Does consolidation
contradict growth ?
Mitja Gaspari, Minister, Slovenia
OECD, 26 November 2010
Case of Slovenia:
key issues for reform processes
A. Current economic outlook: where are we?
B. Fiscal consolidation: efficiency of public spending
C. Competitiveness: administrative burdens,
financing growth
D. Structural measures: tackling ageing population
and health
E. Governance: better institutions
F. Scoreboard: implementation of the exit strategy
A. Current Economic Outlook
Slovenia – a small and open Euro-area economy
Trade leads the recovery, followed by domestic demand
Annual percentage change
2008
2009
2010
2011
2012
2013
GDP (real growth, %)
3.7
-8.1
0.9
2.5
3.1
3.3
Employment (SNA)
2.8
-1.9
-2.2
-0.3
0.2
0.5
Inflation (annual average, %)
5.7
0.9
1.8
2.0
2.2
2.5
Current account (% of GDP)
-6.7
-1.5
-0.9
-1.0
-1.1
n.a.
General government balance
(% of GDP – ESA95)
-1.8
-5.8
-5.6
-4.8
-3.8
-2.6
General government gross
debt (% of GDP)
22.5
35.4
40.5
42.7
43.6
44.1
Source: Budget Memorandum 2011-2012, September 2010  MoF update & IMAD, SORS
*Public finances 2010-2013 – policy change scenario, forecast – ESA95 methodology
A. Current Economic Outlook
Domestic Demand and GDP
20
15
10
5
0
-5
-10
-15
-20
-25
-30
year-on-year growth, %
GDP
gross fixed capital formation
household spending
government spending
2006
Source: SORS, Bank of Slovenia
2007
2008
2009
2010
2011
2012
20
15
10
5
0
-5
-10
-15
-20
-25
-30
A. Current Economic Outlook
Unit Labour Cost (ULC)
10
growth, %
8
6
4
10
8.5
8
6.0
4.5
6
3.7
4
2.6
2
0.9
1.0
0.0
0
0.9
0.8
2
0
-2
-2
-4
-4
ULC
average compensation per employee
productivity
-6
-8
03
04
Source: SORS, Bank of Slovenia
05
06
07
08
-6
-8
09
10
11
12
A. Current Economic Outlook
Saving-Investment Gap
Source: Bank of Slovenia
A. Current Economic Outlook
External Debt
Source: Bank of Slovenia
A. Current Economic Outlook
General Government Balance and Debt
59.6%
60%
1%
55.8%
0.3%
52.0%
-0.3%
48.1%
-0.8%
Government debt in % GDP
-1.0%
40.5%
43.8%
42.7%
43.6%
-1%
43.8%
44.1%
42.9%
40%
-2.1%-2%
-2.6%
34.4%
-2.4%
-3%
30%
24.7%
-3.8%
24.5%
21.3%
-4%
21.5%
-5.3%
20%
-4.8%
-5%
-7.5%
Government balance in % GDP
50%
0%
-6%
-6.5%
10%
-6.7%
-7%
-6.7%
-7.1%
0%
-8%
2005
2006
2007
2008
2009
2010*
2011*
2012*
2013*
2014*
2015*
General Government Debt, % GDP- no policy change scenario
General Government Debt, % GDP - policy change scenario
General Government Balance, % GDP - no policy change scenario
General Government Balance, % GDP - policy change scenario
Source; MoF, ESA95; *estimate
B. Fiscal Consolidation
The Concept of the Slovenian Exit Strategy
B. Fiscal Consolidation
The Slovenian Exit Strategy Policy Mix
B.
DEVELOPMENT
PRIORITIES:
• SETTING PRIORITY
MEASURES AND
PROJECTS TO ACHIEVE
DEVELOPMENT
• ADJUSTMENTS OF THE
•COHESION POLICY
C.
A.
FLEXICURITY ELEMENTS
ON THE LABOUR MARKET:
• A CEILING ON SOCIAL
CONTRIBUTIONS
•ACTIVE EMPLOYMENT
POLICY
• IMPROVEMENTS OF
LABOUR RELATIONS
INSTITUTIONAL
ADJUSTMENTS:
 CORPORATE
GOVERNANCE
FINANCIAL SUPERVISION
 PUBLIC SERVICES
STRUCTURAL MEASURES:
PENSION SYSTEM
 HEALTH SYSTEM
 LONG-TERM CARE
CONSOLIDATION OF
PUBLIC FINANCES:
• EXPENDITURE FISCAL
RULE
• TARGET DEFICIT AND
PUBLIC DEBT
E.
D.
SOCIAL COHESION:
• SOCIAL RIGHTS TO
PUBLIC FUNDS
•SOCIAL PROTECTION
CASH BENEFITS
FINANCIAL INSTRUMENTS
FOR DEVELOPMENT:
• GUARANTEE SCHEMES
• COORDINATION OF
FINANCING
MECHANISMS
•DEALING WITH
IMPAIRED ASSETS
B. Fiscal Consolidation
Key ingredients of the fiscal pie*
FISCAL SUSTAINABILITY MEASURES*)
IMPLEMENTATION IN SLOVENIA**)
1. Fiscal rule - strong legislative backing
1. Implied in the Decree on the
Development Planning Documents and
Procedures for the Preparation of the
2. Multi-year spending limits
National Budget.
2. The Budget Memorandum defines
multi-year expenditure ceilings that link
general government expenditure to the
3. Open and accountable budgeting
growth of potential output.
3. Clear procedures defined by the Decree
on the Development Planning
Documents and Procedures for the
Preparation of the National Budget;
4. Disciplined budget preparation and
setting up of an independent fiscal
council in 2009.
execution
4. Programme-based budgeting, with topdown approach.
*) Blanchard, Cotarelli principles, IMF direct, November 2010
**) Decree on the Development Planning Documents and Procedures for the Preparation of the National
Budget and planned amendments to the Public Finance Act in April 2011
B. Fiscal Consolidation
Fiscal stability
 Goal: government deficit below 3% GDP and general government
debt below 45% of GDP by 2013
 Guiding principle: fiscal consolidation to be achieved by adjusting
expenditure and not by increasing taxes
 Fiscal rule: government expenditure linked to trend growth of
GDP
 Methodology: Programme-based Budgeting, National
Development Priorities, Logical Framework Approach
B. Fiscal Consolidation
Fiscal rule: the upper limit for public expenditure
Gt+1 = Gt × (1 + g*)
Nominal growth of public finance expenditure (g*):
g* = gtrend - u×(bt - b*) - v×(ft - f*)
preventive arm
corrective arm
bt estimate for consolidated gross gov. debt in % of GDP  b* target;
ft estimate for primary public finance balance in % of GDP  f* target;
gtrend arithmetic average three previous years, current year (t) and three-year
forecast for nominal growth of potential GDP estimated by the EU production
function method; 0  u, v  1 “speed coefficients” for target consolidated gross
gov. debt and for target primary public finance balance, respectively; parameters
b*, f*, u, v are determined for a two-year period.
Fiscal consolidation → fiscal rule parameter changes →
upper limit for public finance changes
B. Fiscal Consolidation
National Development Priority programmes & financing *
1: Entrepreneurship and knowledge for
development
% in GDP
% in structure of budget expenditure
% in structure of expenditure from EU sources
2008
(realization)
2009
(realization)
2010
(plan)
2011
(plan)
2012
(target)
2013
(target)
2,2
9,1
1,2
2,8
9,8
2,3
3,2
9,9
3,8
3,0
9,9
3,5
3,2
11,2
2,7
3,2
11,9
3,1
6,3
26,2
0,0
7,6
28,5
0,4
8,6
26,9
0,8
7,9
26,2
0,7
7,8
28,1
0,5
7,8
30,0
0,4
1,7
7,0
0,5
1,7
6,0
1,0
2,4
7,2
2,6
2,1
6,7
2,2
2,1
7,4
3,2
2,1
7,9
2,9
10,2
42,4
1,7
12,1
44,3
3,7
14,2
44,0
7,2
13,1
42,8
6,4
13,1
46,7
6,4
13,1
49,8
6,4
2: Flexicurity and social cohesion
% in GDP
% in structure of budget expenditure
% in structure of expenditure from EU sources
3: Transport and energy development
% in GDP
% in structure of budget expenditure
% in structure of expenditure from EU sources
TOTAL
% in GDP
% in structure of budget expenditure
% in structure of expenditure from EU sources
*Estimates and calculations, GODEA
C. Competitiveness
Simplifying the administrative procedures
Doing Business-rankings of Slovenia
2007
2008
2009
2010
2011
Starting a business
(rank)
98
120
41
25
28
Procedures
(number)
9
9
5
3
2
Time
(days)
60
60
19
6
6
Cost
(% of income per capita)
9.4
8.5
0.1
0
0
Min. capital
(% of income per capita)
16.1
49.8
46.8
43.3
45.0
Construction permits
(rank)
63
62
69
63
63
Procedures
(number)
14
15
15
14
14
Time
(days)
207
208
208
197
199
Cost
(% of income per capita)
122
114
112.2
79.9
85.1
Employing workers*
(rank)
146
166
158
162
-
Difficulty of hiring index
(0-100)
61
78
78
78
-
Rigidity of hours index
(0-100)
60
60
60
53
-
Difficulty of redundancy index
(0-100)
50
50
40
30
-
Rigidity of employment index
(0-100)
57
63
59
54
-
Redundancy cost
(0-100)
40
40
37
37
-
Source: World Bank: Doing Business, 2007-2011, *not included in 2011 survey, due to crisis circumstances
C: Competitiveness:
Boosting innovation: WEF-rankings of Slovenia
Source: WEF Global Competitiveness Report, 2009.
C: Competitiveness: Financing entrepreneurship lifecycle
Financial flow – enterprise
lifecycle
FINANCING FURTHER GROWTH
AND DEVELOPMENT
Further Growth and Restructuring
GROWTH FINANCING
Early Growth and Expansion
SEED CAPITAL
(Angels 3F)
Valley of Death
START-UP FINANCING
Start-up
Set up of enterprise
LOW RISK
HIIGH RISK
SID – financing services for SME, exporters, R&D, technology, education
SEF guarantees, grants
SEF – micro & development guarantees, direct loans
SEF – grants for new technological equipment
SEF equity financing
JAPTI one-stop-shop
JAPTI – voucher system to support growth and development
JAPTI – mobility, export education, market entry …
STA – technology, young researchers, innovations
SRA – basic, applicative & postPhD research project co-financing
ECO Fund – energy saving, energy efficiency
C: Competitiveness: Streamlining entrepreneurship financing
D: Structural Measures
Age-related labour income/consumption profile
Labour income
Total consumption
AGE
25 years
SURPLUS
31 years
DEFICIT
DEFICIT
Age
Source: SORS; Sambt 2009.
AGE 56
years
D: Structural Measures
Pension reform
Aim:
Long-term financial sustainability and “decent” pensions
Measures:
 Extend years of work by raising the full retirement age to 65
 Encouraging bonus policy and restrictive malus policy
 Extended pension base from 18 to 34 best consecutive years
 Elimination of net social transfers from the pension system
 Reformulation of compulsory supplementary pension insurance
into professional insurance for all workers in difficult jobs
 Modernisation of the voluntary supplementary pension
insurance scheme
D: Structural Measures
Total effect of the proposed pension reform
% of pension expenditure in GDP
21
No policy pokojninski
change
Obstoječi
scenario
sistem
20
Pension reform
Simulirane
vrednosti ob
uvedbi
ukrepa
scenario
18
17
16
15
14
13
12
11
Leto
Year
2059
2054
2049
2044
2039
2034
2029
2024
2019
2014
10
2009
Izdatki za pokojnine (% v BDP)
Pension expenditure, % of GDP
19
D: Structural Measures
Health care and health insurance
Aim: financial sustainability and rationalisation in implementing
health services.
Measures:
 Health Services Act – to maintain the level and quality of
health services despite limited resources.
 Health Care and Health Insurance Act – to preserve general
access to necessary health services and insurance
entitlements based on solidarity. Health security will be
ensured by means of compulsory health insurance.
 Private sector health services will be financed independently
by private capital (households, private insurance companies
etc. ) and will not be integrated into public services basket
available to citizens.
D: Structural Measures
Public expenditure on health as % of GDP
1998
Belgium
6.4
Germany
8.2
France
8.1
Italy
5.4
Netherlands 5.2
Austria
7.6
Slovenia
5.9
Sweden
7.0
EuroArea
6.9
1999
6.5
8.2
8.1
5.5
5.1
7.8
5.9
7.1
6.9
2000
6.6
8.2
8.0
5.8
5.0
7.6
6.1
7.0
6.9
2001
6.7
8.3
8.1
6.1
5.2
7.7
6.3
7.3
7.0
Source: European Commission, Draft report on health systems
2002
6.7
8.4
8.4
6.2
5.5
7.7
6.3
7.6
7.0
2003
7.1
8.5
8.7
6.2
5.8
7.8
6.2
7.8
7.2
2004
7.5
8.1
8.7
6.6
5.8
7.9
6.1
7.5
7.2
2005
7.4
8.2
8.8
6.8
5.9
7.9
6.1
7.5
7.3
2006
7.2
8.1
8.7
6.9
7.4
7.8
6.0
7.4
7.3
2007
7.3
8.0
8.7
6.6
7.3
7.9
5.6
7.3
7.2
2008
7.4
8.1
8.7
7.0
7.4
8.1
6.0
7.6
7.4
D: Structural Measures
Efficiency and effectiveness in the health sector
Source: European Commision, Draft report on health systems
E: Governance
Institutional adjustments
• Management of public institutions and public administration
including Agency for Capital Investment Management, transformation of
Capital Fund (KAD) and Restitution Fund (SOD), Public Fund for the
Management of the State-owned Real Property, change of activities of
DARS d.d. (Slovenian Motorway Company), adjustments of financial
services provision, transformation of the Competition Protection Office,
establishment of a Public Procurement Agency …
• Transport and energy infrastructure, aimed at efficient
environmental and climate policy including adjustment of the
system of siting transport and energy infrastructure in the environment,
development of the railway system (infrastructure and services),
promoting renewable energy sources, adaptation to climate change,
increasing the competitiveness of agriculture and food processing
industry, optimisation of forest management
F. Scoreboard:
IMPLEMENTATION OF THE EXIT STRATEGY, 28 October 2010
Laws:
ZVK
ZUDD
ZUKN
ZPKS
ZPOGD
ZNJS
ZUNPD
ZUAJN
ZZFP
ZZIZ
ZDR
ZUTD
ZMD
ZMP
ZŠ
ZPIZ
ZDOZ
ZUPJS
ZSP
ZSV
ZZD
ZZVZ
Z
DARS
ZŽP
ZPEV
ZPS
Draft, public
consultation
Intersectoral
coordination
Government
Committees
Government
adoption
National
Assembly
Entry into
force
Priorities
Entrepreneurship and knowledge for development
Flexicurity and social cohesion
Development-oriented
transport and energy
infrastructure
Abbervations: ZVK Competition Protection Act; ZUDD Financial Participation Act; ZUKN Law on Corporate Governance of State Capital Investments; ZPKS
Act on Restructuring of KAD (Pension Fund Management) and SOD (Slovenian Compensation Company); ZPOGD Act regulating Guarantees of the Republic
of Slovenia for the Obligations of Companies originating from the Restructuring of Debts; ZNJS Non-commercial Public Utilities Act; ZUNPD Act on the
Management of Immovable State Property; ZUAJN Act establishing the Public Procurement Agency; ZZFP Act amending the Financial Operations, Insolvency
Proceedings and Compulsory Dissolution Act; ZIZ Act amending the Execution of Judgments in Civil Matters and Insurance of Claims Act ; ZDR Act amending
the Employment Relationship Act; ZUTD Act on Labour Market Regulation; ZMD Act on Small Work; ZMP Act regulating the Minimum Wage; ZŠ Scholarship
Act; ZPIZ Pension and Disability Insurance Act; ZDOZ Long-term Care and Insurance for Long-term Care Act; ZUPJS Exercise of Rights to Public Funds Act;
ZSP Act on Social Security; Benefits Act on Financial Social Assistance); ZSV Social Security Act (Act on Social Security Services); ZZD Health Services Act;
ZZVZZ Health Care and Health Insurance Act; ZDARS Act amending the Slovenian Motorways Company Act; ZŽP Act amending the Railway Transport Act ;
ZPEV Act on Transport, Energy and Water Infrastructure Spatial Planning; ZPSClimate Change Act
Key policy dilemmas remain …
•
•
•
•
Consolidation vs. growth
Long-term vs. short-term effects
Tackling imbalances: fiscal balance, current account
Tackling structural issues: productivity,
competitiveness, governance
• Adjustment timeframe and commitment
• Structural measures contribution to growth?
ARE WE OPTIMISING TOO MUCH?
The reasonable man adapts himself to the world; the
unreasonable one persists in trying to adapt the world to
himself. Therefore all progress depends on the unreasonable
man.
George Bernard Shaw (1856-1950),
Man and Superman (1903) "Maxims for Revolutionists"