STRUCTURAL REFORMS IN SLOVENIA

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STRUCTURAL REFORMS IN SLOVENIA

• Ljubljana, November 2005

2
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)

• Measures
• Restructuring of public finances
• Tax system reform
• Increasing competitiveness
• Efficient use of EU funds for accelerated
  development
• Privatisation and development of financial system
• Liberalisation and competitiveness of public
  utilities

• Priority I
• Competitiveness and growth

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Priorities and Measures (2)

• Measures
• Reform of the university system
• Efficient use of knowledge and innovation.
• Technological and innovation programmes
• Alliances between the economy and universities
• Programmes for transfer and rise of knowledge in
  the economy

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

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Priorities and Measures (3)

• Measures
• Improved budget preparation procedures
• Rationalisation of public sector activities
• Impact assessment of regulations
• Improving the system for drawing EU funds

• Priority III
• More efficient and cost-effective state

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Priorities and Measures (4)

• Measures
• Flexible labour market and higher employment
• Fairer and more motivating system of social
  transfers
• Changes and adjustments of the pension system
• Health care reform

• Priority IV
• Modern welfare state and higher employment

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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 economy126/127
  (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

• Simpler and more business-friendly environment,
• Simplified tax system with lower tax burden,
• Privatisation
• More efficient knowledge accumulation and
  stimulation of knowledge flows btw. the economy
  and universities,
• Selection of large national projects to be
  co-financed from EU funds,
• Modernisation of the welfare state so as to
  motivate the individuals for activity,
• More rational health-care system,
• 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

• Tax reform
• Privatisation and withdrawal of the state from
  active ownership
• Deregulation, demonopolisation and promotion of
  competition and competitiveness
• 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 RD, 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 RD
  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)
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Budget Sustainability of Flat Tax (in SIT bn,
2004)
- Reduction of budget revenues Increase of
revenues / reduction of exp.
16
Social Sustainability of Flat Tax(Current system
vs. Flat tax, with child allowance)
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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 Slovenias 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 IIKnowledge
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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 RD (2010)
• Additional public funds from privatization
  (similar to Finland)
• Distribution of new funds for RD 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

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Development Priority IIIEfficient 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/cult
  ural heritage/concentration of economic subjects)
• European Social Fund (ESF)
• Establishing alliances between RD 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.