Economic Policies
#22Key Findings
With low unemployment rates indicating a tight labor market, Slovenia falls into the middle ranks (rank 22) with regard to economic policies. Its score on this measure has improved by 1.3 points relative to 2014.
With the robust growth of previous years having already slowed before the pandemic, GDP dropped by 4.2% in 2020. However, it bounced back quickly in 2021. The government has focused on improving the efficiency of state-funded infrastructure projects and expanding the list of large projects supported by EU funding.
The overall unemployment rate rose only mildly during the pandemic, from 4.4% in 2019 to 5.2% in 2020. By late 2021, it had returned to a record low of 3.8%. Structural challenges remain, but long-term unemployment rates have fallen. A minor proposed tax reform would relieve taxpayers at both ends of the income scale, but has been opposed by unions and opposition parties.
Public debt had been on a downward trend, but pandemic spending and shutdowns pushed the overall level to nearly 80% of GDP in 2020. Deficits are again on the decline. Public R&I spending has been increased, but remains below 1% of GDP.
With the robust growth of previous years having already slowed before the pandemic, GDP dropped by 4.2% in 2020. However, it bounced back quickly in 2021. The government has focused on improving the efficiency of state-funded infrastructure projects and expanding the list of large projects supported by EU funding.
The overall unemployment rate rose only mildly during the pandemic, from 4.4% in 2019 to 5.2% in 2020. By late 2021, it had returned to a record low of 3.8%. Structural challenges remain, but long-term unemployment rates have fallen. A minor proposed tax reform would relieve taxpayers at both ends of the income scale, but has been opposed by unions and opposition parties.
Public debt had been on a downward trend, but pandemic spending and shutdowns pushed the overall level to nearly 80% of GDP in 2020. Deficits are again on the decline. Public R&I spending has been increased, but remains below 1% of GDP.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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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.
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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.
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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.
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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.
The Slovenian economy has been growing robustly from 2014 to 2019. However, real GDP growth declined from more than 4.8% in 2017 to about 3.2% in 2019, largely because of the high export propensity of the Slovenian economy and its strong dependence on development in larger European economies. However, the COVID-19 pandemic and extensive closures of the economic activity hampered growth and caused a drop of GDP in 2020 for more than 4.2%.
The Šarec government stuck to the controversial infrastructure projects initiated by its predecessor. These projects included the construction of a second Karavanke highway tunnel toward Austria, and the construction of a second railway line between Divača and the port of Koper. However, development struggled, as the projects continued to suffer from mismanagement, corruption and delays in implementation. The Šarec government was more successful in privatizing state banks, which has been on the agenda for some time. It sold 75% minus one share in the largest Slovenian bank (NLB) to institutional investors and the third largest bank (ABanka) to the U.S. fund Apollo, which also owns Slovenia’s second largest bank, Nova KBM d.d. The Janša government placed strong emphasis on economic recovery following the pandemic-induced shock in 2020, with GDP growth forecasted to be 6.4% in 2021 and 4.2% in 2022. While the Janša government did not decide to sell any of the remaining state-owned companies, it did put additional emphasis on improving the efficiency of major state-funded infrastructure projects, as well as further expanding the list of projects that are being funded by the government or from EU recovery and cohesion funds.
The Šarec government stuck to the controversial infrastructure projects initiated by its predecessor. These projects included the construction of a second Karavanke highway tunnel toward Austria, and the construction of a second railway line between Divača and the port of Koper. However, development struggled, as the projects continued to suffer from mismanagement, corruption and delays in implementation. The Šarec government was more successful in privatizing state banks, which has been on the agenda for some time. It sold 75% minus one share in the largest Slovenian bank (NLB) to institutional investors and the third largest bank (ABanka) to the U.S. fund Apollo, which also owns Slovenia’s second largest bank, Nova KBM d.d. The Janša government placed strong emphasis on economic recovery following the pandemic-induced shock in 2020, with GDP growth forecasted to be 6.4% in 2021 and 4.2% in 2022. While the Janša government did not decide to sell any of the remaining state-owned companies, it did put additional emphasis on improving the efficiency of major state-funded infrastructure projects, as well as further expanding the list of projects that are being funded by the government or from EU recovery and cohesion funds.
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
While the unemployment rate increased from 2009 to 2013, since 2014, the labor market has significantly improved. In 2016, the number of registered unemployed persons fell below 100,000 for the first time since 2010 and continued to decline each year, reaching a ten-year nadir in September 2019 of 69,834. In recent years, the unemployment has fallen steadily from 9.1% in 2015 to 4.4% in 2019. However, the improvement in labor market performance has been driven largely by the economic recovery, which came to an abrupt stop in 2020 due to the COVID-19 pandemic, which also affected unemployment (5.2% in 2020). But with the major incentives to support the labor market provided by the Janša government, unemployment rates did not fall dramatically and started to rebound as early as late 2020, reaching a record low of 3.8% (65,379 persons) in November 2021. Despite improvements in the period under review, some structural challenges have remained, but long-term unemployment rates decreased slightly in the period under review.
Citations:
Stropnik, N. (2020): Slovenia revises its unemployment benefit regulation to foster employment. ESPN, Flash Report 2020/14, Brussels.
Citations:
Stropnik, N. (2020): Slovenia revises its unemployment benefit regulation to foster employment. ESPN, Flash Report 2020/14, Brussels.
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
Slovenia’s tax system was overhauled in the 2004 – 2008 term and has changed only gradually since then. 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 a handful of different rates 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.
Under the Šarec government, changes in tax regulations were modest. In February 2019, the prime minister announced that the government would draft a package of measures before the end of the year and, in June 2019, a reform tax package was put up for public debate. The changes proposed are minor, and include cutting income tax rates in the second and third brackets by one to two percentage points, a slight increase in tax deductions, higher capital gains taxes on items that have been owned for less than 20 years, and a higher rate of personal income tax on rental property. In October 2019, the prime minister announced that there would be no property tax implemented until at least 2022, as there was no consensus among the coalition parties on the issue.
The Janša government prepared a mini-tax reform in 2021, which would help economic recovery and relieve taxpayers. The proposed measures include raising the general allowance for dependent family members from €3,500 to €7,500, with a transitional period from 2022 to 2024. The harmonization of allowances and net annual tax bases regarding the personal income tax scale is also being reintroduced. The reform would also bring higher net salaries, as the government is proposing a reduction in the tax rate from 50% to 45% for taxpayers in the highest (fifth) income class. The changes would also relieve the burden on capital income, namely the personal income tax rate on interest earned, while the dividends and capital gains rate would be reduced from 27.5% to 25%, and the rental property rate from 27.5% to 15%. But following strong opposition to the proposal from trade unions and opposition parties, citing fears concerning budgetary balance, the fate of the proposal is unclear.
At almost 37%, the tax-to-GDP ratio is below the EU average, but relatively high from a regional perspective. The post-pandemic fiscal deficit suggests that revenues to finance the budget over the mid-term are questionable.
The progressive income tax provides for vertical equity. The tax burden for enterprises is below the EU average, but higher than in most other Central and Eastern European countries. Moreover, given the complexity of tax procedures for both individuals and companies, the Janša government proposed a de-bureaucratization act, which would simplify procedures.
Slovenia’s revenue from environmentally relevant taxes remains above the EU average. Environmental taxes made up 3.73% of GDP in 2017 (EU-28 average: 2.4%) and energy taxes made up 3.16% of GDP (EU-28 average: 1.84%). In the same year, the environmental tax amounted to 10.13% of total revenue from taxes and social security contributions (EU-28 average: 5.97%).
Citations:
European Commission (2019): Environmental Implementation Review 2019. Country Report Slovenia. SWD(2019) 131 final. Brussels (https://ec.europa.eu/environment/e ir/pdf/report_si_en.pdf).
OECD Tax Revenue Statistics (2021): Slovenia. Paris (https://www.oecd.org/tax/revenue-statistics-slovenia.pdf).
Under the Šarec government, changes in tax regulations were modest. In February 2019, the prime minister announced that the government would draft a package of measures before the end of the year and, in June 2019, a reform tax package was put up for public debate. The changes proposed are minor, and include cutting income tax rates in the second and third brackets by one to two percentage points, a slight increase in tax deductions, higher capital gains taxes on items that have been owned for less than 20 years, and a higher rate of personal income tax on rental property. In October 2019, the prime minister announced that there would be no property tax implemented until at least 2022, as there was no consensus among the coalition parties on the issue.
The Janša government prepared a mini-tax reform in 2021, which would help economic recovery and relieve taxpayers. The proposed measures include raising the general allowance for dependent family members from €3,500 to €7,500, with a transitional period from 2022 to 2024. The harmonization of allowances and net annual tax bases regarding the personal income tax scale is also being reintroduced. The reform would also bring higher net salaries, as the government is proposing a reduction in the tax rate from 50% to 45% for taxpayers in the highest (fifth) income class. The changes would also relieve the burden on capital income, namely the personal income tax rate on interest earned, while the dividends and capital gains rate would be reduced from 27.5% to 25%, and the rental property rate from 27.5% to 15%. But following strong opposition to the proposal from trade unions and opposition parties, citing fears concerning budgetary balance, the fate of the proposal is unclear.
At almost 37%, the tax-to-GDP ratio is below the EU average, but relatively high from a regional perspective. The post-pandemic fiscal deficit suggests that revenues to finance the budget over the mid-term are questionable.
The progressive income tax provides for vertical equity. The tax burden for enterprises is below the EU average, but higher than in most other Central and Eastern European countries. Moreover, given the complexity of tax procedures for both individuals and companies, the Janša government proposed a de-bureaucratization act, which would simplify procedures.
Slovenia’s revenue from environmentally relevant taxes remains above the EU average. Environmental taxes made up 3.73% of GDP in 2017 (EU-28 average: 2.4%) and energy taxes made up 3.16% of GDP (EU-28 average: 1.84%). In the same year, the environmental tax amounted to 10.13% of total revenue from taxes and social security contributions (EU-28 average: 5.97%).
Citations:
European Commission (2019): Environmental Implementation Review 2019. Country Report Slovenia. SWD(2019) 131 final. Brussels (https://ec.europa.eu/environment/e ir/pdf/report_si_en.pdf).
OECD Tax Revenue Statistics (2021): Slovenia. Paris (https://www.oecd.org/tax/revenue-statistics-slovenia.pdf).
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
Despite the unexpected economic slowdown and the resulting need for a budget revision, the Šarec government managed to achieve a small fiscal surplus in 2019. Buoyed by the surplus, active public debt management, low interest rates and substantial privatization proceeds, public debt fell from 70.4 % of GDP in 2018 to 66.7% in 2019. But the COVID-19 pandemic and the associated economic shutdowns changed those positive trends, leading to a substantial rise in public debt – due to the Janša government’s financing of anti-coronavirus measures – to almost 80% in 2020. The general government cash-flow deficit is estimated at 4.6% of GDP in 2022 and 2.7% of GDP in 2023, below the Maastricht level.
Interest payments on servicing public debt amounted to 1.7% of GDP in 2020, which is more than €300 million lower than in 2014, when it amounted to 2.9% of GDP. In the 2020–2021 period, more than €4.4 billion has been paid out of the state budget for anti-COVID measures.
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 December 2018, the Fiscal Council warned of a deterioration of the fiscal stance. As a matter of fact, the revised 2019 budget did not fully meet the targets of the medium-term budgetary framework. In 2021, the Fiscal Council issued several warnings that projections for the coming years in the adopted budget documents are not based on appropriate facts, which has increased the risk of a structural deterioration in public finances. The state budget deficit is expected to amount to almost €4 billion in 2021, which is €0.5 billion more than in 2020, according to the Fiscal Council.
Citations:
European Commission (2020): Country Report Slovenia 2020. SWD(2020) 523 final. Brussels (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-slovenia-en.pdf), 17-18.
European Commission (2021): Country Report Slovenia 2021. SWD(2021) 915 final. Brussels (https://ec.europa.eu/info/sites/default/files/economy-finance/commission_opinion_on_the_2022_draft_budgetary_plan_of_slovenia.pdf).
Interest payments on servicing public debt amounted to 1.7% of GDP in 2020, which is more than €300 million lower than in 2014, when it amounted to 2.9% of GDP. In the 2020–2021 period, more than €4.4 billion has been paid out of the state budget for anti-COVID measures.
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 December 2018, the Fiscal Council warned of a deterioration of the fiscal stance. As a matter of fact, the revised 2019 budget did not fully meet the targets of the medium-term budgetary framework. In 2021, the Fiscal Council issued several warnings that projections for the coming years in the adopted budget documents are not based on appropriate facts, which has increased the risk of a structural deterioration in public finances. The state budget deficit is expected to amount to almost €4 billion in 2021, which is €0.5 billion more than in 2020, according to the Fiscal Council.
Citations:
European Commission (2020): Country Report Slovenia 2020. SWD(2020) 523 final. Brussels (https://ec.europa.eu/info/sites/info/files/2020-european-semester-country-report-slovenia-en.pdf), 17-18.
European Commission (2021): Country Report Slovenia 2021. SWD(2021) 915 final. Brussels (https://ec.europa.eu/info/sites/default/files/economy-finance/commission_opinion_on_the_2022_draft_budgetary_plan_of_slovenia.pdf).
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Slovenia’s R&I activities have long been of both low quality and quantity. The objectives of R&I policy include a polycentric model of science development and networking of research organizations, autonomous guidance, monitoring and evaluation of R&D activities, and the promotion of science development cores in areas that are the basis of long-term socioeconomic development.
While public R&I spending increased between 2018 and 2021, it still doesn’t comprise 1% of GDP (0.98% in 2021). In some areas of research, the extent of EU funding has declined, as Slovenia has experienced serious administrative difficulties in absorbing funds for R&I under the Šarec government, and two ministers resigned because they did not manage to increase EU funding absorption rates. The Janša government strengthened the Government Office for Development and European Cohesion Policy both in terms of funding and human resources, and EU funding absorption rates improved dramatically in the period under review, from 40% of allocated funds (2019) to 64% of allocated funds (2021).
Citations:
European Commission. (2021). Cohesion Data: Slovenia. (https://cohesiondata.ec.europa.eu/countries/SI).
While public R&I spending increased between 2018 and 2021, it still doesn’t comprise 1% of GDP (0.98% in 2021). In some areas of research, the extent of EU funding has declined, as Slovenia has experienced serious administrative difficulties in absorbing funds for R&I under the Šarec government, and two ministers resigned because they did not manage to increase EU funding absorption rates. The Janša government strengthened the Government Office for Development and European Cohesion Policy both in terms of funding and human resources, and EU funding absorption rates improved dramatically in the period under review, from 40% of allocated funds (2019) to 64% of allocated funds (2021).
Citations:
European Commission. (2021). Cohesion Data: Slovenia. (https://cohesiondata.ec.europa.eu/countries/SI).
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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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.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
In the wake of the pandemic, the share of non-performing loans in affected sectors, such as accommodation and tourism, have risen in Slovenia. The decline of corporate credit has challenged the business models of banks. From March 2020 to March 2021, firms and households were enabled to postpone amortization and interest payments on their loans. Public guarantee schemes for loans were introduced to avoid bankruptcies. The central bank intensified its monitoring of commercial banks and made the reclassification of non-performing loans more flexible.
Slovenia was the first post-socialist EU member state to introduce the euro. Because of its troubled financial sector, the country became a strong supporter of a European solution when the euro crisis began. In 2013/14, it was the first EU member state to apply the rules of the new European banking union. While the resulting restructuring of the domestic financial sector has prompted substantial domestic conflicts, the Šarec government stuck to the controversial sale of major banks to foreign investors. The Bank of Slovenia has played an active role in the regulation and supervision of financial markets.
Citations:
Alenka Krasovec/Damjan Lajh 2021: Slovenia: Tilting the Balance? In: Verheugen, Günter/Vodicka, Karel/Brusis, Martin (Hrsg.): Demokratie im postkommunistischen EU-Raum. Wiesbaden: Springer, p. 171.
Council of Europe 2021: Anti-money laundering and counter-terrorist financing measures: Slovenia. 3rd Enhanced Follow-up Report. https://rm.coe.int/moneyval-2021-5-fur-slovenia/1680a29c71.
IMF: Republic of Slovenia. Staff Report for the 2021 Article IV Consultation, Washington: IMF, 3 May 2021
Slovenia was the first post-socialist EU member state to introduce the euro. Because of its troubled financial sector, the country became a strong supporter of a European solution when the euro crisis began. In 2013/14, it was the first EU member state to apply the rules of the new European banking union. While the resulting restructuring of the domestic financial sector has prompted substantial domestic conflicts, the Šarec government stuck to the controversial sale of major banks to foreign investors. The Bank of Slovenia has played an active role in the regulation and supervision of financial markets.
Citations:
Alenka Krasovec/Damjan Lajh 2021: Slovenia: Tilting the Balance? In: Verheugen, Günter/Vodicka, Karel/Brusis, Martin (Hrsg.): Demokratie im postkommunistischen EU-Raum. Wiesbaden: Springer, p. 171.
Council of Europe 2021: Anti-money laundering and counter-terrorist financing measures: Slovenia. 3rd Enhanced Follow-up Report. https://rm.coe.int/moneyval-2021-5-fur-slovenia/1680a29c71.
IMF: Republic of Slovenia. Staff Report for the 2021 Article IV Consultation, Washington: IMF, 3 May 2021