EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 523 final COMMISSION STAFF WORKING DOCUMENT Country Report Slovenia 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Reform priorities 3.1.Public finances and taxation 3.2.Financial sector23 3.3.Labour market, education and social policies27 3.4. Competitiveness reforms and investment33 3.5.Environmental Sustainability44 Annex A: Overview table48 Annex B: Commission debt sustainability analysis and fiscal risks53 Annex C: Standard tables54 Annex D: Investment guidance on Just Transition Fund 2021-2027 for Slovenia60 Annex E: Progress towards the Sustainable Development Goals (SDGs)62 LIST OF Tables Table 1.1:Key economic and financial indicators – Slovenia Table 2.1:Assessment of the implementation of the 2019 Country-Specific Recommendations (CSRs)

Table 3.2.1:Financial soundness indicators, all banks in Slovenia Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth Table E.1:Indicators measuring Slovenia’s progress towards the SDGs LIST OF Graphs Graph 1.1: Composition of GDP growth Graph 1.2: Composition of potential growth Graph 1.3: Compensation per employee and labour productivity, annual % change Graph 1.4: Net international investment position (NIIP) by sector Graph 1.5: Debt decomposition Graph 1.6: GDP per capita in Slovenian regions, 2017 Graph 2.1: Level of implementation of 2011-2019 Country-Specific Recommendations (CSRs) Graph 3.1.1: Pension expenditure as % of GDP Graph 3.1.2: Dashboard on healthy ageing, 2017 Graph 3.2.1: Private equity investments as a % of GDP, average 2016-2018

Graph 3.3.1: Labour shortages as reported by employers in the industry, construction and services sector, 2008-2019 Graph 3.3.2: Share of graduate employed in occupations that do not require tertiary education Graph 3.3.3: At-risk-of-poverty-or-social exclusion rate in its components Graph 3.4.1: Labour productivity in Slovenia as a ratio of labour productivity in the euro area Graph 3.4.2: Productivity gap by sectors, 2009-2018 Graph 3.4.3: Productivity growth Graph 3.5.1: Greenhouse gas intensity of the economy, Slovenia and the EU Graph 3.5.2: Renewable energy: share in gross final energy consumption LIST OF Boxes Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Slovenia Box 3.3.1: Monitoring performance under the European Pillar of Social Rights Box 3.4.1: Drivers of Slovenia’s research and innovation performance Box 3.4.2: Investment challenges and reforms in Slovenia Executive summary Slovenia’s solid growth offers the opportunity to improve its long‑term sustainability ( ). The economy is growing strongly, although more slowly than in recent years. The efficiency of the economy is improving, helped by previous structural reforms. The labour market has improved to record levels, with a continued increase in the employment rate accompanied by a decrease in both the overall unemployment rate and the long-term unemployment rate. However, investment remains below both historical and EU averages, dragging down productivity growth. Income inequality is low and other social indicators are good and improving further. The pace of reform has stalled recently despite the urgent need for comprehensive reforms to the pensions, healthcare and long-term care systems. These reforms are necessary to tackle the challenge of an ageing population and ensure long-term fiscal sustainability. In 2019, Slovenia’s economic growth decelerated considerably, but remains robust. After growing by more than 4% in 2017 and 2018, the economy is expected to grow at the slower rate of 2.5% in 2019, and 2.7% in 2020 and 2021. This is somewhat below Slovenia’s potential growth rate. There are also risks on the horizon. As a small, open economy, Slovenia remains vulnerable to the continued uncertainty at global level and a further decline in international trade dynamics. However, the economy’s diversification should make it relatively resilient to sector-specific shocks. Growth is driven by domestic demand. Consumption is expected to continue to grow at a robust pace, supported by rising employment and disposable income. Although growth of investment in dwellings and other construction remains quite strong, investment growth in machinery and equipment has weakened substantially in 2019, primarily due to global trade uncertainty. With exports growing more slowly than imports, the external sector has a negative impact on growth. The inflation rate was 1.7% in 2019, and is expected to increase only slightly in 2020 and 2021.

The unemployment rate is below its pre-crisis level. Helped by economic growth, the unemployment rate fell to 4.6%in 2019, and is expected to stabilise at 4.2% in 2020 and 2021. The long-term unemployment rate continued to decline in 2019, falling 2.2%, well below the euro-area average. However, the long-term unemployment rate of older workers remains a concern, and at the same time certain sectors face labour market shortages. Fiscal policy was pro-cyclical in 2019. The general government budget was in balance in 2017, and reached a surplus of 0.8% of GDP in 2018. The surplus fell to 0.5% of GDP in 2019, and is expected to remain broadly stable over the medium term. Although revenues continue to increase due to economic growth, this effect is more than offset by expenditure increases and tax reductions. Public debt is forecast to fall from 70.4% of GDP in 2018 to below the 60% of GDP threshold in 2021, after having peaked at 82.6% of GDP in 2015. Further investment in innovation and infrastructure (environmental, transport and energy) remains necessary to keep Slovenia on a sustainable growth path. The innovation potential of the economy is hampered by: rather low public investment in research and innovation, limited science-industry cooperation and uneven innovation and digital capacities among firms. Waste is well managed overall, but urban wastewater and water losses are still causes for concern. Sustainable transport connections, in particular rail, are not sufficiently developed to fully support a carbon-friendly modal shift or the economic development of less‑developed regions. However, investment in sustainable transport is increasing. The share of renewable energy remains low. The ageing of Slovenia’s population means that significant investments are necessary to ease pressure on the healthcare and long-term care systems. The transition away from coalmines and coal-powered electricity production is at an early stage. Overall, Slovenia has made limited progress in addressing the 2019 country-specific recommendations ( ). This assessment does not take into account the contribution of the EU 2021-2027 cohesion policy funds. There has been some progress in the following areas: ·Older and low-skilled workers - Slovenia implemented a number of measures to increase the employability of low-skilled and older workers. Others measures are being discussed, awaiting adoption, and awaiting implementation. ·Business environment - Slovenia has taken measures to reduce the costs of compliance with regulations, in particular by promoting e-procedures and e-services. ·Public procurement - Slovenia adopted reforms to strengthen the independent oversight of public procurement, and also continued to train procurement officers. ·Focus investment-related economic policy on research and innovation – Slovenia has not fully implemented its research and innovation strategy, and there is little harmonisation among different policies and strategies. ·Focus investment-related economic policy on sustainable transport, in particular rail – Slovenia published an investment plan for transport to increase the funding of railways and sustainable mobility in the period 2020-2025. It also adopted an action plan for alternative fuels in transport that set specific objectives and outlined specific measures. ·Privatisations – Another 10% of the shares of the largest bank, Nova Ljubljanska Banka, have been sold. The sale of Abanka, the third largest Slovenian bank, was also finalised in 2019. Both these measures were expected under State aid rules. However, other privatisations have come to a halt. There has been limited progress in the following areas: ·Pensions - Although some measures have been adopted to improve the adequacy of pensions, no measures have been taken to ensure the long-term sustainability of the pension system. ·Equity markets - Slovenia tries to support equity markets financially, mainly by using EU funds. However, other factors hampering the development of equity markets have not been addressed. ·Healthcare - Slovenia has not yet presented a legislative proposal, but some other measures on improving the performance of the system are ongoing. ·Focus investment-related economic policy on the low-carbon and energy transition - Slovenia received about €90 million for climate change adaptation from the cohesion policy for 2014-2020. The selection and implementation of projects has improved. However, a comprehensive climate change strategy covering all sectors has not yet been drawn up. A more specific regulatory framework for adaptation to climate change is planned to be included in the Environmental Protection Law, which is currently being adopted. The use of low-carbon energy is limited. The implementation of low-carbon projects in the fields of transport and power generation is lagging behind. Slovenia took the necessary steps to upgrade its draft National energy and climate plan, but failed to submit it by the deadline. ·Focus investment-related economic policy on investment in environmental infrastructure – Slovenia accelerated the implementation of the EU co-financed wastewater projects but investment gap still prevail in this sector. In addition, the integration of environmental aspects, particularly, nature considerations, into planning and implementing infrastructure projects, is challenging. To tackle the challenges in the water sector, the Government proposed an amendment of the national water legislation in December 2019. There has been no progress in the following areas: ·Long-term care – A proposal was not publicly available by the end of 2019. However, the Ministry of Health announced that one would be ready for early 2020. On the indicators of the Social Scoreboard supporting the European Pillar of Social Rights, Slovenia is performing well. Income inequality is low and the risk of poverty and social exclusion has decreased in recent years. The early leaving rate from education and training is very low but significant gender gaps exist, with males achieving worse educational outcomes at the age of 15 and lower tertiary attainment rates. The labour market participation of older workers and low-skilled workers is low, and old-age poverty remains a challenge.

Slovenia is making good progress towards its national targets under the Europe 2020 strategy. It has already achieved – or is well on track to achieving – national targets for employment the early school leaving rate, tertiary educational attainment, energy efficiency and greenhouse gas emissions. However, the 2020 target for R&D and renewable energy are not likely to be reached. Slovenia is performing well on the SDGs ( ). On most sub-indicators, in particular the social ones, Slovenia is performing better than the EU average. Slovenia performs particularly well in sub-theme inequality within countries of SDG10 (see Section 3.3.3). However, there are a few indicators where Slovenia is below the EU average and on a deteriorating path. From a macroeconomic perspective, investment as a share of GDP (SDG 9) is also worth mentioning. It stood at 19.2% in 2018, below the EU average of 20.9%, and has been falling in recent years. The key structural issues analysed in this report that point to particular challenges for Slovenia’s economy are set out in the paragraphs below. The ageing of the population is putting a strain on the pension, healthcare and long-term care systems. Age-related expenditure is expected to increase by about 6% of GDP between 2016 and 2070, one of the largest increases in the EU. Notably, pension expenditure is expected to increase from 10.9% of GDP in 2016 to 14.9% of GDP in 2070. A reform aiming at improving pension adequacy and encouraging workers to work longer was adopted in November 2019. The Fiscal Council estimates that this reform will increase pension expenditure by 1pp. of GDP by 2040. At the same time, no concrete action has been decided for the second pillar of the reform, intended to improve the sustainability of the system. Furthermore, the use of long-term unemployment and long-term-sick-leave schemes as “bridges” to retirement put a further strain on the sustainability of the pension system. Overall, healthcare outcomes are good, but expenditure is rising, and public healthcare financing is strongly cyclical. There is therefore a risk that revenues might not cover increased expenditure in an economic downturn. The government is currently re-initiating the process for a comprehensive reform of the healthcare system (). Slovenia does not have an overarching law that covers long-term care. Slovenia’s ageing population means that chronic conditions will be more prevalent in the future. This will make it necessary to: (i) devise new care models; (ii) place greater emphasis on sickness prevention; and (iii) ensure the integration of the healthcare system with the long-term care system. The government intends to present a legislative proposal covering long-term care in the first half of 2020. Boosting investment could further improve potential growth and productivity. Labour productivity is now growing again, after a period in which it failed to close the gap with the EU average. This improvement has been driven primarily by efficiency gains, as past structural reforms are now paying off. However, investment remains below historical and EU averages, choking off a more rapid catch‑up towards average EU productivity levels. Potential growth is nevertheless expected to stabilise at a robust [3.5%] per year. The inactivity rates of older and less skilled workers are high while labour shortages are increasing. The inactivity rate of 55-64 year olds is significantly higher than the EU average. The unemployment rate, and the long‑term unemployment rate in particular, are also above the EU average for this cohort. This early exit from the labour market is underpinned by several factors, including low participation in life-long learning and certain features of the unemployment and health systems. As the labour market tightens, labour shortages are becoming more acute, partly due to skills mismatches and insufficient digital literacy. The banking sector has improved steadily, but alternative sources of finance are not sufficiently developed to support innovation and growth. Banks’ profitability, solvency and asset quality have improved significantly, although the low-interest-rate environment puts banks under pressure to reduce costs and increase revenues. Strong growth in consumer lending led the Bank of Slovenia to issue binding measures to mitigate risks. Slovenia’s equity and venture capital markets are still not sufficiently developed and the market capitalisation of the national stock exchange is low. The underdeveloped equity markets, which partly reflect the small size of the economy, may stifle market entry and the growth of innovative and high‑potential firms. Despite significant privatisation measures taken in 2018 and 2019, the State still plays a significant role in the economy. In 2018-2019, Slovenia further reduced its stake in Nova Ljubljanska Banka and fully privatised Abanka. However, the State still plays a dominant role in some crucial sectors, such as insurance and telecommunications, and there are plans to increase its role in the tourism sector. This could hamper competition and efficient resource allocation. Although the business environment has improved, problems remain regards public procurement and administrative/regulatory burden. Slovenia has taken measures to gradually reduce administrative burden and regulatory restrictions, but both remain obstacles for businesses. The justice system continues to reduce its backlog but commercial court proceedings often remain lengthy and the prosecution of economic and financial crime faces difficulties affecting business decisions. Slovenia is implementing measures to improve professionalisation and strengthen remedy procedures in public procurement. However, competition in public procurement and tender aggregation in the health sector remain problematic, potentially leading to higher costs for the Slovenian taxpayer and lost opportunities for its businesses. Balancing trade-offs to achieve clean energy transition. The carbon intensity of the economy is rather high, primarily due to transport, electricity production, and heating. In order to reduce carbon intensity, the infrastructure for cleaner and renewable energy sources will need to be built, which could have an impact on the natural heritage, if not appropriately managed. A comprehensive strategy for climate change adaptation has not yet been drawn up. Severe socioeconomic impacts and environmental degradation can be observed in Slovenia’s coal‑mining regions. The Commission’s proposal for a Just Transition Mechanism under the next multi-annual financial framework for the period 2021-2027 includes a Just Transition Fund, a dedicated just transition scheme under InvestEU, and a new public sector loan facility with the EIB. It is designed to ensure that the transition towards EU climate neutrality is fair by helping the most affected regions in Slovenia to address the social and economic consequences. Key priorities for support by the Just Transition Fund, set up as part of the Just Transition Mechanism, are identified in Annex D, building on the analysis of the transition challenges outlined in this report. 1. Economic situation and outlook GDP growth In 2019, Slovenia’s economy grew at a solid rate, but the current economic cycle appears to have already peaked. Slovenia’s GDP is expected to have grown by 2.5%in 2019, after growth of 4.1% in 2018. The slowdown was primarily due to the declining contribution of the external sector, related to a global slowdown in trade. Over the first three quarters, exports grew by 4.6% (compared to the same period in 2018), slightly less than imports, which rose by 5.0%. Domestic demand remained the main driver of growth. Private consumption continued to rise, supported by the relatively strong increase in household disposable income. Investment growth was particularly strong in residential construction (12.2%), while investment in machinery and equipment increased by 3.1%. Graph 1.1:Composition of GDP growth Source: European Commission Winter forecast 2020 In the coming years, annual GDP growth is expected to remain at 2.7%. As in 2019, domestic demand is expected to drive economic development, with net exports making a negative contribution (Graph 1.1). Growing disposable income and employment will continue to support private consumption, which is expected to continue to increase at a relatively strong pace. Investment is expected to be driven by demand for new housing, which had been sluggish in previous years. At the same time, the uncertainty prevailing in global markets limits firms’ willingness to invest, despite the tight labour market and high rate of capacity utilisation. In particular, investment in machinery and equipment is expected to continue growing at the relatively muted rate it recorded in 2019. In 2020 and 2021, the risks the country faces are mainly related to the external environment. However, the Slovenian economy may be relatively resilient as its export structure is diversified and not particularly strongly affected by sector-specific shocks. Graph 1.2:Composition of potential growth Source: European Commission Autumn forecast 2019

Slovenia’s growth potential is increasing. Overall, potential growth is currently expected to stabilise at 3.5%. Although total factor productivity recovered quickly after the crisis, the contribution of capital accumulation remains low. Looking ahead, the contribution to potential growth from investment is expected to increase, while the contribution from labour is expected to decline after 2021 due to the ageing population. (Graph 1.2). Investment remains below the EU’s and Slovenia’s long-term average levels. Investment in R&D (‘other investment’) is growing at rather low rate. This is detrimental to the achievement of SDG 8 and 9. In absolute terms, investment in the manufacturing sector has increased compared to the pre-crisis period (driven by metal products, electrical equipment and motor vehicles) but it has decreased in sectors such as wholesale and retail trade, transportation and storage and even information and communication. Inflation Inflation remains moderate. After a deflationary period 2015-2016, prices in Slovenia developed closely in line with those in the euro area in 2017 and 2018. Yet, in 2019, inflation reached 1.7% markedly higher than the inflation rate of 1.2% in the euro area. Main driver of this growth, were the prices of services. Price increases, particularly in services, reflect also recent wage increases. For the coming years, it is expected that inflation will remain close to 2.0%, somewhat above the euro area inflation rate. Core inflation (net of energy and food prices) is expected to reach above 1.6% over the forecast horizon. Labour market The labour market continues to improve with rising employment and falling unemployment. The employment rate was 75.4% in 2018 and improved to 76.5% by the third quarter of 2019. It is forecast to further improve over the coming years. This, combined with an inflow of foreign workers, is expected to help alleviate labour supply constraints to some extent. The unemployment rate further declined from the 2018 average of 5.1% in 2018 to 4.6% in 2019. Over the coming years, it is expected to decline further. The tightening of the labour market has been accompanied by growing wage pressures. Nominal compensation per employee ( ) increased by 3.9% in 2018 and is projected to continue growing by 3.6% in both 2019 and 2020 respectively. This is mainly due to the rise in public sector pay (agreed in negotiations with trade unions at the end of 2018), and the additional increase in the net minimum wage by 3.4% to €700, in line with the act adopted in December 2018 (European Commission, 2019 a). Real compensation per employee, which grew by 1.7% in 2018, is projected to grow 2% in 2019. In 2020 and 2021, the growth of real compensation would be slightly lower as inflation is projected to accelerate. Despite improved labour market conditions, structural challenges are still a concern. The working age population is decreasing, due to the rapidly ageing population. Challenges persist in the labour market participation of older workers (aged 55-64). Despite recent increases, their employment rate remained well below the EU average in 2018 (47.0% compared to 58.7% in the EU). The contrast is even starker for low-skilled older workers, who had an employment rate of 30.5% (compared to 44.0% in the EU) in 2018. Social developments Inequality is low and the share of people at risk of poverty or social exclusion has on average decreased, but remains high for the elderly. Slovenia is performing well on most indicators related to poverty and inequality. Income inequality is the lowest in the EU and the share of income of the poorest 40% of the population is one of the highest. In 2018, the at-risk-of-poverty-or-social exclusion rate (AROPE) decreased by 0.9pps to 16.2%. The decrease is due to a decrease in the severe material deprivation rate (-0.9pps) and a very low work intensity rate (‑0.8pps). The at-risk-of-poverty rate (AROP) was the same in 2018 as in the previous year (13.3%) and below the EU average for 2018 (17.1%). Yet, the rate of old-age poverty (24.4% compared to an EU average of 20.9% in 2018), which mainly affects women over the age of 65, remains a challenge. Competitiveness Sloveniaʼs export market share was increasing, supported by moderate unit labour cost developments and a favourable destination mix. Slovenia’s export market share increased by 4.7 pps back in 2018. This increase is expected to continue, for both goods and services, also supported by the relatively stable growth in Slovenia’s destination markets. The nominal wage growth has led to an increase in nominal unit labour costs. Unit labour costs grew by 3% in 2018 and are expected to peak at 3.3% in 2019, still below that of other Member States in the region. Growth in unit labour costs is then expected to moderate gradually. Graph 1.3:Compensation per employee and labour productivity, annual % change Source: Eurostat External position Sloveniaʼs current account has been in surplus since 2012. Slovenia’s current account balance turned positive in 2012 and peaked at 6.1% of GDP in 2017. After posting a surplus of 5.7% of GDP in 2018, it is expected to have declined further in 2019, as imports are expected to have grown faster than exports due to stronger domestic demand. Although both goods and services balances are in surplus, the surplus in services is especially strong. The current account surplus is higher than might have been expected based on economic fundamentals ( ). The same holds for the cyclically adjusted current account surplus, which exceeded 8% of GDP in 2018, and is projected to remain at comparable levels in 2019-2021. In addition to trade balance, the surplus is driven by public and private deleveraging, as well as low investment. The high current account surplus supported a rapid improvement of the net international investment position. Slovenia’s passive net international investment position has broadly halved from 2012 to 2019 (Graph 1.4). In particular, the banking sector has built up net foreign assets since 2014 and has been able to maintain this position afterwards. Government liabilities have declined sharply since 2015. Non-financial corporations have maintained small liabilities since 2015. The net international investment position is expected to improve further thanks to the current account surplus and the fall in government debt. Graph 1.4:Net international investment position (NIIP) by sector Source: Eurostat Financial sector Slovenia’s banking sector has improved significantly, showing better profitability, better asset quality and strong liquidity. The return on equity has increased and the ratio of non-performing loans has declined, reaching 4.5% in June 2019 (from 22.8% in 2014). Banks also enjoy a relatively stable funding basis and abundant liquidity. Despite the privatisation of a number of its bank holdings, the Slovenian state still plays a substantial role in the financial sector (see Section 3.2.1). Private debt

The private indebtedness ratio continues to decline. Since the indebtedness ratio peaked in 2010 (at 115.2% of GDP), private sector debt fell to 72.8% of GDP in 2018, and was below both prudential and fundamental benchmarks ( ) in 2019. Credit flow has turned positive and is supporting economic growth, but rapid nominal GDP growth until end 2018 still caused the private debt-to-GDP ratio to decline. In November 2019, the Bank of Slovenia in line with slowing economic fundamentals, adopted macroprudential measures to limit the growth of credit, especially consumer loans. These measures include the capping of consumer loan durations and limiting the ratio of annual debt servicing costs to a borrower’s net income. Graph 1.5:Debt decomposition Source: Eurostat Housing market The strong increase in house prices since 2016 has been mainly driven by the lack of supply of residential buildings. Since the summer of 2016, prices for residential buildings in Slovenia have been increasing strongly. In 2018, house prices recorded the highest pace of real growth since the financial crisis (7.4%, which is faster than wage growth), making Slovenia one of the euro-area Member States that registered the highest annual growth in house prices. The favourable economic situation and buoyant labour market have played a role, but the low level of investment in residential buildings was the major factor in pushing up house prices. Despite the favourable interest rates, credit growth has been less buoyant than in the run-up to the crisis. The banking system is less exposed and more resilient to potential shocks in the real estate market than during the last financial crisis. Banks’ exposure is further limited by the recent macro-prudential measures taken by the Bank of Slovenia. House prices are still growing, but first signs of a slowdown were observed in 2019. A gradual slowdown in the demand for residential buildings (due to diminishing affordability) and an increase in construction have started to mitigate house price growth in 2019. It is expected that, with a further recovery in construction activity, house prices will continue to moderate in the near future. Regional disparities Regional and sub-regional disparities in Slovenia persist. Eastern Slovenia lags behind Western Slovenia (which includes the capital) in GDP per capita (71% and 103% of the EU average in 2017 respectively). However, the cross-regional coefficient of variation of GDP per head weighted by population is one of the lowest in the euro area. The disparities are pronounced at sub-regional (local) level. In particular, the role of the capital sub-region around Ljubljana in the economy is predominant: it produced 37% of national GDP in 2017, with 26% of country’s population. Its GDP per capita in 2017 (120% of the EU average) was almost three times higher than in Slovenia’s poorest region (Zasavska, 45% of the EU average). The population is growing in Western Slovenia but shrinking in the Eastern. Between 2000 and 2017, the population of Eastern Slovenia shrunk by 0.4%, while it grew by 7.7% in Western Slovenia. The sub-regional picture is more complex. Two of the least developed sub-regions (Pomurska and Zasavska) lost more than 7% and 5% respectively of their population due to both, natural population decrease (more deaths than births) and emigration. The population of the capital sub-region and the coastal Obalno-Kraska sub-region grew significantly (12% and 8% respectively). Although the capital sub-region experienced natural population increase and net immigration, population growth in other sub-regions was only due to net immigration. Graph 1.6:GDP per capita in Slovenian regions, 2017 Source: Eurostat Divergent population trends underpinned convergence in GDP per capita, despite the slow economic growth in the less developed region. Between 2010 and 2017, GDP grew faster in Western Slovenia than in the less developed eastern part of the country (1.7% annually against 1.4%). However, the fast growing population of the western regions (in particular the capital sub-region) resulted in convergence in GDP per capita (see Section 3.4). Public finances The general government overall balance is expected to remain in surplus. The general government surplus is forecast to have decreased from 0.8% of GDP in 2018 to 0.5% of GDP in 2019. This reduction was driven by the economic slowdown, a strong increase in government expenditure and the revenue-decreasing measures adopted by the Parliament. The surplus is expected to stay at 0.5% of GDP in 2020, due to further tax reduction measures, and to increase slightly to 0.6% of GDP in 2021. Slovenia’s structural fiscal position is expected to improve gradually in the coming years. The debt-to-GDP ratio continues to decline but this trend could change again in the longer term. Thanks to the low interest rate environment, active public debt management, general government surplus and privatisation proceeds, public debt is forecast to decline below the reference value of 60% of GDP in 2021. This would help Slovenia achieve SDG 17. However, because expenditure on pensions, healthcare and long-term care is projected to increase significantly (due to both the ageing of the population and the pension measures adopted in 2019), the debt-to-GDP ratio could start increasing again in the longer term. Sustainable development goals Overall, Slovenia is performing well with regard to the SDGs. On most sub-indicators, in particular the social ones, it is performing better than the EU average. Slovenia performs particularly well with regard to SDG 10, sub-theme inequality within countries (see Section 3.3.3). There are, however, a few indicators, where Slovenia is below the EU average and showing a negative trend. From a macro-economic perspective, the share of investment in GDP (SDG 9) is worth mentioning. It stood at 19.2% in 2018, below the EU average of 20.9%. This challenge is discussed in Chapter 1. The Slovenian development strategy 2030 aims to reach the average EU emission productivity and achieve a 27% share of renewable energy sources in final energy consumption. Table 1.1:Key economic and financial indicators – Slovenia Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for real GDP and HIPC, Autumn forecast 2019 otherwise) 2. Progress with country-specific recommendations Slovenia has a good track record in implementing country-specific recommendations (CSRs). Since the start of the European Semester in 2011, there has been substantial progress or full implementation of almost 60% of all CSRs addressed to Slovenia (Graph 2.1). However, more than 10% of the CSRs addressed to Slovenia have recorded no or only limited progress in the implementation. Graph 2.1:Level of implementation of 2011-2019 Country-Specific Recommendations (CSRs) Source: European Commission

The public debt ratio is decreasing rapidly but pressure on the long‑term sustainability of public finances remains. The public debt ratio increased four-fold with the crisis, peaking at 82.6% of GDP in 2015. Also due to policy action, the ratio has rapidly decreased to 70.4% in 2018 and is expected to fall below 60% in 2021. In parallel, the fiscal framework has been strengthened. At the same time, fiscal policy has become pro-cyclical due to: (i) the expiration of temporary measures taken during the crisis; and (ii) further expansionary measures introduced recently. Due to ageing-related costs, particularly on pensions, the pressure on the long-term sustainability of public finances remains significant. The Slovenian banking sector has improved remarkably since 2014. Decisive policy action and the improving macroeconomic situation have helped the banking sector to recover rapidly since 2014. The non-performing loans ratio continues to decline. It reached 4.5% in June 2019, down from 7.4% a year earlier. At the same time, profitability increased and the average capital adequacy ratio is solid (18.1% in June 2019). The sale of shares of Nova Ljubljanska Banka (NLB) and Abanka in 2018 and 2019, stemming from the 2013 State aid commitments, will further help ensure the viability of the sector in the long term. Measures have been adopted to increase the employability of low-skilled and older workers. Since 2011, Slovenia has been recommended to take measures to increase the employability of low-skilled and older workers. The 2013 labour market reform and targeted active labour market policies somewhat increased employment opportunities for older and low-skilled workers. However, their participation rate remains low. The business environment has improved, although progress has slowed down recently. Slovenia has reduced the number of regulated professions significantly, but progress has slowed down in recent years. Measures have been taken to reduce administrative burden and efforts are continuing. A comprehensive framework for the governance of state-owned enterprises was put in place after the crisis. However, there is a risk that the capacity of the Slovenian Sovereign Holding is weakened after 2020 when its assets will be gradually transferred back to the state (see Section 3.1.5). With the use of national and EU funding, Slovenia tries to improve alternative funding for SMEs and fast-growing companies. In 2019, Slovenia made limited progress in addressing the first of the 2019 CSRs. Despite intensive discussions there is still no proposal for a comprehensive healthcare reform. The reform is expected to be discussed by the government only in mid-2020. Other measures were announced but these address the CSR only to a limited extent. A reform proposal for long-term care was announced for release in early 2020 but no details have been revealed or discussed with stakeholders. The pension reform adopted in November 2019 improves the adequacy of pensions but puts a strain on the sustainability of the pension system in the long term. At the same time, measures taken in 2012 to limit early retirement seem to be having some effect, but the early exit from the labour market remains a challenge. Slovenia also implemented a number of measures to increase the employability of low-skilled and older workers. Other initiatives (such as on digital literacy) are still at the proposal stage. Slovenia made some progress in addressing the second of the 2019 CSRs. Slovenia tries to support equity markets, mainly using EU funds but the still significant state ownership in some sectors and the regulatory framework continue to reduce the potential of Slovenia’s capital markets to further develop (see Section 3.2.2). Slovenia continued improving the business environment. However, instruments like the Single Document, the regulatory impact assessments and the SMEs test are not fully effective yet (see Section 3.4.2). Slovenia also adopted an important reform of the National Review Commission, thereby strengthening independent oversight of public procurement. Slovenia is also training procurement officers and providing guidance to improve professionalisation of tendering authorities. There has been progress with e-procurement and the SME participation in tenders has increased. While the privatisation of state-owned or state-controlled banks, in line with obligations under state aid rules, was finalised in 2019 (see Section 3.1.5), other planned privatisations have come to a halt. Slovenia made limited progress in addressing the third of the 2019 CSRs. The country is adopting and implementing relevant strategies and developing investment plans. This assessment does not take into account the contribution of the EU 2021-2027 cohesion policy funds ( ). To tackle the challenges in the water sector, the Government proposed an amendment of the national water legislation in December 2019. Upon request from a Member State, the European Commission can provide tailor-made expertise via the Structural Reform Support Programme to help design and implement growth-enhancing reforms. Since 2016, such support has been provided to Slovenia for about 40 projects. In 2019, several projects were delivered on the ground. The Commission, for example, facilitated the exchange of good practices on promoting supplementary pension savings. Support for improving the healthcare system also continued. Tools were developed to: (i) assess the performance of the health system; (ii) plan the healthcare workforce; (iii) assess patient safety; and (iv) measure the quality of care. In addition, Slovenia received assistance from the Commission for deploying integrated long-term care services and for updating the system for reimbursing hospital services. In 2019, work also started on promoting the labour-market integration of the long-term unemployed and those not in employment, education, or training. The Commission is also assisting the authorities in the preparation of the Strategic Environmental Assessment of the Slovenia’s draft integrated national energy and climate plan. Table 2.1:Assessment of the implementation of the 2019 Country-Specific Recommendations (CSRs) Source: European Commission For CSR 3: The regulatory framework underpinning the programming of the 2021-2027 EU cohesion policy funds has not yet been adopted by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF). Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Slovenia Slovenia is an important beneficiary of the EU funds. The financial allocation from the EU Cohesion policy funds ( I ) for Slovenia amounts to €3.8 billion in the current Multiannual Financial Framework, equivalent to around 1.2% of the GDP annually. By the end of 2019, some €3.5 billion (around 93% of the total) was allocated to specific projects, while €1.6 billion was reported as spent by the selected projects ( II ), showing a level of implementation above the EU average. While bringing about a more harmonious development through reducing economic, social and territorial disparities, EU Cohesion policy funding also contributes to addressing structural challenges in Slovenia. The Cohesion policy programme for Slovenia has allocated EU funding of almost €1 billion to smart growth, almost €1.2 billion to sustainable growth and sustainable transport and more than €800 million to inclusive growth. EU Cohesion policy funding is contributing to major transformations of the Slovenian economy. It is doing so by promoting growth and employment through investments in areas such as research, technological development and innovation, competitiveness of enterprises, in low-carbon economy, sustainable transport, employment, social inclusion and education. By 2019, investments driven by European Regional Development Fund and Cohesion Fund have already supported cooperation of 180 enterprises with research institutions, over 15,000 people are already benefitting from improved water supply and almost 320,000 square metres of public buildings were renovated to be more energy efficient. The funds have also supported flood protection measures, which will benefit almost 18,000 people. More than 950 educational institutions will be connected to wireless networks and more than 310 new export companies will be supported. The European Social Fund focuses on helping people to find a job, in particular for young people (23,460 young people) and low-skilled and older workers (25,000 people). It also contributes to the promotion of social inclusion and the fight against poverty (19,000 people). 42,900 participants will be involved in programmes to acquire new skills and to raise their level of education ( III ). Agricultural and fisheries funds and other EU programmes also support the investment needs. The European Agricultural Fund for Rural Development makes available in total €1.1 billion and the European Maritime and Fisheries Fund in total €30.2 million (including the national co-financing for both). Slovenia benefits also from other EU programmes, such as the Connecting Europe Facility, which allocated EU funding of €331 million to specific projects on strategic transport networks, and Horizon 2020 allocated EU funding of €257 million (including 153 SMEs with about €68 million). EU funding helps to mobilise important private investment. By the end of 2018, European Structural and Investment Funds ( IV ) supported programmes mobilised additional capital by committing about €333 million in the form of loans, guarantees and equity ( V ). This amount accounted for 8.8% of all decided allocations of the European Structural and Investment Funds. EU funds already invest substantial amounts on actions in line with the Sustainable Development Goals (SDGs). In Slovenia, European Structural and Investment Funds support 12 of the 17 SDGs and up to 95% of the expenditure is contributing to those. 3. Reform priorities 3.1.Public finances and taxation 3.1.1.fiscal policy The general government headline balance remains in surplus, and the public debt ratio continues to fall. According to the Autumn 2019 Economic Forecast, the budget surplus is expected to have decreased from 0.8% of GDP in 2018 to 0.5% of GDP in 2019, due to the economic slowdown and tax relief on the annual holiday allowance (European Commission, 2019 b). The surplus is forecast to remain broadly stable in 2020 and 2021. In structural terms, the government deficit is expected to have deteriorated from 0.7% of GDP in 2018 to 1.0% in 2019 but is expected to improve slightly in the coming years. Supported by the headline surplus, active public debt management, the low interest rate environment and privatisation proceeds, public debt is projected to fall from 66.7% of GDP in 2019 to below 60% in 2021. New tax measures adopted in October 2019 lower the tax burden on labour, while revenues from the recurrent taxation of immovable property and capital remain below the EU average. In addition to exempting the annual holiday allowance from income tax and social security contributions, the Parliament has adopted changes to the tax code to reduce labour taxes by lowering tax rates, increasing tax brackets and increasing the general allowance. The tax changes, which became effective at the beginning of 2020, mostly benefit middle-income and high-income earners, while low-income and secondary earners (spouses with lower labour income) keep facing a high labour tax wedge (European Commission, forthcoming). To compensate partially for the revenue loss, taxes on capital gains, rental income and corporate income have been slightly increased, and there are plans to improve tax collection. The government has withdrawn the new reform proposal on real estate taxation planned for 2020, although recurrent taxes on immovable property are considered to be less detrimental to growth than corporate taxes, and its revenues are currently low (0.5% of GDP compared to an EU average of 1.5% in 2018). Slovenia is also significantly below the EU average in its tax revenues from both capital stock and the various types of capital income (these tax revenues amount to 4.9% of GDP in Slovenia, ranking 21st among Member States, compared to an EU average of 8.5% in 2018), which should be part of a balanced and inclusive tax system. Public expenditure has been increasing strongly. In 2019, expenditure is forecast to have grown faster than revenues, due to: (i) a substantial public sector pay rise negotiated with trade unions in late 2018; (ii) a further relaxation of temporary consolidation measures in the area of social transfers; (iii) an additional increase of social transfers; (iv) indexation of pensions; and (v) an increase in public investment. For 2020, the restricted payment of the performance bonus, stricter conditions for receiving unemployment benefits and lower public investment are expected to attenuate expenditure growth. However, expenditure growth will still remain high. Ageing-related expenditure, particularly on pensions, puts pressure on the sustainability of Slovenia’s public finances in the long term ( ). The sustainability gap indicator S2 shows that a fiscal adjustment of 5.4% of GDP is required to stabilise the debt-to-GDP ratio in the long term, pointing to medium risks to long-term sustainability ( ). This result is primarily driven by the projected increase in spending on pensions (contributing 3.6% of GDP to the increase). It does not yet take into account the pension measures adopted in November 2019, which are expected to increase the gap further (see Section 3.1.3). Health care and long-term care expenditure also contributed to the sustainability gap. 3.1.2.fiscal framework

Slovenia’s independent fiscal institutions fulfilled their obligations mandated by law. The scope of the mandate of both the Fiscal Council and the macroeconomic forecaster IMAD is one of the broadest among the new Member States and close to the EU average ( ). While the deviations of the annual budget from the medium-term budgetary framework are overall limited, the revised budgetary documents for 2019 are currently being reviewed by the Constitutional Court for not fully respecting the ceilings set in the adopted framework ( ). The Fiscal Council assessed that fiscal rules will be complied with in 2020 and 2021. However, it also highlighted significant risks to compliance stemming from: (i) inconsistencies between the projections and the adopted or proposed measures; (ii) the possibility of adopting some pending measures with a negative budgetary impact; and (iii) risks related to the macroeconomic environment ( ). In addition, the Fiscal Council has repeatedly pointed to the absence of comprehensive policies to ensure the long-term sustainability of Slovenia’s public finances (see Section 3.1.1) ( ). In response, the government confirmed its assessment that the draft budget for 2020 and 2021 is appropriate ( ). 3.1.3.pension system The pension reform ( ) in 2012 had positive short-term and medium-term effects on the adequacy and sustainability of pensions. The 2012 reform gradually increased the statutory retirement age to 65 for men (in 2016) and women (in 2020) and introduced higher penalties for early retirement. The 2012 reform also introduced bonuses for prolonging working lives (European Commission, 2017 a). The number of new old-age and other types of pensioners has been slowly decreasing since 2012, while the number of those contributing to the pension system has been increasing. The ratio between those contributing and those receiving pensions is thus improving. In 2018, it rose to 1.51, up from 1.38 in 2013. Another positive factor affecting this ratio is the inclusion of younger contributors in the pension and disability insurance system on the basis of student work (Government of Slovenia, 2019). The measures to limit early retirement appear to be successful. In 2018, 318 people retired early (less than 2% of new retirees) compared to 475 in 2017. Recent projections indicate a considerable increase in pension expenditure in the long term. The 2012 pension reform is expected to provide a stable pension environment for a ten-year period only. As a percentage of GDP, pension expenditure in Slovenia is projected to increase from 10.9% in 2016 to 14.9% in 2070, which is one of the largest increases in the EU (European Commission, 2018 a). This can mostly be explained by: (i) the early exit of workers from the labour force, itself largely a result of previous pension legislation; and (ii) the retirement of the largest age cohorts, which will also enjoy longer retirement due to increased longevity (Government of Slovenia, 2019; IMAD, 2018; MoLFSAEO, 2018). Further delaying a pension reform aimed at improving the fiscal sustainability of the system increases pressure on government expenditure. Even though the transfer from the state budget to pensions has declined in recent years as employment has improved, it still exceeded €1 billion (2% of GDP) in 2018 (IMAD, 2019 a). Graph 3.1.1:Pension expenditure as % of GDP Source: The 2018 Ageing Report: Economic and Budgetary Projections for the EU Member States (2016-2070), European Commission Long-term unemployment and long-term sick leave are often used as an early exit from the labour market and as a ‘bridge’ to retirement. Nearly 1 in 4 new retirees in 2018 previously had the status of an unemployed person in the year before their retirement. However, recent legislative changes imposed stricter eligibility conditions on unemployment benefits for older workers. Data indicate that long-term sick leave might also be used to exit the labour market early. The share of employees on long-term sick leave is increasing, and this is especially notable among women aged over 60. This development is not necessarily the result of severe illness. Instead, it may partly reflect the increase in the statutory retirement age introduced by the 2012 pension reform, which led to an increase in the number of older workers. Other features of the labour market, such as the absence of appropriate structural measures to adapt jobs to an ageing population and the lack of effective vocational rehabilitation of workers, may have contributed to this increase as well. These shortcomings potentially have a negative effect on the sustainability of public finances, through the pension and health funds (HIIS, 2018). Poverty among elderly people, especially among women, is still a concern. In 2018, the at-risk-of-poverty or social exclusion (AROPE) rates for the age groups 65+ and 75+ were higher than the EU average (20.1% and 23.7%, respectively, compared to EU averages of 18.6% and 20.1%). These rates are especially high for women. Compared with the EU average, the Slovenian pension system produced, in 2018, relatively low aggregate replacement ratios (0.58 and 0.45, respectively) ( ) and low median relative incomes of people aged 65+ (European Commission and Social Protection Committee, 2018). The fiscal consolidation measures adopted after 2012 considerably reduced current pensions as well as the minimum income provision for old people. In September 2019, around 8% of the old-age pensioners in Slovenia received net monthly pensions lower than €300 ( ). The average gross old-age pension is substantially higher (about €640 in 2018) (PDIIS, 2018), but it still does not cover the full costs of care in a public nursing home, only basic care in public nursing homes (Republic of Slovenia, Court of Audit, 2019). The amendment to the Pension and Disability Insurance Act (ZPIZ-2G) adopted in November 2019 will improve the adequacy of pensions. The amendment has two main objectives, namely to support longer work activity without increasing the statutory retirement age, and ensure a decent income in retirement. Provided that the pension-qualifying period of 40 years of work has been attained, the pension rate for men will be raised to the level applicable to women (from 57.3% to 63.5% of the long-term average pay) by 2025, which should improve the pension adequacy of future pensioners. Furthermore, the pension rate for both men and women who have worked for a minimum period of 15 years is also being raised from 26% to 29.5% of the long-term average pay. Higher pension rates will improve the income adequacy of the most vulnerable groups within the pension system, in particular the recipients of the lowest old‑age, invalidity and survivors’ pensions. Higher pension rates will also increase disability insurance benefits. The new law also introduces an additional bonus (an accrual rate of 1.36% per child for up to three children), which would mainly improve pension adequacy for women. To encourage workers to work longer, major changes are envisaged in the so-called ‘dual status’. Pensioners, who qualify for the old age pension and continue to work, would for 3 years receive 40% of the pension they are entitled to, in addition to their salary. After that, their pension will drop to only 20%, as is the case now. However, the new law does not improve the social situation of current pensioners. Nor does it address the longstanding issue that social security contributions of active self-employed persons may be calculated on the basis of the minimum income amount. Currently 80% of self-employed persons make use of this possibility ( ). Unless they have saved for retirement purposes through other channels, they would have to depend on the minimum old-age pension after retirement. (European Commission, 2019 a). The amendment puts a strain on the sustainability of the pension system. The Fiscal Council has estimated that the new legislation will see pension expenditure increase by 1 pp. of GDP by 2040 and even more in the following years, further adding to long-term sustainability risks ( ). Discussions have already started at the technical level between the government and social partners about a possible second reform step to improve the sustainability of the pension system. This second step may include updating the current indexation mechanism and/or increasing the statutory retirement age. However, no concrete measures have been agreed yet. 3.1.4.healthcare and long-term care The projected increase in healthcare spending due to ageing is weighing on the long-term fiscal sustainability of the system. In 2016, Slovenia’s public spending on healthcare accounted for 5.6% of GDP, which was below the EU average of 6.8%. However, driven by changes in demographic structure, public spending on healthcare is projected to increase by 1.0% of GDP between now and 2070 (EU: 0.9%) according to the ‘AWG reference scenario’ ( ) of the Council’s Ageing Working Group (European Commission, 2017 a). When taking into account the impact of non-demographic drivers on future spending growth (‘AWG risk scenario’ ( )), healthcare expenditure is expected to increase by 2% of GDP between now and 2070 (EU: 1.6 pps). The share of health spending financed by the general government has been increasing, but remains below the EU average. The public share of total health spending has gradually grown since 2014 and reached 72.2% in 2017. This was still below the EU average of 79.4%. However, about half of private spending in Slovenia comes from voluntary healthcare insurance, which is almost a synonym for obligatory health insurance as the vast majority of citizens has taken out such insurance. Accordingly, voluntary healthcare insurance accounts for 14.3% of current health expenditure, the highest share in the EU. Other private spending comes almost entirely from out-of-pocket expenditure (12.3% of total health spending), which is one of the lowest shares in the EU (OECD/EOHSP, 2019). Previous attempts to reform and broaden the funding sources for the health system have failed. The government relaunched the preparation of a new draft healthcare and health insurance act in autumn 2019. Given the current sensitivity of health sector revenues to labour market fluctuations, the draft act is expected to propose measures to diversify funding streams, such as replacing the current voluntary‑health‑insurance with a compulsory lump-sum contribution. The government intends to transform the health insurer into an active buyer of health services, promoting efficiency in contracting and quality. It plans to launch a consultation in mid-2020 and submit the proposal to the Parliament by autumn 2020. Slovenia has experienced an increase in life expectancy at birth in recent years and has achieved most of the targets of the United Nations’ SDGs for health. Life expectancy at birth was 81.2 years in 2017, up from 76.2 years in 2000. Preventive measures and concerted efforts across policy areas have contributed to declines in preventable mortality, although preventable mortality rates are still above the EU average. Suicide rates in Slovenia have considerably decreased since 2000. The growing number of cases of lung cancer in women is still of concern, but Slovenia is progressing with the implementation of a smoking reduction programme and achieving SDG 3. However, in 2017, more than 12 of the almost 20 years of life expectancy gained for Slovenians aged 65 were on average years in which they would have disabilities (Graph 3.1.2). Primary care helps to limit hospital admissions but the number of physicians remains low. The primary care system contributes to low rates of avoidable hospital admissions compared to the EU average. However, the number of doctors in Slovenia (3.1 per 1,000 population) is well below the EU average and patients report difficulties registering with a general practitioner, even in densely populated urban areas. The authorities are trying to increase the attractiveness of working in the system, and more general practitioners are currently being trained. Graph 3.1.2:Dashboard on healthy ageing, 2017 Source: Eurostat database for life expectancy and healthy life years (data refer to 2017); SHARE survey for other indicators (data refer to 2017) Action is being taken to reduce waiting times. Some 3.3% of the population reported unmet needs for medical care in 2018, mainly due to long waiting times for medical treatment. Waiting times affect all income groups equally. Several measures are being introduced or planned to improve management and reduce waiting lists. These include a mapping of healthcare and long-term care resources (infrastructure, equipment and healthcare workforce), an e‑referral scheme and restricting unnecessary referrals to specialists. This will contribute to the achievement of SDG 3. Inefficiencies in pharmaceutical spending exist despite recent efforts by the government. Spending on pharmaceuticals and medical devices is the third largest category of health expenditure in Slovenia and a major component of private spending on health (OECD/EOHSP, 2019). The authorities consider pharmaceutical policies to improve the situation in some hospitals or the competition in off-patent medicines, including regular updates on pricing and reimbursement and alternative procurement methods (see Section 3.4.4). Slovenia has started a process to improve the governance of both the health system and the hospital financing system. New governance tools on health‑workforce planning at national and regional level have been available since the third quarter of 2019. A system to assess the performance of the health system has been designed and is being implemented. Slovenia has also taken a first step to update the hospital financing system. This step aims to better match the costs of hospital care with insurance reimbursement levels, setting incentives for providing appropriate levels of care. The European Commission is helping Slovenia to implement key health‑sector reforms in these areas, including health system governance, hospital financing, quality of care, and long-term care. In addition, the European Structural and Investment Funds are supporting the shift from inpatient to outpatient treatment of mental health conditions. Regional disparities in the health of the population have somewhat decreased, but differences remain. From 2011 to 2017, regional disparities in life expectancy declined, which was mostly due to socio-economic factors. The Obalno-kraška region in Western Slovenia had the highest life expectancy at birth for women. In contrast, the life expectancy at birth for women in the Podravska region in Eastern Slovenia was more than two years lower. For men, the difference between the best and worst performing region was even more than three years (IMAD, 2019 a).

Needs for long-term care are growing even faster than for regular healthcare, but under the current system, the integrated provision of long-term care community services are underdeveloped. In 2017, spending on the health component of long-term care was 9.8% of total health expenditure, significantly less than the EU average of 17% (OECD/EOHSP, 2019). Furthermore, the share of out‑of‑pocket financing of long-term care costs has been steadily growing over the last decade and has reached almost 27% of these costs in 2017. In September 2019, the Slovenian Court of Auditors found that the state had failed to provide a viable, financially sustainable solution for long-term care during the last 10 years and to guarantee equal treatment for all. There is a risk that these costs will soon increase as the Slovenian population is ageing rapidly. Efforts to regulate long-term care as part of a unified system in Slovenia have been underway for over 15 years. This is due in particular to the complexity of the system, requiring the interconnection of activities under the purview of several ministries, and the unresolved issue of financing. In 2019, Slovenia, with assistance under the structural reform support programme, progressed for the design of core parameters of the future long-term care system. Pilot schemes testing the future roll‑out of the system at national level are ongoing. The government also announced that it would present a draft of a comprehensive law in April 2020 and that it expects the law to pass the parliamentary procedure by the end of 2020. 3.1.5.state-owned enterprises Since the financial crisis, the presence of the state in the economy has been reduced and the management of state shareholdings improved. The interlinkages between state-owned banks and state-owned enterprises and political interference in corporate governance were one of the main causes of the deep crisis that hit Slovenia in 2012-2013. Bold policy actions had to be taken in response. In the aftermath of the crisis, a list of state-owned entities for privatisation was set up and the management of state shareholdings was centralised. In 2015, a state‑asset‑management strategy classified state shareholdings into three categories: portfolio, important and strategic. The strategy considered that only the latter category should obtain or maintain a majority government stake. For ‘important’ entities, the state shareholding could be reduced to 25% plus one share, while ‘portfolio’ entities could be sold off entirely. Important results were achieved subsequently. The state reduced its shareholdings in several sectors of the economy, albeit with some delays. The average net return on equity in these state-owned bodies almost doubled compared to 2013. The governance framework for state-owned enterprises was also brought in line with the relevant international guidelines (OECD, 2015; Vitale, forthcoming). After two major divestments in 2019, the privatisation process is stalling and might even be partially reversed. In June 2019, the Slovenian Sovereign Holding (SSH) sold Abanka, the third largest bank in Slovenia, to a private investor and reduced the state’s ownership in NLB, the largest bank, to 25% plus one share. The state remains by far the largest individual shareholder in NLB and can effectively control the bank. With these two sales, Slovenia has fulfilled commitments given to the European Commission in response to the State aid provided to banks in 2013 (as amended in 2018). No further relevant privatisations were conducted in 2019 or are planned for 2020 and beyond, despite the SSH’s 2019 annual asset management plan (SSH, 2018), which still lists 25 ‘portfolio’ and 19 ‘important’ assets (including Abanka and NLB). Instead, the authorities ha implementing the government’s tourism strategy, which envisages the consolidation and development of state-owned tourism companies. This would increase state ownership in the tourism sector, at least temporarily, although most of the relevant assets are classified as ‘portfolio’ or ‘important’. At the end of 2020, the operational capacity of the SSH may be weakened. In 2017, a law was passed mandating that the ownership of strategic and important assets should be transferred from the SSH back to the state by the end of 2020. For SSH, this would imply the loss of dividends from its holdings, which have been hovering around €40 million a year in recent years. If sufficient funding for SSH is not ensured, this could impinge on its capacity to perform its duties effectively. It could also weaken the separation between the state’s exercise of its ownership function and other - potentially conflicting - state activities, such as market regulation or industrial policy (OECD, 2015). The performance of state-owned enterprises was relatively good in 2018. With a 6.2% net return on equity on an aggregated basis, the performance of state-owned enterprises, that are fully managed by the SSH was slightly lower than in 2017 (6.5%) but above the target value of 6.1% set in the management plan (SSH, 2019). 3.2. Financial sector 3.2.1.banking and insurance Table 3.2.1:Financial soundness indicators, all banks in Slovenia Source: European Central Bank - Consolidated Banking Data (CBD2); European Commission calculations The profitability, solvency and asset quality of the banking sector continue to improve. Return on equity reached 10.7% in 2018, up from 9.1% in 2017, mainly thanks to the net release of impairments. However, profitability might come under pressure when the current release of provisions comes to an end. The average capital adequacy ratio has slightly deteriorated (18.1% in June 2019) due to strong credit growth, but banks remain well capitalised. The non-performing loans ratio has improved further and reached 4.5% in June 2019, down from 7.4% one year earlier. Credit to households continues to grow at a dynamic year-on-year rate of 6.4% in July 2019, while lending to non-financial corporations is more moderate with a year-on-year rate of around 3.0%. With a loan-to-deposit ratio of 74.4% in June 2019, banks benefit from a substantial excess of deposits over loans. This ensures a relatively stable funding basis and abundant liquidity. However, the growing maturity mismatch between long-term loans and sight deposits makes banks vulnerable to a sudden rise in interest rates. Banks need to find new sources of income and control costs to maintain profitability. Current profitability is mainly driven by decreasing impairments and by the release of previous impairments. This is bound to change as new lending progressively generates new impairments. Bank profitability is also likely to come under pressure from persistently low interest rates and increases in compliance, prudential, supervisory and investment costs. One possible strategy to offset these negative factors is to focus on fee income and develop new lending products and services, while enforcing strict and prudent risk management practices. Banks could also opt for partnerships or acquisitions to reduce their costs and achieve economies of scale. Residential real estate prices grew strongly in 2018. As highlighted by the Bank of Slovenia, growth in residential real estate prices picked up in 2018, particularly in Ljubljana and Koper, and was among the highest in the euro area (Bank of Slovenia, 2019). There are first signs of a slowdown in 2019 (see Chapter 1). Consumer lending is a source of concern, due to its high growth and long maturities. Consumer lending grew by 11.8% year-on-year in July 2019, partly driven by the aggressive behaviour of some medium-sized banks underwriting non-purpose-specific consumer loans of longer maturities. Consumer lending represents 27% of the total stock of household loans, the highest percentage in the EU. The average maturity of consumer loans at approval has lengthened markedly over the last 3 years. The original maturity of new consumer loans averaged 7 years in the first quarter of 2019, and exceeded 9 years at certain banks. On 1 November 2019, the Bank of Slovenia activated binding borrower based measures to mitigate risks related to household lending. To prevent the relaxation of credit standards and to improve banks’ resilience, the Bank of Slovenia had already decided on 22 October 2018 to expand the existing macroprudential recommendation for housing loans to all consumer loans (European Commission, 2019 a). Despite these measures, the risks associated with consumer lending remained elevated and banks continued to deviate significantly from the recommendations. Therefore, as of November 2019, the Bank of Slovenia changed the recommendation into a binding instrument, placing caps on the maturity of consumer loans (7 years) and on the debt service-to-income ratio for all household loans. The Bank of Slovenia has faced considerable public and political pressure to withdraw its macroprudential measures. The Banking Association, and some important members of the government have strongly criticised the macroprudential initiative of the Bank of Slovenia, some of them even asking the Bank of Slovenia to reverse it. Such pressures should not hamper the independency of the Bank of Slovenia. Non-performing loans (NPLs) have continued their downward trend. Declining NPLs are reported by both the Bank of Slovenia and the European Central Bank. The segment of the credit portfolio most heavily burdened with NPLs is non-financial corporations, despite the improving credit quality of this segment. According to the European Central Bank, NPLs to non-financial corporations fell from 16.3% in June 2018 to 9.3% in June 2019, thanks to a favourable economic environment, solid credit growth and resolute actions by the banks and regulators. Repayments, sales of claims, write-offs and collateral liquidation accounted respectively for 33%, 25%, 25% and 10 % of the reduction in non-performing exposures in 2018. Collateral liquidation is projected to grow in 2019 and 2020, while sales are likely to decrease significantly. The Bank Asset Management Company (BAMC) is progressing towards fulfilling most of its mandate, especially in terms of profitability and assets reduction. The state-owned BAMC, which bought up bad loans from the country's banks in 2013 and 2014, made a profit of €57.7 million in 2018 (compared with €67 million in 2017), after two years of moderate losses. This translates into an average annual return on equity of 28.9% in 2018. Between its inception in 2013 and December 2018, the BAMC generated cumulative cash flows of over €1.5 billion, representing about 74.1% of the transfer value of its assets. The last bonds issued to finance asset transfers were repaid in December 2017 and refinanced by bank loans. Its objective is to reduce its assets to €126.7 million by the end of its mandate in December 2022. The BAMC is confronted with a number of challenges. Firstly, achieving the cost efficiency ratio set by the government will become more and more difficult as residual assets are more costly to manage. Secondly, keeping skilled staff with knowledge of the files in a company with such a short life expectancy is challenging as their skills can sometimes be better remunerated elsewhere. Although it has significantly decreased, the stake of the Slovenian state in the financial sector remains substantial. The sale of 75% of the shares of Nova Ljubljanska Banka (NLB) and the privatisation of Abanka are steps in the right direction. However, the Slovenian state still controls a significant share of the financial sector through its stakes in NLB and Sava Re. The state directly or indirectly controls 60% of the insurance sector in terms of gross written premiums, an unusually high share in such a non-strategic sector and an outlier in the EU. Several attempts by a foreign insurance group to increase its stake in Sava Re were rejected. Maintaining a high level of state involvement may entail in the longer run risks for financial stability, economic efficiency and public finances (see Section 3.1.5). 3.2.2.access to finance for small and medium-sized companies

In a context of very low interest rates, banks financing constitute the bulk of the external funding of SMEs. Credit lines, leasing and bank loans were more relevant and more used for Slovenian SMEs than on average in the EU. In Slovenia, bank loans were relevant for 52% of SMEs (and used by 23% of them), while credit lines were relevant for 60% (used by 40%). Leasing was relevant for 53% and equity for 17% (European Commission, 2019 c). Equity funding remains underdeveloped in light of the ambitions of the Capital Market Union. The limited availability of equity funding in Slovenia adversely affects its innovative start-up and scale-up environment. Slovenia lags behind other EU and central and eastern European countries (e.g. Czechia, Slovakia, Croatia) in the share of private equity funding for businesses (Invest Europe, 2019). Private equity is important for scale-ups, notably those that are looking for more than €500 000 of external funding. Venture capital remains scarce, partly due to an unfavourable regulatory environment and low inflows of venture capital from abroad. According to the European Investment Fund (EIF, 2019), venture capital investment in Slovenia as a share of GDP is one of the lowest in the EU. Slovenia also ranks low in terms of SMEs’ confidence in talking about financing with equity investors and venture capital firms and in obtaining the desired equity, with only 9% of the respondents reporting that they felt confident doing this, which is significantly below the EU average of 22% (European Commission, 2019 c). Lack of financial and investment literacy among some types of SMEs and lack of trust in alternative financial sources and the continuity of public financial incentives are contributing to the challenge. The Slovenian capital market has limited effectiveness and attractiveness in bringing investors and companies together. The liquidity of the Slovenian stock exchange is limited ( ). Low trading volumes lead to high per-trade costs. This may be one explanation for why Slovenia lags behind the EU average in its stock market capitalisation. The development of the local capital market could be stimulated by growth funds, further listings (including of currently state-owned enterprises), and allowing private and public pension funds to invest more in equity. Graph 3.2.1:Private equity investments as a % of GDP, average 2016-2018 Source: Invest Europe After a period of rapid growth, Slovenia’s FinTech markets have entered a calmer period. Slovenian companies have had a high success rate on several international crowdfunding platforms. Slovenian companies also raised significant funding through initial coin offerings. In 2017, around 5% of funds raised in global initial coin offerings went to Slovenian projects. More recently, the FinTech scene has seen a period of calm, with less projects initiated. Slovenia is preparing a new regulatory framework for block-chain technology. This could include the creation of a regulatory sandbox to facilitate further FinTech innovation. Slovenia is actively beefing up its equity markets with the help of EU funds. According to the 2018/19 Global Entrepreneurship Monitor survey, Slovenia ranks above the average of high‑income countries in the support it gives to SMEs to access finance. The government supports the development of the capital market in particular through studies and pilot projects aimed at improving capital market conditions for SMEs. In August 2019, the Slovene Enterprise Fund (SEF) launched a public call “Seed Capital – Co-investment with private investors”, aimed at supporting innovative start-ups with high growth potential for equity capital, and at encouraging private investors to invest into the seed stage of company development. After favourable first experiences, the government plans to increase the scope of this investment fund in the coming years, mainly by using the EU cohesion policy funds. Furthermore, in 2018, the SEF invested €8 million in the Central European Fund of Funds with the aim of raising equity investment in SMEs. Slovenia’s development bank (SID Bank) and the European Investment Fund (EIF) with EU guarantee (EFSI) back the Slovene Equity Growth Investment Programme, each providing €50 million. The programme supports Slovenian SMEs and midcaps (i.e. companies employing up to 3,000 employees), with equity investments aiming to support business growth and expansion, including internationalisation. 3.3. Labour market, education and social policies 3.3.1.Labour Market The labour market continues to record improvements, in line with economic growth. The employment rate continued to increase accompanied by a decline in the unemployment rate (see Chapter 1). The activity rate increased to 80.2% in Q3 2019, above the EU average of 78.8%. The long-term unemployment rate decreased to 2.2% in 2018, compared with the EU average of 2.9%. Labour market improvements are also evident for young people, as the youth unemployment rate decreased sharply (8.8% in 2018 from 11.2% in 2017). Slovenia is performing well on the gender employment gap, which in 2018 was 7.3 pps (against the EU average of 11.5 pps). However, the country is moving away from the SDG target to close ‘the gender gap in the inactivity rate due to caring responsibilities’. Furthermore, as a result of the ageing population, challenges, in terms of labour market participation, still persist for older workers (employment rate of 48.9% in Q3 2019 compared to 60.2% in the EU), and, particularly, the low-skilled older workers (employment rate of 27.5% in Q3 2019 compared to 45.3% in the EU). The long-term unemployment of older workers remains a major challenge. In 2018, the long-term unemployment as a percentage of total unemployment of the 55-64 age group was 63.7% (versus an EU average of 58.9%). This is also because unemployment benefits and long-term sick leave are used as a ‘bridge’ to (early) retirement (see Section 3.2). The wage-setting mechanisms, where wages increase rapidly with seniority, may also contribute to reducing the employability of older workers (European Commission, 2017 a). The government focused its efforts on reducing the low employment rate of workers in the 45-54 and 55-64 age categories, by imposing stricter eligibility conditions for receiving unemployment benefits. The inactivity of people in these age categories has a direct negative impact on the sustainability of the pension and health systems (see Section 3.1.3). One of the remedial measures taken by Slovenia to tackle this issue was the introduction of a subsidy for employers that hire people older than 58 on a permanent basis, with priority given to the employment of recipients of unemployment benefits and cash social assistance. The measure is co-financed by the European Social Fund (European Commission, 2019 a). In 2019, the authorities continued their efforts to reform the unemployment benefit schemes. Following the amendments to the Labour Market Regulation Act passed by the Slovenian Parliament in November 2019, the minimum monthly unemployment benefit will significantly increase from €350 to €530 gross. This will bring it up to the same level as the net basic minimum income for single-person households, which is €402 net. At the same time, the eligibility conditions to access unemployment benefits have been tightened across the board. Consultation of social partners in the Economic and Social Council on legislative proposals has been standard for a long time, but some challenges remain concerning the practical effectiveness of social dialogue. In autumn 2019, the government and the Economic and Social Council agreed to widen the consultation of the social partners from legislative proposals of the government to all legislative proposals tabled in the Parliament. However, late involvement of social partners in the consultations and lack of resources rather often limit the social partners’ ability to participate effectively in the social dialogue (European Commission, 2018 b). Active labour market policies are still not sufficiently effective in addressing long-term unemployment. In Q2-2019, the long-term unemployed accounted for 53.3% of all unemployed persons (ESS, 2019), but only for 30% of those included in active labour market policies, although they would have priority. Active labour market policies lack sufficient funding, and funding is not efficiently allocated across different measures and regions. The lack of flexibility in their design and delivery reduces the efficiency of these measures. As a result, current active labour market policies are not suited to address regional differences and specific needs, which limits their effective targeting. Furthermore, there are challenges in creating incentives for the unemployed to search for work. These challenges are partly due to a lack of consistency and policy coordination between the design of active labour-market policies and other related social-policy areas (notably the social protection system). Evaluations of active labour-market policies to date are not sufficiently formalised nor focused on long-term effects. Despite recent positive developments, the persistently high segmentation in the labour market for young people remains a challenge. The share of employees in precarious contracts ( ) is at 3.7% (2018) significantly above the EU average of 2.1%. The employment recovery led to the creation of many permanent jobs, but young people are still more likely than other age groups to be employed in non-standard types of work. These non-standard types of work include self-employment; temporary or part-time jobs; involuntary part-time work; and low-paid jobs. While the share of temporarily employed young people has declined in recent years, it remains very high: 67% in 2018, significantly above the EU average of 43.5%. Labour shortages occur in all sectors. The share of employers reporting labour shortages in 2019 has been high across all sectors (Graph 3.3.1), particularly in construction and industry (40.1% and 38.0%, respectively). However, in both these sectors, it has declined compared to 2018. In the services sector, 22.8% of employers reported labour shortages in 2019 (an increase of 2.6pps compared to 2018). Graph 3.3.1:Labour shortages as reported by employers in the industry, construction and services sector, 2008-2019 Source: Eurostat As Slovenia’s population ages, adult up-skilling and re-skilling assume considerable importance. Only 70,000 jobs are categorised as belonging to elementary occupations while the total number of adults with lower secondary qualification or less is around 210,000 and only around 1,000 adults acquire an upper-secondary qualification each year (European Commission, 2019 d). This highlights the need for a more substantial upskilling and reskilling effort. The participation of older employees in lifelong learning is also too low to facilitate adaptation to job digitalisation and automation or for bridging the knowledge and skills mismatch (IMAD, 2019 a). As a share of GDP, Slovenia spends less than a half as the OECD countries on average, on active labour market policies, including re- and up-skilling measures (0.24% compared to 0.52%, respectively, in 2016). 3.3.2.education and skills Participation in early childhood education and care is growing, but there are gaps for certain groups. Participation for children over 4 years was 92.1% in 2017, close to, but still below, both the EU benchmark of 95% for 2020 and the EU average of 95.4%. Participation is low among children from migrant and low socioeconomic backgrounds. These are precisely the children who could benefit substantially from the proven social, intercultural and educational impact of early childhood education and care. Since autumn 2018, kindergartens can apply for funds to offer short free programmes of 240 hours to children in their last year before primary education who have not previously participated in early childhood education (European Commission, 2019 d).

The early-school-leaving rate is low, and the achievement of basic skills is good, but there is a large gender gap in reading skills. Slovenia’s early-school-leaving rate of 4.2% (2018) is significantly below both the EU average of 10.6%, and Slovenia’s own Europe 2020 national target of 5% (European Commission, 2019 d). It also ranks among “best performers” on the Social Scoreboard. The OECD’s Programme for International Skills Assessment (PISA) shows that the share of underperformers in Slovenia is below the EU average in all three skills ( ). However, the share of underperformers increased by 2.7 pps for reading while remaining largely stable for the other two skills. In December 2019 the Government adopted national strategy for the development of reading literacy 2019-2030. The share of top performers is above the EU average for mathematics and science, but below for reading (OECD, 2019 a). The gender gap in the share of low achievers in all three skills is above the EU average and growing, with boys performing worse, especially in reading (13.9 pps gap, 1.8 pps higher than in 2015, EU average: 9.4 pps). Migrant background and school characteristics significantly affect educational outcomes. The difference between the average performance of learners with a migrant background and that of native students is one of the largest in the EU and has grown since 2015. The gap between schools with many pupils with the migrant background –often vocational schools- and other schools is one of the largest in the EU (OECD, 2019 b). The number of hours of Slovenian language lessons available to migrants significantly increased in 2019 from 35 hours to a minimum of 120 hours per pupil in the first year of education. Despite a post-crisis decline, education spending remains significantly higher than the EU average and is set to increase further in 2020. In 2017, general government expenditure on education was higher than the EU average, both as a proportion of GDP (5.4% compared to an EU average of 4.6%) and as a proportion of total general government expenditure (12.6% compared to an EU average of 10.2%) (European Commission, 2019 d). However, the GDP share is significantly lower than the 6.6% of GDP in 2009. The government has, in the coalition agreement, agreed to increase it to 6% of GDP. The government agreed a three-step increase in salaries in the public sector (including teachers) in 2019 and 2020, with a 4% increase for each step. The first two steps were implemented in January and in November 2019. A growing number of teachers are approaching retirement age and shortages are already appearing in certain fields. More than 50% of tertiary education teachers are over 50 years old. The proportion of teachers over 50 is somewhat lower at lower education levels. There is a shortage of special education experts, and in some rural areas also for teachers of subjects such as science, technology, engineering, and mathematics (European Commission, 2019 d). The proportion of teachers who feel well or very well prepared in using information and communications technology for teaching (67%) is much higher than the EU average (39.4%). The percentage of teachers who believe that teaching is a valued profession in society (5.6%) is one of the lowest in the EU (OECD, 2019 c). Tertiary attainment is high, but significant differences between men and women and between native-born and foreign-born raise concerns. The percentage of people aged 30-34 with tertiary qualifications in 2018 was 42.7%, above the EU average of 40.7%, but declined significantly from 46.4% in 2017, which might be partially due to the deadline for completion of pre-Bologna studies by 2016. This percentage is much higher for women (56.3%) than for men (31.6%), with the gap being the largest in the EU ( ). This is detrimental to meeting SDG 5. There is also a very large difference between the tertiary attainment of native-born (45.3%) and that of foreign-born (22.1%) (European Commission, 2019 d). Slovenia has developed a graduate tracking mechanism that could help improve the labour market relevance of tertiary education. It should make it possible to monitor the careers of graduates (MIZS, 2019) and provide information on labour market needs for different disciplines to policy makers, universities and students. The discrepancy between the qualifications of the Slovenian labour force and the labour market needs has significantly increased in the last decade. In 2018, almost one in six (15.6%) highly qualified people in Slovenia were employed in occupations that do not require tertiary education (Graph 3.3.2). This share is lower than in the EU. It has, however, more than doubled since 2008 (7.1%), although this may be due to methodological changes in 2011 and 2014. Some skills anticipation activities take place in Slovenia, although there is no comprehensive and coordinated system in place. Although Slovenia ranks close to the EU average regarding digital skills, a major source of concern is the low level of inclusion of digital skills in the curricula of primary and secondary schools (European Commission, 2019 e). Slovenia did not advance in integrating digital skills into the educational curricula, but changes in this area have been announced and progress will be monitored. Development and assessment of digital competences is not yet comprehensively integrated into the curricula. The specific standards of knowledge for these competences, their assessments and the use of information and communication technologies for this purpose are still in the pipeline. Digital skills improve at tertiary level, with a share of graduates in science, technology, engineering, and mathematics close to the EU average. The percentage of female graduates in these subjects is the highest in the EU at 20.5% (European Commission, 2019 e). According to a 2017 business survey of foreign investors in Slovenia, 64% of them encountered difficulties when searching for adequately skilled personnel (SPIRIT, 2017). However, this difficulty may partly be caused by brain drain. Graph 3.3.2:Share of graduate employed in occupations that do not require tertiary education Source: Eurostat Regional differences in education and learning are not very pronounced. Indicators of regional disparities in education are less pronounced than for other indicators, such as GDP per capita or R&D intensity (OECD, 2019 d). However, Western Slovenia fares better than Eastern Slovenia, in particular concerning the share of adults with tertiary education and the participation rate in life-long learning. Disparities of the above-mentioned areas are higher at a more granular geographical level. The participation rate in life-long learning in Osrednjeslovenska is more than 15%, whereas it was less than 5% in Prekmurje (IMAD, 2019 a). Slovenia’s 2030 strategy for development sets 2030 targets for sustainable development goals in education. Slovenia wants to significantly improve the participation rate in lifelong learning. From 12% in 2017 it should rise to at least 19%. The share of adults with tertiary education should rise from 32.5% in 2017 to 35% in 2030. This would contribute to SDG 4. 3.3.3.social policy Since the economic recovery, the risk of poverty or social exclusion has been falling, but remains higher in the eastern than in the western region. Two of the areas with the highest share of materially deprived people are in the eastern region. For both areas, the share of materially deprived people was above 19%. In 2017, almost 10% of households in Zasavska were receiving some form of assistance, which is five times more than the share in the regions with the lowest unemployment rates. There is a downward trend in the share of people at risk of poverty or social exclusion, except for the elderly. Compared to the previous year, the at-risk-of-poverty or social exclusion rate (AROPE) ( ) decreased by 0.9 pps to 16.2% in 2018, below the EU average of 21.9% (Graph 3.3.4). Slovenia has the lowest child (0-17 years) poverty rate (13.1%) in the EU. However, for people aged over 65, the AROPE rate increased from 18.3% in 2017 to 20.1% in 2018, well above the EU average (18.6%). This rate deteriorated even more evidently for elderly women, increasing to 24.4% in 2018, against an EU average of 20.9%. The drop in the at-risk-of-poverty or social exclusion rate is due to the decrease in the severe material deprivation rate (by 0.9pps) and the very low work intensity rate (by 0.8pps). The at-risk-of-poverty rate (AROP) remained the same as in 2018 (13.3%), which is below the EU average (17.1%). Out of about 268,000 people in Slovenia, living below the at‑risk‑of‑poverty threshold in 2018, 89,000 were retired (18.1% of all retired persons), of which 60,000 were women. (SURS, 2019). Graph 3.3.3:At-risk-of-poverty-or-social exclusion rate in its components Source: Eurostat, European Commission Overall, social benefits in Slovenia reduce both the incidence of poverty and its depth. In 2018, social benefits played a significant role in alleviating poverty by reducing the poverty rate by 43.16% and the depth of poverty rate by 67%. Sickness and disability benefits had the largest effect on both the poverty rate (reducing it by 28%) and its depth (reducing it by 45%). Box 3.3.1: Monitoring performance under the European Pillar of Social Rights The European Pillar of Social Rights is a compass for a renewed process of upward convergence towards better working and living conditions in the European Union. It sets out 20 essential principles and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social protection and inclusion. Slovenia performs relatively well on most indicators of the Social Scoreboard supporting the European Pillar of Soci al Rights. Strong economic growth contributed to the continued increase in employment and the further decrease in unemployment. The share of people at risk of poverty or social exclusion has further declined, although it remains well above the EU average f or elderly people, and especially for elderly women. The income quintile ratio (S80/S20) is well below the EU average, making Slovenia one of the most equal countries in the EU. The net earnings of a full-time single worker earning the average wage are slo wly increasing but should be monitored. Self-reported unmet needs for medical care reached the EU average. The participation of older and low-skilled workers in the labour market remains a challenge. Despite positive trends in recent years, the activity and employment rates of these workers remain well below the EU average. Their participation rate in lifelong learning is also below the EU average. Slovenia developed a number of ‘activation’ measures to address this issue (see Section 3.3.1.). Slovenia is one of the countries leading the EU in the prevention of early leaving from education and training. With a rate of only 4.2% of early leaving from education and training in 2018, Slovenia continues to be well below the EU average (10.6%) and its Europe 2020 national target of 5%. The country has put in place preventive measures to identify students who are at risk of leaving school early; and to offer professional/educational assistance and inclusion in the school counselling process. In addition, the ESF‑financed programme Project Learning for Young Adults targets the vulnerable group of young adults who leave school early and are not in employment, education, or training. Project Learning for Young Adults helps them to develop their potentials for successful participation in education; and to build professional identity to facilitate their integration into employment and the wider society. Slovenia also adopted many measures to create a supportive school environment for pupils with migrant backgrounds, a group with a higher rate of early school leaving than their non-migrant peers both in Slovenia and in other EU Member States. 3.4. Competitiveness reforms and investment

3.4.1.productivity enhancing investment Labour productivity growth is resuming after a period of rather limited convergence with euro area levels. Labour productivity grew by 2.3% in 2018, substantially more than the a