Does consolidation contradict growth ? Mitja Gaspari, Minister, Slovenia OECD, 26 November 2010

Does consolidation contradict growth ?

Mitja Gaspari, Minister, SloveniaOECD, 26 November 2010

Case of Slovenia: key issues for reform processes

A. Current economic outlook: where are we?B. Fiscal consolidation: efficiency of public spendingC. Competitiveness: administrative burdens, financing growthD. Structural measures: tackling ageing population and healthE. Governance: better institutionsF. 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 3.3Employment (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


Domestic Demand and GDP

Source: SORS, Bank of Slovenia


Unit Labour Cost (ULC)

Source: SORS, Bank of Slovenia


Saving-Investment Gap

Source: Bank of Slovenia


External Debt

Source: Bank of Slovenia


General Government Balance and Debt

B. Fiscal Consolidation

The Concept of the Slovenian Exit Strategy


The Slovenian Exit Strategy Policy Mix

INSTITUTIONAL ADJUSTMENTS: CORPORATE GOVERNANCE

FINANCIAL SUPERVISION PUBLIC SERVICES

STRUCTURAL MEASURES:PENSION SYSTEM HEALTH SYSTEM LONG-TERM CARE


Key ingredients of the fiscal pie*FISCAL SUSTAINABILITY MEASURES*) IMPLEMENTATION IN SLOVENIA**)

1. Fiscal rule - strong legislative backing

2. Multi-year spending limits

3. Open and accountable budgeting

4. Disciplined budget preparation and execution

1. Implied in the Decree on the Development Planning Documents and Procedures for the Preparation of the National Budget.

2. The Budget Memorandum defines multi-year expenditure ceilings that link general government expenditure to the 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; setting up of an independent fiscal council in 2009.

4. Programme-based budgeting, with top-down 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


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


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 *

*Estimates and calculations, GODEA

Source: World Bank: Doing Business, 2007-2011, *not included in 2011 survey, due to crisis circumstances

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 -

Doing Business-rankings of Slovenia

C. Competitiveness

Simplifying the administrative procedures

Source: WEF Global Competitiveness Report, 2009.

C: Competitiveness:

Boosting innovation: WEF-rankings of Slovenia

SEED CAPITAL(Angels 3F)

Valley of Death

START-UP FINANCINGStart-up

GROWTH FINANCINGEarly Growth and Expansion

FINANCING FURTHER GROWTH AND DEVELOPMENT

Further Growth and Restructuring

Financial flow – enterprise lifecycle

HIIGH RISKLOW RISK

Set up of enterprise

SID – financing services for SME, exporters, R&D, technology, education

C: Competitiveness: Financing entrepreneurship lifecycle

SEF guarantees, grants

JAPTI one-stop-shop

SEF – micro & development guarantees, direct loans

SEF – grants for new technological equipment

SEF equity financing

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

Source: SORS; Sambt 2009.

DEFICIT

SURPLUS

DEFICIT

AGE25 years

AGE 56 years

D: Structural Measures Age-related labour income/consumption profile

31 years

Labour income

Total consumption

Age

D: Structural Measures

Pension reform

Aim: Long-term financial sustainability and “decent” pensionsMeasures: 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


Total effect of the proposed pension reform % of pension expenditure in GDP

10

11

12

13

14

15

16

17

18

19

20

21

2009

2014

2019

2024

2029

2034

2039

2044

2049

2054

2059

Izd

atk

i za

po

ko

jnin

e (%

v B

DP

)

Leto

Obstoječi pokojninski sistem

Simulirane vrednosti ob uvedbi ukrepa

No policy change scenario

Pension reform scenario

Pension expenditure, %

of GD

P

Year


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.


Public expenditure on health as % of GDP

Source: European Commission, Draft report on health systems

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Belgium 6.4 6.5 6.6 6.7 6.7 7.1 7.5 7.4 7.2 7.3 7.4 Germany 8.2 8.2 8.2 8.3 8.4 8.5 8.1 8.2 8.1 8.0 8.1 France 8.1 8.1 8.0 8.1 8.4 8.7 8.7 8.8 8.7 8.7 8.7 Italy 5.4 5.5 5.8 6.1 6.2 6.2 6.6 6.8 6.9 6.6 7.0 Netherlands 5.2 5.1 5.0 5.2 5.5 5.8 5.8 5.9 7.4 7.3 7.4 Austria 7.6 7.8 7.6 7.7 7.7 7.8 7.9 7.9 7.8 7.9 8.1 Slovenia 5.9 5.9 6.1 6.3 6.3 6.2 6.1 6.1 6.0 5.6 6.0 Sweden 7.0 7.1 7.0 7.3 7.6 7.8 7.5 7.5 7.4 7.3 7.6 EuroArea 6.9 6.9 6.9 7.0 7.0 7.2 7.2 7.3 7.3 7.2 7.4


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 2010Laws:

ZVK ZUDD ZUKN ZPKS ZPOGD ZNJS ZUNPD ZUAJN ZZFP ZZIZ ZDR ZUTD ZMD ZMP ZŠ ZPIZ ZDOZ ZUPJS ZSP ZSV ZZDZZVZ

ZDARS ZŽP ZPEV ZPS

Draft, public consultation

Inter-sectoral coordinationGovernment Committees

Government adoption

National Assembly

Entry into force

Priorities Entrepreneurship and knowledge for development Flexicurity and social cohesionDevelopment-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"