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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Slovenia published on 1 July 2009.
Fiscal sustainability requires improved expenditure efficiency and structural reforms, especially further pension reform
Since 2002, Slovenia has followed prudent fiscal policies, leading to a significant improvement in both the actual and structural deficits. But this success should not lead to complacency as the improvement in the underlying position is weaker than it appears. Volatile tax elasticities led to exceptionally high tax receipts that have been hiding part of the fiscal cost of recent tax reforms. Expenditure restraint was helped by an agreement to partially index public sector wage growth to inflation, which also contributed to ease qualification for euro adoption, a policy which has now resulted in large public wage increases. The improvement in the fiscal position also reflected a build-up of contingent liabilities in the area of highway construction; the public company in charge of highways may not be able to raise enough revenues from tolls to reimburse its debt while fulfilling its maintenance duty. On top of that, long-term liabilities related to ageing remain daunting. There is general agreement among the experts that the 1999 pension reform has not been adequate to ensure long-run sustainability. According to estimates by the European Commission, the degree of ageing in Slovenia will be the second most pronounced in the EU, and the total ageing costs will rise by almost 13.6% of GDP by 2060.
To maintain fiscal sustainability, the strategy of pre-funding part of ageing costs should be resumed as soon as the crisis subsides, by running a balanced budget over the medium term. Consolidation achieved through expenditure restraint being more sustainable, the government should supplement the rules of the Maastricht Treaty and the Stability and Growth Pact by a public expenditure rule designed to ensure a gradual decline in expenditure as a share of GDP. Improving education and health efficiency, linking spending performance more tightly to budgeting and better targeting social transfers would also help control expenditure growth .
Pre-funding of ageing costs, however, cannot be the sole strategy to accommodate the upcoming expenditure arising from ageing, because the sizeable fiscal surplus implied is not likely to be politically feasible or economically desirable. Accordingly, renewed efforts to contain ageing costs through pension reforms should not wait for the economic situation to improve. In particular, a reform of the pension system should aim at raising the effective retirement age and lowering the replacement rate (e.g. by shifting the indexation of pensions from wages to prices or extending the contribution period to receive a full pension). The government should therefore consider transforming the current defined benefit scheme into a notional defined contribution scheme, or if the defined benefit system is continued, introducing an automatic adjustment of the retirement age to life expectancy.
Age-related public spending is projected to rise sharply in most EU member states1
Projected change in total age-related expenditure, 2004-50, per cent of GDP
1. EU members before enlargement in May 2004. Data for Greece is not available.
2. Excludes long-term care for France and Portugal.
Source: European Commission (2006), “The Impact of Ageing on Public Expenditure: Projections for the EU25 Member States on Pensions, Health Care, Long-term Care, Education and Unemployment Transfers (2004-2050)”, European Economy, Special Report , No. 1.
Further tax reforms should also help increase labour demand
Tax policies should focus on reducing employer contributions to social security. To compensate for revenue losses, the government should raise property taxation and, by broadening tax bases, indirect taxes as well. An increase in the value added tax rate could also be considered in the medium run. The government should also improve the design of environmental taxes by strengthening the link to pollution.
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How to obtain this publication
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The complete edition of the Economic Survey of Slovenia is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. (It can also be downloaded in Slovene, see link below, but does not contain all the charts available in the English version.)
Policy Brief v slovenščini je dostopen tudi v PDF formatu. Povzema oceno in priporočila OECD, ne zajema pa vseh grafov z zgornjih spletnih strani.
For further information please contact the Slovenia Desk at the OECD Economics Department at eco.survey@oecd.org.
The OECD Secretariat's report was prepared by Margit Molnar and Colin Forthun under the supervision of Pierre Beynet. Research assistance was provided by Desney Erb.
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