Policy measures to support economic activity in the short term should not put fiscal sustainability and real convergence at risk. Measures taken to support the banking sector, while slow to produce results, have been appropriate, and the 2009 sizeable fiscal stimulus is justified as there is room for discretionary fiscal policy. However, being a small open economy, Slovenia should prioritise those discretionary fiscal measures that help foster its potential growth. Measures to support short-term activity should be removed as soon as activity picks up. The timing of the planned public wage increase should be reconsidered and a social agreement ensuring that real wage growth does not exceed that of productivity renewed. Looking ahead, to the recovery and beyond, it is important that the stance of fiscal policy should take into account the actual monetary conditions in Slovenia so as not to repeat what happened after euro adoption, when fiscal policy was not sufficiently restrictive to provide an appropriate policy-mix vis-à-vis the euro area monetary stance, which was relatively loose for Slovenia. Most importantly, structural reforms are key to ensure real convergence and resiliency to shocks.
Achieving fiscal sustainability requires pursuing structural reforms even during bad times. Upcoming ageing costs are daunting for Slovenia as the last pension reform has not been sufficient to ensure long-run sustainability. Consequently, a new pension reform should aim at lowering the replacement rate and raising the effective retirement age, with an automatic adjustment of the retirement age to life expectancy. As soon as the crisis subsides, the strategy of pre funding part of ageing costs should be resumed by running a balanced budget over the medium term. To achieve this goal, a public expenditure rule should be designed to ensure a gradual decline in expenditure as a percentage of GDP.
Pension reform is also one of the key measures to increase labour participation. Slovenia has a high employment rate compared to the OECD average, but the labour force participation rate of the elderly is still very low by international comparison. Beyond increasing the retirement age, the design of the pension reform needs to remove incentives for early retirement and facilitate gradual exits from the labour force. To increase the employment rate of younger age cohorts, the length of tertiary studies needs to be reduced by strengthening incentives for rapid graduation. Also, the ratio of the minimum wage to the average one is still very high by international comparison and should be reduced further.
The business environment needs to be enhanced to foster productivity growth. The OECD’s product market regulation indicator confirms the overall business friendly environment, despite a slightly less liberal stance than the OECD average. In order to strengthen competition, the Competition Protection Office should be made a fully independent agency with its own budget. Also, a list of state-owned companies to be privatised once the economy recovers should be published. In the meantime, the government should explore ways to improve the management of state companies, such as appointing managers solely based on expertise, and more generally by following the OECD guidelines.
