Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Slovenia
Date: 2013-05-29
Institutions: European Commission
Subjects: Slovenia, budget deficit, budgetary equilibrium, gross domestic product, public expenditure, stability pact, tax reform

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 396 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Slovenia 

{SWD(2013) 396 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Slovenia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

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2 

According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) Member States shall avoid excessive government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth conducive to employment creation. 

On 2 December 2009, the Council decided, in accordance with Article 126(6) of the 
TFEU, that an excessive deficit existed in Slovenia and issued a recommendation1 to 
correct the excessive deficit by 2013 at the latest, in accordance with Article 126(7) of 
the  TFEU  and  Article  3  of  Council  Regulation  (EC)  No  1467/97  of  7  July  1997  on 
speeding up and clarifying the implementation of the excessive deficit procedure2. In 
order  to  bring  the  general  government  deficit  below  3%  of  GDP  in  a  credible  and 
sustainable  manner,  the  Slovenian  authorities  were  recommended  to  implement  the 
fiscal consolidation measures in 2010 as planned, ensure an average annual structural 
budgetary  adjustment  of  ¾%  of  GDP  over  the  period  2010-2013,  and  specify  the 
measures that are necessary to achieve the correction of the excessive deficit by 2013 
cyclical conditions permitting and accelerate the reduction of the deficit if economic or 
budgetary conditions turn out better than expected at that time. 

On 15 June 2010, the Commission concluded that based on the Commission services' 
2010  Spring  Forecast,  Slovenia  had  taken  effective  action  in  compliance  with  the 
Council  recommendation  of  2  December  2009  to  bring  its  government  deficit  below 
the 3% of GDP reference value and considered that no additional step in the excessive 
deficit procedure was therefore necessary.  

According to Article 3(5) of Regulation (EC) No 1467/97, the Council may decide, on 
a  recommendation  from  the  Commission,  to  adopt  a  revised  recommendation  under 
Article 126(7) of the TFEU, if effective action has been taken and unexpected adverse 
economic  events  with  major  unfavourable  consequences  for  government  finances 

All documents related to the excessive deficit procedure of Slovenia can be found at: 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/slovenia_en.htm 
OJ L 209, 2.8.1997, p. 6. 

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(6) 

(7) 

(8) 

(9) 

occur  after  the  adoption  of  that  recommendation.  The  occurrence  of  unexpected 
adverse economic events with major unfavourable budgetary effects shall be assessed 
against the economic forecast underlying the Council recommendation. 

In  accordance  with  Article  126(7)  of  the  TFEU  and  Article  3  of  Council  Regulation 
(EC)  No  1467/97,  the  Council  is  required  to  make  recommendations  to  the  Member 
State concerned with a view to bringing the situation of an excessive deficit to an end 
within  a  given period.  The  recommendation has to establish a maximum deadline of 
six months for effective action to be taken by the Member State concerned to correct 
the excessive deficit. Furthermore, in a recommendation to correct an excessive deficit 
the Council should request the achievement of annual budgetary targets which, on the 
basis of the forecast underpinning the recommendation, are consistent with a minimum 
annual  improvement  in  the  structural  balance,  i.e.  the  cyclically-adjusted  balance 
excluding  one-off  and  other  temporary  measures,  of  at  least  0.5%  of  GDP  as  a 
benchmark. 

On the basis of the Commission’s 2013 in-depth review on Slovenia the Commission 
considers  that  Slovenia  is  experiencing  excessive  macroeconomic  imbalances. 
Sustainable  improvements  in  fiscal,  macroeconomic  and  labour  market  outcomes 
require simultaneous progress in reducing macroeconomic imbalances and correcting 
the excessive deficit. 

The Commission services’ 2009 Autumn Forecast, which was underlying the Council 
recommendation  under  Article  126(7)  of  the  TFEU  of  2  December  2009,  projected 
that  the  Slovenian  economy  would  expand  by  1.3%  in  2010  and  2.0%  in  2011.  The 
years 2012 and 2013 were beyond that forecast's horizon, but under the hypothesis of a 
gradual closure of the large negative output gap by 2015, higher growth than in 2011 
was expected for 2012 and 2013. While GDP growth in 2010 was almost at par with 
that  expected  in  the  Commission  services'  2009  Autumn  Forecast,  in  2011  it  was 
below  the  projected  2.0%.  The  Slovenian  economy  slipped  back  into  recession  in 
2012. The Commission services' updated 2013 Spring Forecast3 implies a much more 
adverse scenario than the one foreseen at the time of the Council recommendation also 
for 2013. Overall, GDP growth turned out to be markedly lower than projected in the 
Commission services' 2009 Autumn Forecast. This is having adverse effects on both 
the revenue and expenditure sides compared to what was expected at the time of the 
Council recommendation. 

Slovenia has seen real GDP falling considerably more abruptly than in the euro area as 
a  whole  as  a  result  of  the  global  economic  and  financial  crisis  as  well  as  domestic 
imbalances. The real GDP drop of 7.8% in 2009 was driven mainly by trends in gross 
capital formation. The export-led recovery Slovenia enjoyed in 2010 and 2011, when 
real  GDP  grew  by  1.2%  and  0.6%,  respectively,  was  modest  due  to  the  drag  from 
weak  domestic  demand.  In  2012  the  Slovenian  economy  slipped  into  a  double  dip 
recession with a negative real GDP growth of -2.3%. A positive contribution to growth 
from net external demand was a result of robust growth of export to non-EU markets 
and a sharp decline in imports due to weak domestic demand. 

(10)  The Commission services' updated 2013 Spring Forecast projects a further drop in real 
GDP by 2.0% in 2013 because of falling employment, negative real wage growth and 
a continued decline in investment. The deleveraging of non-financial corporations and 

3 

This  forecast  is  based  on  the  Commission  services’  2013  Spring  Forecast,  whose  horizon  has  been 
extended to 2015. In addition, the update incorporates two bonds issued on the US market on 2 May 
2013 with an impact on interest expenditure, deficit and debt. 

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rehabilitation of the banking sector are assumed to progress, but not yet sufficiently to 
support the start of a new investment cycle. Thus, private consumption and investment 
are  forecast  to  remain  the  main  drag  on  growth.  The  positive  contribution  to  growth 
from  net  foreign  demand  is  projected  to  slightly  decline.  The  forecast  continued 
recession  with  GDP  growth  of  -0.1%  in  2014  is  a  result  of  delays  in  resolving  the 
banking  crisis  and  restructuring  the  highly  indebted  corporate  sector.  Real  GDP 
growth  is  projected  at  1.3%  in  2015  on  the  back  of  gradually  strengthened  domestic 
demand  resulting  mainly  from  a  rehabilitation  of  the  banking  sector,  progress  in  the 
deleveraging of corporations and improved consumer confidence. 

(11)  The general government deficit had soared to 6.2% of GDP in 2009 due to strong, in-
built  expenditure  dynamics  mainly  of  interest  expenditure  and  social  transfers.  The 
largely  ad-hoc  consolidation  measures  in  2010  targeted  lower  growth  of  the  public 
sector  wage  bill  and  social  transfers  in  particular.  The  indexation  of  social  benefit 
rates, including pensions,  and  of  public sector wages was halved  for 2010 and some 
work  related  bonuses  were  restrained.  On  the  revenue  side,  excise  duty  rates  on 
alcohol,  cigarettes  and  mineral  oils  increased.  These  measures,  approved  before  the 
adoption  of  the  Council  EDP  recommendation,  contributed  to  the  slight  reduction  of 
the headline deficit in 2010 to 5.9% of GDP.  

(12)  The  2011  budget  extended  and  strengthened  the  consolidation  measures  on  the 
expenditure side from 2010 for mostly another year. On the revenue side, excise duty 
rates on cigarettes were further increased. Nonetheless, the headline deficit peaked at 
6.4%  of  GDP  in  2011  when  capital  support  operations  to  loss-making  state-owned 
enterprises and one-offs contributed 1.4% of GDP to the deficit. 

(13)  The March 2013 EDP notification as validated by the Commission (Eurostat) reported 
the  2012  general  government  deficit  at  4.0%  of  GDP.  This  outturn  covers  another 
recapitalisation of the largest bank by some 0.2% of GDP in June 2012, being treated 
as one-off. The government implemented a major current expenditure restraint through 
cuts  in  public  sector  wages  and  social  transfers.  However,  most  consolidation 
measures are again valid only temporarily. In addition, public investment was reduced 
again,  resulting  in  a  drop  totalling  to  45%  in  real  terms  since  2009.  Finally,  capital 
injections,  including  one-offs,  to  public  corporations  were  markedly  lower  than  in 
2011.  On  the  revenue  side,  the  government  cut  the  corporate  income  tax  rate  and 
introduced more generous investment and R&D allowances.  

(14)  The  Commission  services'  updated  2013  Spring  Forecast  projects  the  general 
government  deficit  in  2013  at  5.5%  of  GDP.  However,  without  two  one-off 
conversions  of  hybrid  debt-equity  instruments  into  equity  of  the  two  largest  banks, 
amounting to 1.2% of GDP, the deficit for 2013 would be projected at 4.3% of GDP. 
The forecast deficit of 5.5% of GDP compares with the national deficit target for 2013 
at  7.9%  of  GDP  from  the  2013  update  of  the  stability  programme,  which  includes 
recapitalisations  of  banks  at  3.7%  of  GDP.  Public  finances  in  2013  are  expected  to 
benefit from the full-year effects of savings measures in the Act on Balancing Public 
Finances, which entered into force in June 2012, and new approved revenue increasing 
measures from the 2013 budget. The worsening labour market is forecast to result in 
falling social contributions. By contrast, social transfers are projected to increase again 
because of a still high number of new pensioners at the end of 2012 and in early 2013. 

(15)  The  Commission  services'  updated  2013  Spring  Forecast  projects  the  2014  deficit  at 
4.9%  of  GDP  under  a  no-policy  change  assumption.  The  2014  budget  does  not 
incorporate new discretionary measures, except for a drop in the corporate income tax 

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rate to 16% and broad stabilisation of the public sector wage bill at the 2013 level. On 
the  expenditure  side,  in  particular  interest  expenditure  and  social  transfers  are 
projected  to  keep  increasing  because  of  higher  debt,  growing  number  of  old-age 
pensioners and indexation of pensions. Under a no-policy change scenario, the deficit 
is  projected  at  5.5%  of  GDP  in  2015.  The  forecast  incorporates  further  increases  in 
interest  expenditure,  higher  public  sector  wage  bill  after  the  expiry  of  temporary 
measures curbing salaries of public sector employees and the final step of the gradual 
decrease in corporate income tax rate by 1 pp. to 15%. 

(16)  Excluding  additional  fiscal  resources  to  strengthen  banks,  risks  to  the  deficit 
projections seem balanced. Upside risks result from announced new savings measures 
in  the  2013  supplementary  budget,  while  downside  risks  stem  from  a  weak  budget 
implementation  and  the  court  judgement,  still  challenged  by  the  government, 
stipulating the payment of the salary increase to public employees postponed in 2010. 

(17)  According to the Commission services' 2013 Spring Forecast the average annual fiscal 
effort taken at face value is estimated at 0.5% of GDP over the period 2010 – 2013. 
The consolidation was backloaded to 2012 and 2013. When adjusted for the impact of 
revisions in potential output growth between the current forecast and that underlying 
the  Council  recommendations  of  2  December  2009  as  well  as  for  the  impact  of 
revenue  developments  as  compared  to  those  implied  by  standard  elasticities,  the 
average annual adjusted structural effort between 2010 and 2013 is estimated at 1.1% 
of GDP. This is above the recommended average annual fiscal effort of ¾% of GDP.  

(18)  The  total  amount  of  additional  consolidation  measures  implemented  by  Slovenian 
authorities  in  response  to  the  Council  EDP  recommendation  over  2010-2013  is 
estimated  at  around  6¾%  of  GDP  based  on  a  bottom-up  approach.  This  estimate 
excludes  consolidation  measures  amounting  to  around  0.8%  of  GDP  from  the  2010 
budget already included in the Commission services' 2009 Autumn Forecast. Measures 
amounting  to  some  5%  of  GDP  have  included  in  particular  lowered  indexation 
mechanisms  and  cuts  in  the  public  sector  wages  and  social  benefit  rates  as  well  as 
higher indirect taxes. In addition, the authorities significantly cut public investment by 
around 1¾% of GDP over 2010-2012. 

(19)  Slovenia faces steeply increasing public debt due to persistently large primary deficits 
and  to  a  lesser  extent  stock-flow  adjustments  and  higher  interest  payments.  From  as 
low as 22% of GDP in 2008, debt increased to 54% of GDP in 2012. The Commission 
services’ updated 2013 Spring Forecast projects it to increase to 61% of GDP in 2013, 
thus breaching the Treaty reference value. Based on a no-policy-change scenario, debt 
is  forecast  to  increase  further  to  69%  of  GDP  in  2015.  These  projections  do  not 
include  up  to  11%  of  GDP  of  state  guarantees  for  asset  transfers  to  a  Bank  Asset 
Management Company and up to 3% of GDP of cash for recapitalisations as stipulated 
in the Banking Stability Act. 

(20)  Slovenia was hit with unexpected adverse economic developments. The economy is in 
a  double  dip  recession  projected  to  last  into  2014.  Employment  has  been  affected 
negatively,  unemployment  has  risen  sharply  and  real  wage  growth  became  negative. 
Slovenia  is  also  experiencing  excessive  macroeconomic  imbalances  which  seriously 
hamper  investment.  Thus,  domestic  demand  continues  to  decline.  This  is  having 
adverse  effects  on  both  the  revenue  and  expenditure  sides  compared  to  what  was 
expected  at  the  time  of  the  Council  recommendation.  In  line  with  the  rules  of  the 
Stability and Growth Pact, this suggests that a new deadline for the correction of the 
excessive deficit in Slovenia by 2015 is appropriate. 

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(21)  Granting  two  additional  years  for  the  correction  of  the  excessive  deficit  would  be 
commensurate  with  intermediate  headline  deficit  targets  of  4.9%  of  GDP  for  2013 
(3.7%  of  GDP  without  1.2%  of  GDP  one-off  expenditure  to  recapitalise  the  two 
largest  banks),  3.3%  of  GDP  for  2014  and  2.5%  of  GDP  for  2014.  The  underlying 
improvement in the structural budget balance implied by these targets is 0.7% of GDP 
in 2013, 0.5% of GDP in 2014 and 0.5% of GDP in 2015, the last two corresponding 
to the minimum improvement required by Article 5(1) of Council Regulation (EC) No 
1466/97 of 7 July 1997. In total, to reach the above-mentioned structural targets, the 
Slovenian  authorities  would  need  to  implement  additional  consolidation  measures  of 
1% of GDP in 2013, 1½% of GDP in 2014 and 1½% of GDP in 2015 on top of the 
measures already included in the baseline scenario. These targets take into account the 
need  to  compensate  for  the  negative  second-round  effects  of  fiscal  consolidation  on 
public finances, through its impact on GDP growth.  

(22)  The European Commission Fiscal Sustainability Report 2012 shows that Slovenia is at 
high sustainability risk in the medium and long term. The 2012 Ageing Report shows 
a high projected increase in total age-related public expenditure over the years 2010-
60.  To  this  end,  additional  containing  of  age-related  expenditure  growth  by  further 
adjusting  all  relevant  parameters  of  the  pension  and  social  security  systems  appears 
necessary to contribute to the sustainability of public finances in the long term. 

(23)  Slovenia  fulfils  the  conditions  for  the  extension  of  the  deadline  for  correcting  the 
excessive general government deficit as laid out in Article 3(5) of Regulation (EC) No 
1467/97  on  speeding  up  and  clarifying  the  implementation  of  the  excessive  deficit 
procedure, 

HAS ADOPTED THIS RECOMMENDATION: 

(1) 

(2) 

(3) 

(4) 

(5) 

Slovenia should bring an end to the present excessive deficit situation by 2015. 

Slovenia should reach a headline general government deficit target of 4.9% of GDP 
in 2013 (3.7% of GDP without 1.2% of GDP one-off expenditure to recapitalise the 
two  largest  banks),  3.3%  of  GDP  in  2014  and  2.5%  of  GDP  in  2015,  which  is 
consistent with an annual improvement of the structural balance of 0.7% of GDP in 
2013, 0.5% of GDP in 2014 and 0.5% of GDP in 2015, in order to bring the headline 
government  deficit  below  the  3%  of  GDP  threshold  by  2015,  based  on  the 
Commission services' updated 2013 Spring Forecast.  

Slovenia  should  rigorously  implement  the  measures  already  adopted  to  increase 
mainly indirect tax revenue and reduce the public sector wage bill and social tranfers, 
while  standing  ready  to  complement  them  with  additional  measures  if  their  yield 
would prove less than foreseen or if any measure is repealed by the justice system.  

In  addition,  Slovenia  should  specify,  adopt  and  implement  new  structural 
consolidation measures, on top of those already included in the Commission services' 
updated 2013 Forecast that are necessary to achieve the correction of the excessive 
deficit by 2015. 

The  Council  establishes  the  deadline  of  [1  October  2013]  for  Slovenia  to  take 
effective action and, in accordance with Article 3(4a) of Council Regulation (EC) No 
1467/97, to report in detail the consolidation strategy that is envisaged to achieve the 
targets. 

Furthermore,  the  Slovenian  authorities  should  (i)  accelerate  the  reduction  of  the  headline 
deficit  in  2014  and  2015  if  economic  or  budgetary  conditions  turn  out  better  than  currently 
expected; (ii) specify, adopt and implement structural consolidation measures which gradually 

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decrease  the  current  expenditure  ratio  to  GDP,  secure  a  lasting  improvement  in  the  general 
government  structural  balance,  support  growth  potential  of  the  economy  including  through 
avoiding  further  cuts  in  public  investment,  and  gradually  put  the  debt  ratio  on  a  downward 
path.  Finally,  to  ensure  the  success  of  the  fiscal  consolidation  strategy,  it  will  be  also 
important  to  back  the  fiscal  consolidation  by  comprehensive  structural  reforms,  in  line  with 
the Council recommendations addressed to Slovenia in the context of the European Semester 
and Macroeconomic Imbalances Procedure. 

Beyond the report foreseen in recommendation (5), the Slovenian authorities should report on 
progress made in the implementation of these recommendations at least every [six months] as 
well as in a separate chapter in the stability programmes, until full correction of the excessive 
deficit has taken place.  

This recommendation is addressed to the Republic of Slovenia. 

Done at Brussels,  

For the Council 
The President 

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