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STRUCTURAL REFORMS IN SLOVENIA

STRUCTURAL REFORMS IN SLOVENIA. Ljubljana, November 2005. Structure. Why reforms ? Motivation: Economic growth → Welfare Four priorities : Development P riority I – Competition and G rowth Development P riority II – Knowledge Development P riority III – Efficient S tate

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STRUCTURAL REFORMS IN SLOVENIA

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  1. 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

  3. Priority I Competitiveness and growth 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 Priorities and Measures (1)

  4. Priority II Efficient accumulation, two-way flows and use of knowledge for development, and quality jobs 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 Priorities and Measures (2)

  5. Priority III More efficient and cost-effective state Measures Improved budget preparation procedures Rationalisation of public sector activities Impact assessment of regulations Improving the system for drawing EU funds Priorities and Measures (3)

  6. Priority IV Modern welfare state and higher employment 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 Priorities and Measures (4)

  7. 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)

  8. 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

  9. Development Priority I: Competition and Growth

  10. 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)

  11. 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

  12. 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

  13. 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

  14. Gorenje Mura KD Mercator No. of employees 5,594 4,583 45 8,577 Payroll tax 639.5 87.8 91.2 664.8 Gross wages 244.1 12.3 161.4 40.1 Total 883.5 100.1 252.7 704.9 Impact on Firms’ Cost(in SIT million)

  15. 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)

  17. 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;

  18. 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.

  19. 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.

  20. 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

  21. Development Priority II:Knowledge

  22. 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

  23. Improving Knowledge Accumulation • Increase of the public by 0.5% GDP and private investments into science and technology by1% 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 fundsfor R&D in ratio 80 : 20(technology : science) • Centralization of the technology and innovation policy under oneMinistry • Simplification of the system of raising and using local public funds • Simplification of drawingEU 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-techcompanies • Establishing a fund for promotion of HT companies • Legislation referring to the risk funds • Technological parks • Incubators at the faculties

  24. Development Priority III:Efficient State

  25. Efficient and Cost-Effective State • Reducingpublic 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.

  26. Improvement of the System of Drawing the EU Funds • Concentration of funds for co-financing the EU operative programs undera single budget item • Permanent education and training of personnel to be engaged inCohesion Policy • Selecting the operation programmess and setting up implementing structures for Cohesion Policy 2007 – 2013. • Establishing the Management Authorityfor managing all operating programmes in Slovenia, as well as the Paying Authority.

  27. 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.

  28. 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

  29. Selection of Project Ideas for Large Projects Structural Funds • European Regional DevelopmentFund (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 throughlinking 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

  30. Development Priority IV: Modern Welfare State and Higher Employment

  31. 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

  32. 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

  33. 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).

  34. 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 programmesfor 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.

  35. 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.

  36. Fairer and Motivating System of Social Transfers

  37. 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 acentral decision-making point. • Unifying the criteriafor 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.

  38. 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.

  39. Adjustments and Amendments of the Pension System

  40. 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.

  41. More Efficient Health Care

  42. 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.

  43. 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.

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