties in absorbing funds for R&I. After years of neglect, however, the Cerar government announced substantial increases in R&I spending when introducing the budgets for 2018 and 2019 to parliament in September 2017. In 2018, the science budget increased by almost 20%. The fact that government spending still does not comprise 1% of GDP featured prominently during a major demonstration of Slovenian researchers in Ljubljana in April 2018.

Global Financial System

#30

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
4
Compared to most other East-Central European countries, the degree of foreign ownership within the Slovenian financial sector has remained low. Like its predecessors, the Cerar government has not contributed actively to improving the regulation and supervision of international financial markets. Instead, it has focused on addressing financial problems within the Slovenian banking sector by implementing the bad-bank scheme devised by the Janša government. Established in March 2013, the Bank Assets Management Company (BAMC) has taken over non-performing loans in exchange for bonds backed by state guarantees. The persistent involvement of the Slovenian state in the financial sector still entails some risks for financial stability.
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