Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Slovenia and delivering a Council opinion on the 2016 stability programme of Slovenia
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Slovenia, budget deficit, credit policy, economic policy, economic reform, employment policy, health care system, pension scheme, public administration, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 344 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Slovenia  and delivering a Council opinion on the 2016 stability programme of Slovenia  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Slovenia 

and delivering a Council opinion on the 2016 stability programme of Slovenia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified Slovenia as one of the Member States for which an in-depth review would 
be carried out. On the same day, the Commission also adopted a recommendation for 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 344 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

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(2) 

(3) 

(4) 

(5) 

a  Council  recommendation  on  the  economic  policy  of  the  euro  area7.  That 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  between  the  economies  in  the  economic  and 
monetary  union,  Slovenia  should  ensure  the  full  and  timely  implementation  of  the 
recommendation. 
The  2016  country  report  for  Slovenia8  was  published  on  26  February  2016.  It 
assessed  Slovenia’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 14 July 2015 and Slovenia's progress towards its national 
Europe  2020  targets.  It  also  included  the  in-depth  review  under  Article  5  of 
Regulation  (EU)  No 1176/2011.  On  8  March  2016,  the  Commission  presented  the 
results of the in-depth review.9 The Commission’s analysis leads it to conclude that 
Slovenia  is  experiencing  macroeconomic  imbalances.  Weaknesses  in  the  banking 
sector,  corporate  indebtedness,  the  lack  of  investment  and  long-term  fiscal 
sustainability  risks  constitute  vulnerabilities  that  will  need  to  be  addressed. 
Confidence has returned into the Slovenian banking sector. However, credit growth 
remains negative and the level of non-performing loans remains relatively high. It is 
essential that Slovenia tackles risks to fiscal sustainability stemming from increasing 
pressures  on  its  health  care  and  pension  systems  and  reduces  the  increased  public 
debt. Further reduction of obstacles to investment is required, particularly in the area 
of  public  administration.  There  is  a  need  to  strengthen  the  involvement  of  social 
partners  in  policy  design  and  implementation  of  structural  reforms  in  particular  on 
pensions, health, long-term care and labour market policies. 

On  15  April  2016,  Slovenia  submitted  its  2016  national  reform  programme  and  its 
2016  stability  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance10.  

in 

The 2016 stability programme of Slovenia indicates that the budgetary impact of the 
exceptional inflow  of  refugees  is  significant  and  provides  adequate  evidence  of  the 
scope and nature of these additional budgetary costs. According to the Commission, 
the  eligible  additional  expenditure  amounted  to  0.06%  of  GDP  in  2015  and  is 
currently estimated at 0.07% of GDP in 2016. The provisions defined in Article 5(1) 
and  Article  6(3)  of  Regulation  (EC)  No  1466/97  allow  catering  for  this  additional 
expenditure,  in  that  the  inflow  of  refugees  is  an  exceptional  event,  its  impact  on 
is  significant  and  sustainability  would  not  be 
Slovenia`s  public  finances 

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COM(2015) 692 final. 
SWD(2016) 92 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

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compromised  by  allowing  for  a  temporary  deviation  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective.  Whereas  this  provision  is  not 
applicable  for  2015  as  Slovenia  was  under  excessive  deficit  procedure,  a  final 
assessment regarding 2016, including on the eligible amounts, will be made in spring 
2017 on the basis of observed data as provided by Slovenian authorities. 

[Following  the  abrogation  of  the  excessive  deficit  procedure,  Slovenia  is  in  the 
preventive arm of the Stability and Growth Pact and subject to the transitional debt 
rule.] In its 2016 stability programme, the government plans a gradual improvement 
of the headline balance from 2.2% in 2016 to 0.4% of GDP in 2019. The medium-
term  budgetary  objective  -  a  balance  budget  in  structural  terms,  which  does  not 
respect the requirements of the Stability and Growth Pact - is planned to be achieved 
in  2020,  beyond  the  programme's  horizon.  However,  the  recalculated  structural 
balance  points  to  a  structural  deficit  of  1.2%  of  GDP  in  2019.  According  to  the 
stability programme, the government debt-to-GDP ratio is expected to fall to 80.2% 
of GDP in 2016 and continue to fall to 73.8% of GDP in 2019. The macroeconomic 
scenario  underpinning  these  budgetary  projections  is  plausible.  However,  the 
measures needed to support the planned deficit targets from 2017 onwards have not 
been  sufficiently  specified.  According  to  the  Commission  2016  spring  forecast, 
Slovenia's output gap in 2017 is estimated at 1.8% of GDP, while potential growth is 
projected at 1.1% and real GDP growth at 2.3% of GDP. On this basis, Slovenia is 
assessed  to  be  in  "good  times"  in  2017,  requiring  a  structural  adjustment  of  1%  of 
GDP. However, there is significant uncertainty regarding the calculation of potential 
growth  and  the  output  gap  in  the  specific  case  of  Slovenia  because  of  the  specific 
situation of the labour market, the particularly large economic contraction in  2008-
2013  and  the  structural  reforms  being  implemented.  Alternative  output  gap 
estimations  covering  a  longer  time  horizon,  reflecting  the  ongoing  review  of  the 
estimation method, suggest a smoother output gap profile for Slovenia, implying that 
it  would  be  premature  to  conclude  that  the  Slovenian  economy  is  in  good  times  in 
2017.  Therefore,  requiring  a  structural  effort  in  2017  in  line  with  normal  times 
conditions  appears  more  appropriate  at  the  current  juncture.  There  appears  to  be  a 
risk of some deviation from the recommended adjustment towards the medium term 
objective in 2016 and, under unchanged policies, a risk of a significant deviation in 
2017. The conclusion for 2016 would not change in case the budgetary impact of the 
exceptional  inflow  of  refugees  was  excluded  from  the  assessment.  Slovenia  is 
forecast to comply with the transitional debt rule in 2016 and to broadly comply with 
it  in  2017.  Based  on  its  assessment  of  the  stability  programme  and  taking  into 
account the Commission 2016 spring forecast, the Council is of the opinion that there 
is  a  risk  that  Slovenia  will  not  comply  with  the  provisions  of  the  Stability  and 
Growth  Pact.  Therefore,  further  measures  will  be  needed  to  ensure  compliance  in 
2016 and 2017. 

In July 2015, the Parliament adopted the Fiscal Rules Act. However, an independent 
Fiscal  Council  to  oversee  the  implementation  of  the  rules  has  yet  to  be  appointed. 
Furthermore, revisions to the Public Finance Act required to fully operationalise the 
Fiscal  Rules  Act  and  aimed  at  putting  a  multi-annual  approach  to  budgeting  on  a 
statutory footing remain outstanding. 

The high level of public debt at well above 60 % of GDP makes Slovenia vulnerable 
to nominal growth and interest rate shocks. At the same time, Slovenia's population 
is ageing faster than that of most Member States. Slovenia faces high risks regarding 
the long-term sustainability of public finances, given that it has the highest long-term 

(6) 

(7) 

(8) 

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sustainability  gap  indicator  of  all  Member  States,  stemming  from  the  projected 
increase  in  pension  related  public  spending,  healthcare  and  long-term  care 
expenditure. Projected public spending on pensions is the highest among all Member 
States and is estimated to increase from 11.8 % in 2013 to 15.3% of GDP in 2060. 
The  old  age  dependency  ratio  is  projected  to  more  than  double  between  2013  and 
2060,  putting  significant  pressure  on  the  pension  systems.  Projected  implicit 
liabilities related to the cost of ageing reflect the long-term challenges in terms of an 
ageing  population.  In  addition,  adequacy  problems  for  workers  with  less  than  full 
working careers can be expected in the future, with an increasing number of people 
with incomplete or short working careers, also due to their late entry into the labour 
market,  working  in  intermittent  jobs  and  with  a  low  contribution  density.  A  White 
Paper on pensions was published in April 2016 and will serve as the basis for a wide 
public  consultation.  The  results  of  the  consultation  will  be  fed  into  a  new  pension 
reform that should be adopted within the current legislative term, swiftly starting by 
agreement with social partners on key elements of the reform, namely the retirement 
age, level of pensions, indexation and optimisation of the second pillar.  

Public expenditure on long-term care is projected to more than double by 2060 due 
to  population  ageing.  This  poses  a  significant  fiscal  sustainability  challenge  for 
Slovenia.  The  proportion  of  the  population  aged  80  years  and  older  is  projected  to 
rise  three-fold,  from  4.6  %  in  2013  to  12.4  %  in  2060.  Between  2003  and  2013, 
overall  expenditure  on  long-term  care  increased  by  85 %  with  private  expenditure 
growing  at a  higher  pace  than  public  expenditure.  There is  no  integrated  long-term 
care  system  in  Slovenia.  Slovenia  focusses  its  spending  on formal  in-kind  benefits, 
the majority of which is spent on institutional care rather than home care, although 
both figures are below the EU average. There is significant scope for increasing the 
cost-effectiveness  of  the  healthcare  system  by  strengthening  the  measures  for 
improving primary care as a gate keeper, shifting from in-patient to outpatient care, 
improving  the  efficiency  and  governance  of  hospitals,  improving  contracting  and 
payment  processes  for  health  services,  developing  better  cost  information  for  the 
adjustment  of  the  imported  diagnosis-related  groups,  and  further  development  of  a 
quality monitoring framework. The proportion of joint procurement is low and there 
is  a strong focus on the ‘lowest  price’ award  criterion.  A comprehensive review of 
the  health  care  system  has  been  completed  and  the  National  Healthcare  Resolution 
Plan  2016-2025  was  adopted  by  the  government  at  the  end  of  2015  and  by  the 
parliament in March 2016. The resolution represents a strategic plan for reform but 
while proposals for effective binding implementing measures are in preparation, they 
have yet to be presented. It also remains unclear whether the reform will address key 
issues  such  as  in-built  automatic  stabiliser  schemes,  which  would  cushion  revenue 
fluctuations  over  the  business  cycle  or  the  access  and  quality  of  service  provision. 
The  adoption  of  the  Long-term  Care  Act  and  Healthcare  and  Health  Insurance  Act 
has been repeatedly delayed and the current roadmap for their adoption appears to be 
optimistic for the second half of 2016.  

Labour  market  performance  is  gradually  improving  and  social  conditions  have 
stabilised. Job creation has picked up considerably and unemployment is decreasing. 
However,  participation  rates  of  older  and  low-skilled  workers  remain  a  challenge. 
Long-term  unemployment  still  represents  more  than  half  of  all  unemployed  with  a 
significant  share  of  the  long-term  unemployed  being  low-skilled  or  older  than  50 
years of age. The Guidelines for Active Labour Market Policy Measures 2016-2020 
represent a continuation of the approach implemented so far, while the expenditure 
for  that  policy  area  remains  low.  Temporary  exemptions  from  employers'  social 

(9) 

(10) 

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(11) 

(12) 

contributions for newly employed workers older than 55 were adopted in November 
2015.  Further  measures  to  prolong  working  lives,  including  adapting  the  working 
environment, which are relevant also for the sustainability of the pension system, are 
expected to be presented in 2016. Wage growth stayed in line with productivity gains 
and  continued  to  support  external  competitiveness.  In  November  2015,  the 
parliament  passed  a  bill  proposed  by  the  trade  unions  that  redefined  the  minimum 
wage to exclude some  bonuses. As a result, employer organisations  withdrew from 
the social agreement, weakening the social dialogue considerably.  

Progress  has  been  made  on  the  work-out  of  non-performing  loans,  although  they 
remain at high levels compared with the pre-crisis period. Slovenia has implemented 
several  policy  measures  to  improve  the  sustainability  of  the  banking  sector.  These 
include  strengthening  the  banks’  work-out  capacity  and  introducing  action  setting 
specific  targets  for  the  reduction  of  non-performing  loans.  Slovenia  has  also 
introduced  several  measures  to  manage  credit  risk.  Positive  results  are  expected  by 
mid-2016.  Nevertheless,  the  policy  priorities  in  the  short  term  remain  the  further 
resolution  of  non-performing  loans  and  the  management  of  credit  risk.  Operational 
and  financial  restructuring  of  major  corporates  has  been  completed  and  master 
restructuring agreements are continuously monitored. The Bank Asset Management 
Company  (BAMC)  is  fully  operational  and  its  2017-22  strategy  has  been  set  out. 
While  progress  has  been  made  by  the  BAMC  in  the  work-out  of  its  loan  book,  it 
remains  a  significant  risk  to  the  sustainability  of  public  finances.  In  2015,  its 
activities  contributed  1%  of  GDP  to  the  general  government  deficit  of  2.9%. 
Oversight of the activities of the BAMC appears to be insufficient as the authorities 
had considerably underestimated the deficit of the BAMC in 2015 by 0.7% of GDP 
and appeared unaware of the level of write-offs performed by the BAMC. Additional 
restructuring  tools  are  also  available.  On  the  back  of  substantial  progress  in 
restructuring  of  major  corporates,  Slovenia  has  started  the  restructuring  of  several 
SMEs. Guidelines for the restructuring of SMEs are currently being implemented by 
the  banks.  Progress  has  been  made  on  access  to  finance  for  SMEs  and  micro 
companies.  Nevertheless,  there  is  limited  access  to  alternative  sources  of  financing 
such as venture capital. Small businesses are still overly dependent on bank lending 
despite  the  increasing  availability  of  debt  and  equity  instruments  in  the  market. 
Therefore, that segment is very vulnerable to credit market developments. 

Investment  growth  has  been  muted  in  recent  years,  which  limited  Slovenia's 
economic  output  and  future  growth  prospects.  Private  investment  declined  sharply 
during the economic crisis and since then its share in GDP has been decreasing. With 
public investment strongly dependent on the dynamics of EU funds, more productive 
investment  is  needed  to  stimulate  and  sustain  economic  growth.  Foreign  direct 
investment  in  Slovenia  has  grown  markedly  in  the  last  two  years,  mainly  due  to 
increased  privatisation  efforts.  However,  Slovenia’s  business  environment  remains 
hindered  by  ongoing  deleveraging  and  a  high  level  of  administrative  burden, 
particularly in the areas of construction, spatial planning and tax compliance, but also 
due to restrictive regulation on access to and exercise of regulated professions, which 
impedes  the  inflow  of  investment.  Making  it  easier  to  do  business  in  Slovenia 
depends on increased business trust and further elimination of inefficiencies in public 
administration and red tape stemming from a high number of laws and by-laws and 
frequent  changes  to  legislation.  Around  half  of  the  administrative  burden  reduction 
measures  set  out  in  the  government's  single  document  have  been  implemented,  but 
some  pertinent  measures,  especially  on  building  permits  and  spatial  planning,  have 
been delayed. 

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(13) 

(14) 

(15) 

The  2015-2020  strategy  for  the  development  of  public  administration,  adopted  as 
part  of  Slovenia's  compliance  with  the  pre-conditions  for  accessing  European 
Structural  and Investment Funds for 2014-2020, stretches  across various portfolios, 
making  cross-ministerial  coordination  essential  if  it  is  to  be  implemented  properly 
and  in  good  time.  In  February  2016,  the  government  adopted  the  second  interim 
report on the implementation of the 'Zero tolerance of corruption' programme. There 
has been some progress in the implementation of that programme. However, certain 
measures  of  the  programme  (joint  public  procurement  for  health,  examination  of 
crime  in  banking  sector  and  adoption  of  the  Act  for  integrity  and  prevention  of 
corruption)  have  been  delayed.  The  envisaged  amendment  of  the  Act  for  integrity 
and prevention of corruption will provide an opportunity to improve the functioning 
of the Commission for Prevention of Corruption, by addressing credibility issues and 
the  efficiency  of  its  work.  In  the  justice  system,  the  length  of  trials  has  been 
shortened further and the number of pending cases has been reduced from very high 
levels, partly helped by a smaller number of incoming cases. The decrease is also, to 
a certain extent, determined by changes in the procedural and statistical treatment of 
enforcement  cases.  The  Supreme  Court  continues  to  update  business  processes  in 
courts  and  to  reform  case  management  systems.  Despite  an  improved  insolvency 
framework,  offering  businesses 
reorganisation, 
liquidation proceedings remain lengthy and ineffective.  

increased  opportunities 

for 

State  involvement  in  the  economy  remains  high.  The  state  is  the  largest  employer, 
asset  manager  and  corporate  debt  holder  in  Slovenia.  In  response  to  the 
recommendations  issued  to  Slovenia  between  2012  and  2015  on  that  issue,  the 
country produced a new framework for the Slovenian Sovereign Holding. It includes 
a strategy on the management of state ownership, a set of asset performance criteria 
and  a  management  plan  for  2016.  This  system  complements  the  new  corporate 
governance code for state-owned enterprises adopted at the end of 2014. The strategy 
confirms  the  extent  of  state’s  current  involvement  in  the  economy  and  shifts  the 
focus  towards  an  improved  performance  of  the  state-owned  enterprises.  Therefore, 
implementation of the overhauled framework by the Slovenian Sovereign Holding is 
all  the  more  important  to  ensure  the  separation  of  the  government's  ownership  and 
regulatory  functions  and  the  professional  management  of  state-owned  enterprises. 
This, together with further privatisation of selected assets, should reduce contingent 
liabilities to the budget from this area. The privatisation of NLB is to be launched in 
2016 in line with the Slovenian Sovereign Holding management plan. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Slovenia’s economic policy and published it in the 2016 
country report. It has also assessed the stability programme and the national reform 
programme  and  the follow-up given to  the recommendations  addressed to  Slovenia 
in  previous years.  It has  taken into account  not only  their relevance for sustainable 
fiscal and socioeconomic policy in Slovenia but also their compliance with EU rules 
and guidance, given the need to strengthen the EU's overall economic governance by 
providing EU-level input into future national decisions. The recommendations under 
the European Semester are reflected in recommendations 1 to 4 below. 

(16) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  stability  programme, 
and its opinion11 is reflected in particular in recommendation 1 below. 

11 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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(17) 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  stability  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendations 1, 3 and 4 below. 

HEREBY RECOMMENDS that Slovenia take action in 2016 and 2017 to: 

1. 

2. 

3. 

4. 

Following the correction of the excessive deficit, achieve an annual fiscal adjustment 
of 0.6% of GDP towards the medium-term budgetary objective in 2016 and in 2017. 
Set a medium-term budgetary objective that respects the requirements of the Stability 
and  Growth  Pact.  Strengthen  the  fiscal  framework  by  appointing  an  independent 
fiscal  council  and  amending  the  Public  Finance  Act.  Complete  and  implement  the 
reform  of  the  long-term  care  and  healthcare  systems,  making  them  more  cost-
efficient to ensure long-term sustainability of accessible and quality care. By the end 
of 2017, adopt the reform of the pension system. 

In  consultation  with  social  partners,  increase  the  employability  of  low-skilled  and 
older workers, including through targeted lifelong learning and activation measures. 

Improve the financing conditions for creditworthy business, including by facilitating 
durable  resolution  of  non-performing  loans  and  access  to  alternative  financing 
sources. Ensure the proper implementation of the bank asset management company 
strategy. 

Take  measures  to  modernise  public  administration  and  reduce  the  administrative 
burden  on  business.  Improve  the  governance  and  the  performance  of  state-owned 
enterprises. 

Done at Brussels, 

For the Council 
The President 

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