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STRUCTURAL REFORMS IN SLOVENIA

Ljubljana, November 2005

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Structure

Why reforms? Motivation: Economic growth → Welfare Four priorities:

Development Priority I – Competition and Growth Development Priority II – Knowledge Development Priority III – Efficient State Development Priority IV – Modern Welfare State

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Priorities and Measures (1)

Priority I

Competitiveness and growth

Measures

1. Restructuring of public finances

2. Tax system reform

3. Increasing competitiveness

4. Efficient use of EU funds for accelerated development

5. Privatisation and development of financial system

6. Liberalisation and competitiveness of public utilities

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Priorities and Measures (2)

Priority II

Efficient accumulation, two-way flows and use of knowledge for development, and quality jobs

Measures1. Reform of the university system2. Efficient use of knowledge and

innovation.3. Technological and innovation

programmes4. Alliances between the economy

and universities5. Programmes for transfer and rise

of knowledge in the economy

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Priorities and Measures (3)

Priority III

More efficient and cost-effective state

Measures

1. Improved budget preparation procedures

2. Rationalisation of public sector activities

3. Impact assessment of regulations

4. Improving the system for drawing EU funds

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Priorities and Measures (4)

Priority IV

Modern welfare state and higher employment

Measures

1. Flexible labour market and higher employment

2. Fairer and more motivating system of social transfers

3. Changes and adjustments of the pension system

4. Health care reform

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Why Reforms?

Transition inertia – stable economic growth (1993-2002) Development push in the reformed countries Slow pace of restructuring

The highest state share in the economy:126/127 (Fraser 2005)

Non-competitive country The second highest labour costs per unit GDP in the EU

(Development Report 2005) The highest level of the labour tax wedge in the EU (OECD 2004) Dramatic drop of competitiveness 35→52/60 (IMD 2005)

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Key Proposals

1. Simpler and more business-friendly environment,2. Simplified tax system with lower tax burden,3. Privatisation4. More efficient knowledge accumulation and stimulation of

knowledge flows btw. the economy and universities,5. Selection of large national projects to be co-financed from EU

funds,6. Modernisation of the welfare state so as to motivate the

individuals for activity,7. More rational health-care system,8. More sustainable pension system encouraging longer activity

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Development Priority I: Competition and Growth

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Development Priority ICompetition and Growth

1. Tax reform2. Privatisation and withdrawal of the state

from active ownership3. Deregulation, demonopolisation and

promotion of competition and competitiveness

4. Liberalization of public utilities (PU)

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1. Tax Reform

Motivation for a tax reform To increase the competitiveness of the Slovene

economy and enable it to achieve the Lisbon Strategy goals by:

Simplifying the tax administrative procedures Reducing the tax wedge on labour Decreasing absolute and relative labour costs of

the highly-skilled labour force Enabling companies to invest (via increased

profits) into R&D, new products, new jobs

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Tax Reform Proposal

Following the OECD guidelines, transferring the focus of taxation from production to consumption (from direct to indirect taxes).

Simultaneously:Tax reform (as from 1 January 2007): Abandon the pay-roll tax (- SIT 78 bn.) Introduce the flat personal income tax (20%; - SIT 39 bn.) Introduce the flat VAT (20%) (+ SIT 115 – 135 bn.) Introduce the flat corporate tax (no exemptions and allowances)

Gradual decrease of public expenditures by 2% GDP: 2006: by 0.7% GDP 2007: by 0.8% GDP 2008: by 0.5% GDP

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Impact of Flat-Tax on the Economy

Increasing the profits of firms: SIT 78 bn. from the pay-roll taxes SIT 39 bn. from the personal income tax Total SIT 117 bn. (approximately 1.8 % GDP annually)

Reducing the cost of highly-skilled labour force by 15 % (2GW) to31% (5GW)

Hence, creating a space for capital and R&D intensive investments and new jobs, and increasing demand for highly-skilled labour force

Consequential decrease of the public exp. by 1% GDP and by additional 2% within the proposed term plan

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Impact on Firms’ Cost (in SIT million)

Gorenje Mura KD MercatorNo. of employees 5,594 4,583 45 8,577Payroll tax 639.5 87.8 91.2 664.8Gross wages 244.1 12.3 161.4 40.1Total 883.5 100.1 252.7 704.9

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Budget Sustainability of Flat Tax (in SIT bn, 2004)

- Reduction of budget revenues Increase of revenues / reduction of exp. +

Pay-roll tax-125 + (35 - 45) Pay-roll tax

Personal income tax - (65 - 70) + (25 – 30) Personal income tax

+ (115 - 135) VAT

Corporate income tax 0 + 30 Corporate income taxCapital income tax n.a. n.a. Capital income tax

Total - (190 – 195) + (205 – 250)

Net Lower bound: + 15

Upper bound: + 55

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Social Sustainability of Flat Tax(Current system vs. Flat tax, with child allowance)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

1100

00

1275

01

1425

01

1575

01

1725

01

1875

01

2011

43

2086

43

2175

01

2325

01

2475

01

2625

01

2775

01

2925

01

3125

01

3375

01

3635

96

3885

96

4500

01

5235

49

5985

49

6835

01

7585

01

9200

01

Odstotek pov prečne bruto plače v 2004

Efe

kti

vn

a s

top

nja

do

ho

dn

ine

sedanji sistem z OO EDS z OO EDS s tax credit

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2. Privatisation (1)

State capital funds (KAD & SOD)

Sale of KAD and SOD shares in public share-holding companies according to the term plan by the end of the year 2008;

Keep max 5% each of the shares in individual firms; Transformation of KAD and SOD into portfolio investors

and withdrawal from active ownership; Restructuring their portfolios into globally diversified

investments and clearly defined annual obligations of KAD wrt the pension budget;

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2. Privatisation (2)

Privatisation of state-owned companies Establishing competent privatization commissions Adopting the privatisation programmes for the biggest

companies privatized according to the model 26XY Launching preparations for being listed on the SE in all

partly privatized companies with a large number of shareholders (Telekom, Zavarovalnica Triglav, NLB)

Using IPOs where strategic investors are not optimal

Measures on the capital market for an easier withdrawal of the state from the economy.

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3. Promotion of Competition

Improvement of the market competition (prod. factors)

Improvement of Slovenia’s competitiveness on the global market of business locations

Implementation of a small number of large projects of national significance.

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4. Liberalisation of Public Utilities

Market restructuring of the electricity energy sector - renewal of the gross trading and abolishment of the critical ineffectiveness

Competitive supply of final energy consumers Use of the public communication structure of all PU Competitive transport and logistic services

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Development Priority II:Knowledge

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Reform of the University System

Deregulation of the university system Promotion of private and regional universities (7-10 universities,

at least half of them private) Promoting multidisciplinary university programmes.

Financing Voucher system, combined with the system of postponed student

fees. Tax encouragements for donations to the universities

Other measures Adjustments of the study programmes, employment of the

teachers Encouraging alliances between the universities and institutions Promoting international cooperation and student exchange Abolishing limitations regarding the use of English

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Improving Knowledge Accumulation Increase of the public by 0.5% GDP and private investments into science

and technology by 1% GDP by the year 2010 (NRRP 2005) Total 3% GDP for R&D (2010) Additional public funds from privatization (similar to Finland) Distribution of new funds for R&D in ratio 80 : 20 (technology : science)

Centralization of the technology and innovation policy under one Ministry

Simplification of the system of raising and using local public funds Simplification of drawing EU funds

Promotion of knowledge flows between universities and the economy Financing of the projects applied for by the economy in cooperation with

the university ( through TIA ) Program of young experts employed in the economy, Students grant schemes for promoting science and technical studies.

Promotion of establishing high-tech companies Establishing a fund for promotion of HT companies Legislation referring to the risk funds Technological parks Incubators at the faculties

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Development Priority III:Efficient State

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Efficient and Cost-Effective State

Reducing public exp. by 2 pps by 2008 (and additional 2 pps by 2012)

Introduction of PPP for financing infrastructural projects

Setting up of central registers Register of incomes form public funds Real estate register Establishing of common one-stop offices for the economy (VEM) and the

inhabitants (CSD).

Linking and joining of institutions Tax Administration and Customs Administration

Financing of model tools for simulating the effects of the economic policy Microsimulation models for monitoring financial effects of the reforms.

CGE – OLG model for simulation of impacts of the reforms on employment and growth.

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Improvement of the System of Drawing the EU Funds

Concentration of funds for co-financing the EU operative programs under a single budget item

Permanent education and training of personnel to be engaged in Cohesion Policy

Selecting the operation programmess and setting up implementing structures for Cohesion Policy 2007 – 2013.

Establishing the Management Authority for managing all operating programmes in Slovenia, as well as the Paying Authority.

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Effective Use of the EU Funds

Development-oriented restructuring of the budget for co-financing the projects

The use of EU funds

€ 3.5 bn. in 2007-2013 Distribution of funds

70% for 5-8 large projects 30% for small projects

Preparation of standards for selecting large projects Selection of project ideas for large projects.

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Selection of the Project Ideas for Large Projects

Cohesion Policy

Cohesion Fund (CF) Environment and nature (at least 50% of the funds)

Sustainable use of natural and energy resources. Protection of drinking water wells as long-term strategic

natural resources. Transport infrastructure (at the most 50% of KS funds) Phyrn Highway Third Development Axis

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Selection of Project Ideas for Large Projects

Structural Funds

European Regional Development Fund (ERDF): A net of logistic and technological centres and business

zones. Mobility for development breakthrough (public transport/

access to knowledge). Selection of projects for developing services through

linking of natural and cultural potentials (spas/health care/knowledge/nature/cultural heritage/concentration of economic subjects)

European Social Fund (ESF): Establishing alliances between R&D and the economy

(regional technological universities) National centre for industrial design

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Development Priority IV: Modern Welfare State and Higher

Employment

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Measures to Improve the Labour Market and the Welfate State

More flexible labour market and easier employability

Incentives for activity and employment More transparent and fairer system of social

transfers Sustainability of pension and health

insurance systems

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More Flexible Labour Market and Easier Employment

Reducing the obstacles to more flexible forms of employment: part-time employment, shorter working hours and other (proportion of work-related costs)

Establishing temporary employment agencies and abolishing tax privileges of students’ work.

Reducing the extent of job regulation. Stimulate also temporary and part-time jobs. Linking the unemployment benefit to minimum wage rather than guaranteed

wage. Setting out the maximum redundancy pay (6 wages), simplify procedures for

laying off for fault liability, ease rigidity of collective redundancy, shorten the statutory notice period.

Abolishing compulsory supplements for length of service (possibility of a contract agreement).

Employees’ profit sharing schemes

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Stimulating Activity of the Unemployed

Unemployment assistance could be replaced by social assistance linked to job seeking activity.

Abolishment of obstacles to combining part-time pension with part-time employment.

Setting up “job rotation” programmes. All unemployed should enter the employment programmes and a

number of advisers should rise (up to 150 unemployed per an adviser).

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Changes in Employment Policy and Life-long Learning

Joining Active Employment Policy (AEP) programmes and clearly defining of goals

Including regional partners in special projects Decentralization of setting the target groups Independent evaluation of projects Motivation programmes for attracting candidates to education and

training projects and business incentives Putting in place of the international standard “ Investing into people” Regional domain of adult education.

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Student Scholarship Scheme

Replacing national scholarship with a “schooling supplement” paid in addition to child benefit

Forming of a scholarship fund for sponsor and deficit professions scholarships at the level of the region; scholarships for the talented; co-financing by employees.

All existing scholarship forms should be integrated into the new system.

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Fairer and Motivating System of Social Transfers

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Fairer and Motivating System of Social Transfers

Setting up a central register of rights from public resources and linking of the information systems (IS)

Creation of a central decision-making point. Unifying the criteria for social rights. Unifying the valorization mechanisms. Setting up and unifying the ceiling of redundancy

payments. Unified system of the long-term nursing. More possibilities for activity. Entitlement to social assistance (DSP) related to activity. Modification of standards and conditions with the goal of

stimulating for work.

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Improved Efficiency of the System

Advantages: Simpler system for the user. Simpler system also for decision-maker, one decree. Higher payment for the active workers’ encouragement for work. Fairer Easier monitoring

Savings: Reduction of the procedures, decrees and money-orders. Less possibilities of abuse. Assets should be taken into account. Reduction of the incomes in case of criteria modifications for being

entitled to some social rights and payments of the non-active with the work ability.

Changes of the valorization mechanisms. Limitations of the redundancy payment.

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Adjustments and Amendments of the Pension System

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Proposals

Encouragements for longer activity To reinforce the system of bonus and malus. Part exemption from contributions of the employers when employing the elderly.

To support the combination of part-time pension and part-time activity.

Expanding the coverage with the insurance Contribution payment defining the thickness of the employment even out of the

smaller amount of the working hours. Expand the insurance possibilities for the smaller volume of rights

Combination of social acceptability and economic maintenance To prolong the period of defining the pension payment bases. The valorization methods should come to terms with the rules at other transfers

and financial options.

Arranging the collective and individual insurance Revise the options of directing one part of the contributions of the employers

into the capital covered pension insurances. To allow the plans without a guaranteed profit for individual extra insurance and

to release the investments strategies.

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More Efficient Health Care

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Introduction of the Economic Calculus and Management into Health Care

Introduction of the business and professional standards and measurable indicators.

Gradual and pilot privatization of hospitals. Material liability of the management for the results of public institutions. Compulsory management training Rationalizing of public procurement.

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Adjustment of the Compulsory Health Insurance System

To review the rights referring to the opportunity costs. To limit the length of the sick-leave. System insurance for a long-term nursing. To “clean up” the health care budget. To establish the fund for demographic transition.