Slovenia: accelerate structural reforms to keep recovery on track

04/07/2022 – Slovenia has achieved a strong post-pandemic recovery with record-high employment, but high inflation, supply chain bottlenecks and other impacts from the war in Ukraine are draining economic momentum. Slovenia should focus on reining in inflation and then accelerating reforms to bolster productivity and foster stronger and more sustainable growth for the longer term, according to a new OECD report.

The latest OECD Economic Survey of Slovenia says that, as for many countries, Slovenia’s economy faces heightened uncertainty since Russia’s invasion of Ukraine, adding to pre-existing challenges such as labour shortages and population ageing. The Survey recommends strengthening public finances along with growth-friendly tax reforms and measures to improve worker skills and mobility and speed up the digital transition.

“Slovenia’s economy was recovering well from the COVID-19 crisis, but the war in Ukraine is amplifying inflationary pressures, exacerbating supply chain disruptions and weighing on growth,” OECD Chief Economist and Deputy Secretary-General Laurence Boone said, presenting the Survey alongside Slovenia’s Minister of Finance Klemen Boštjančič. “An ageing workforce means Slovenia needs much stronger productivity growth to keep raising living standards as well as strengthening the pension system. Overcoming these challenges will require structural reforms to build a more digital, sustainable and productive economy.”

Slovenia’s economic activity surpassed its pre-pandemic level in 2021 with GDP growth of 8.1% as government support equivalent to around 10% of GDP cushioned incomes and businesses. The Survey sees GDP growth slowing to 4.6% in 2022 and 2.5% in 2023. Inflation has accelerated to its highest level in 20 years, and is projected to remain high.

This makes it even more important to prepare for the rising pressure on public finances from an ageing population and shrinking workforce in terms of lower receipts and unfunded increases in pension benefits. With Slovenia facing one of the highest pension spending increases of OECD countries in the years ahead, the Survey recommends lengthening contribution periods and a higher statutory retirement age to secure better retirements.

Over the longer term, Slovenia’s growth needs strengthening. In this respect, decentralised wage setting could improve labour market dynamics, by enabling firms to use pay to attract workers and creating incentives to invest in training. Better governance of state-owned enterprises and enhanced competition can also optimise labour resources across the economy.

The tax system could be made more growth friendly by reducing labour taxation, which can act as a disincentive to work, and by increasing consumption and property taxes. Slovenia should also remove some of the exemptions and allowances that narrow its income tax base.

To meet its objective of becoming one of the five most digitalised European Union countries, Slovenia will need to expand access to affordable high-speed internet, improve digital competency among the general population and skills among workers, and increase firms’ adoption of digital tools.

See a Survey Overview with key findings and charts (this link can be used in media articles).

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