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

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Presentation on theme: "Does consolidation contradict growth ? Mitja Gaspari, Minister, Slovenia OECD, 26 November 2010."— Presentation transcript:

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

2 Case of Slovenia: key issues for reform processes A.Current economic outlook: where are we? B.Fiscal consolidation: efficiency of public spending C.Competitiveness: administrative burdens, financing growth D.Structural measures: tackling ageing population and health E.Governance: better institutions F.Scoreboard: implementation of the exit strategy

3 A. Current Economic Outlook Slovenia – a small and open Euro-area economy Trade leads the recovery, followed by domestic demand Annual percentage change 200820092010201120122013 GDP (real growth, %) 3.7-8.10.92.53.13.3 Employment (SNA) 2.8-1.9-2.2-0.30.20.5 Inflation (annual average, %) 5.70.91.82.02.22.5 Current account (% of GDP) -6.7-1.5-0.9-1.1n.a. General government balance (% of GDP – ESA95) -1.8-5.8-5.6-4.8-3.8-2.6 General government gross debt (% of GDP) 22.535.440.542.743.644.1 Source: Budget Memorandum 2011-2012, September 2010 MoF update & IMAD, SORS *Public finances 2010-2013 – policy change scenario, forecast – ESA95 methodology

4 A. Current Economic Outlook Domestic Demand and GDP Source: SORS, Bank of Slovenia

5 A. Current Economic Outlook Unit Labour Cost (ULC) Source: SORS, Bank of Slovenia

6 A. Current Economic Outlook Saving-Investment Gap Source: Bank of Slovenia

7 A. Current Economic Outlook External Debt Source: Bank of Slovenia

8 A. Current Economic Outlook General Government Balance and Debt

9 B. Fiscal Consolidation The Concept of the Slovenian Exit Strategy

10 B. Fiscal Consolidation The Slovenian Exit Strategy Policy Mix B. DEVELOPMENT PRIORITIES: SETTING PRIORITY MEASURES AND PROJECTS TO ACHIEVE DEVELOPMENT ADJUSTMENTS OF THE COHESION POLICY A. CONSOLIDATION OF PUBLIC FINANCES: EXPENDITURE FISCAL RULE TARGET DEFICIT AND PUBLIC DEBT E. FINANCIAL INSTRUMENTS FOR DEVELOPMENT: GUARANTEE SCHEMES COORDINATION OF FINANCING MECHANISMS DEALING WITH IMPAIRED ASSETS D. SOCIAL COHESION : SOCIAL RIGHTS TO PUBLIC FUNDS SOCIAL PROTECTION CASH BENEFITS C. FLEXICURITY ELEMENTS ON THE LABOUR MARKET: A CEILING ON SOCIAL CONTRIBUTIONS ACTIVE EMPLOYMENT POLICY IMPROVEMENTS OF LABOUR RELATIONS INSTITUTIONAL ADJUSTMENTS: CORPORATE GOVERNANCE FINANCIAL SUPERVISION PUBLIC SERVICES STRUCTURAL MEASURES: PENSION SYSTEM HEALTH SYSTEM LONG-TERM CARE

11 B. Fiscal Consolidation Key ingredients of the fiscal pie* FISCAL SUSTAINABILITY MEASURES* ) IMPLEMENTATION IN SLOVENIA**) 1. Fiscal rule - strong legislative backing 2. Multi-year spending limits 3. Open and accountable budgeting 4. Disciplined budget preparation and execution 1.Implied in the Decree on the Development Planning Documents and Procedures for the Preparation of the National Budget. 2.The Budget Memorandum defines multi-year expenditure ceilings that link general government expenditure to the growth of potential output. 3.Clear procedures defined by the Decree on the Development Planning Documents and Procedures for the Preparation of the National Budget; setting up of an independent fiscal council in 2009. 4.Programme-based budgeting, with top- down approach. * ) Blanchard, Cotarelli principles, IMF direct, November 2010 ** ) Decree on the Development Planning Documents and Procedures for the Preparation of the National Budget and planned amendments to the Public Finance Act in April 2011

12 B. Fiscal Consolidation Fiscal stability Goal: government deficit below 3% GDP and general government debt below 45% of GDP by 2013 Guiding principle: fiscal consolidation to be achieved by adjusting expenditure and not by increasing taxes Fiscal rule: government expenditure linked to trend growth of GDP Methodology: Programme-based Budgeting, National Development Priorities, Logical Framework Approach

13 B. Fiscal Consolidation Fiscal rule: the upper limit for public expenditure G t+1 = G t × (1 + g*) Nominal growth of public finance expenditure (g*): g* = g trend - u×(b t - b*) - v×(f t - f*) preventive arm corrective arm b t estimate for consolidated gross gov. debt in % of GDP b * target ; f t estimate for primary public finance balance in % of GDP f * target ; g trend arithmetic average three previous years, current year (t) and three-year forecast for nominal growth of potential GDP estimated by the EU production function method; 0 u, v 1speed coefficients for target consolidated gross gov. debt and for target primary public finance balance, respectively; parameters b *, f *, u, v are determined for a two-year period. Fiscal consolidation fiscal rule parameter changes upper limit for public finance changes

14 B. Fiscal Consolidation National Development Priority programmes & financing * *Estimates and calculations, GODEA

15 Source: World Bank: Doing Business, 2007-2011, *not included in 2011 survey, due to crisis circumstances 20072008200920102011 Starting a business(rank)9812041252528 Procedures(number)99532 Time(days)60 1966 Cost(% of income per capita)9.49.48.58.50.10.100 Min. capital(% of income per capita)16.149.846.843.345.0 Construction permits(rank)63626963 Procedures(number)1415 14 Time(days)207208 197199 Cost(% of income per capita)122114112.279.985.1 Employing workers*(rank)146166158162- Difficulty of hiring index(0-100)6178 - Rigidity of hours index(0-100)60 53- Difficulty of redundancy index(0-100)50 4030- Rigidity of employment index(0-100)57635954- Redundancy cost(0-100)40 37 - Doing Business-rankings of Slovenia C. Competitiveness Simplifying the administrative procedures

16 Source: WEF Global Competitiveness Report, 2009. C: Competitiveness: Boosting innovation: WEF-rankings of Slovenia

17 SEED CAPITAL (Angels 3F) Valley of Death START-UP FINANCING Start-up GROWTH FINANCING Early Growth and Expansion FINANCING FURTHER GROWTH AND DEVELOPMENT Further Growth and Restructuring Financial flow – enterprise lifecycle HIIGH RISK LOW RISK Set up of enterprise SID – financing services for SME, exporters, R&D, technology, education C: Competitiveness: Financing entrepreneurship lifecycle SEF guarantees, grants JAPTI one-stop-shop SEF – micro & development guarantees, direct loans SEF – grants for new technological equipment SEF equity financing JAPTI – voucher system to support growth and development JAPTI – mobility, export education, market entry … STA – technology, young researchers, innovations SRA – basic, applicative & postPhD research project co-financing ECO Fund – energy saving, energy efficiency

18 C: Competitiveness: Streamlining entrepreneurship financing

19 Source: SORS; Sambt 2009. DEFICIT SURPLUS DEFICIT AGE 25 years AGE 56 years D: Structural Measures Age-related labour income/consumption profile 31 years Labour income Total consumption Age

20 D: Structural Measures Pension reform Aim: Long-term financial sustainability and decent pensions Measures: Extend years of work by raising the full retirement age to 65 Encouraging bonus policy and restrictive malus policy Extended pension base from 18 to 34 best consecutive years Elimination of net social transfers from the pension system Reformulation of compulsory supplementary pension insurance into professional insurance for all workers in difficult jobs Modernisation of the voluntary supplementary pension insurance scheme

21 D: Structural Measures Total effect of the proposed pension reform % of pension expenditure in GDP No policy change scenario Pension reform scenario Pension expenditure, % of GDP Year

22 D: Structural Measures Health care and health insurance Aim: financial sustainability and rationalisation in implementing health services. Measures: Health Services Act – to maintain the level and quality of health services despite limited resources. Health Care and Health Insurance Act – to preserve general access to necessary health services and insurance entitlements based on solidarity. Health security will be ensured by means of compulsory health insurance. Private sector health services will be financed independently by private capital (households, private insurance companies etc. ) and will not be integrated into public services basket available to citizens.

23 D: Structural Measures Public expenditure on health as % of GDP Source: European Commission, Draft report on health systems

24 D: Structural Measures Efficiency and effectiveness in the health sector Source: European Commision, Draft report on health systems

25 E: Governance Institutional adjustments Management of public institutions and public administration including Agency for Capital Investment Management, transformation of Capital Fund (KAD) and Restitution Fund (SOD), Public Fund for the Management of the State-owned Real Property, change of activities of DARS d.d. (Slovenian Motorway Company), adjustments of financial services provision, transformation of the Competition Protection Office, establishment of a Public Procurement Agency … Transport and energy infrastructure, aimed at efficient environmental and climate policy including adjustment of the system of siting transport and energy infrastructure in the environment, development of the railway system (infrastructure and services), promoting renewable energy sources, adaptation to climate change, increasing the competitiveness of agriculture and food processing industry, optimisation of forest management

26 F. Scoreboard: IMPLEMENTATION OF THE EXIT STRATEGY, 28 October 2010 Laws: ZVKZUDDZUKNZPKSZPOGDZNJSZUNPDZUAJNZZFPZZIZZDRZUTDZMDZMPZŠZPIZZDOZZUPJSZSPZSVZZD ZZVZ Z DARSZŽPZPEVZPS Draft, public consultation Inter- sectoral coordination Government Committees Government adoption National Assembly Entry into force PrioritiesEntrepreneurship and knowledge for developmentFlexicurity and social cohesion Development-oriented transport and energy infrastructure Abbervations: ZVK Competition Protection Act; ZUDD Financial Participation Act; ZUKN Law on Corporate Governance of State Capital Investments; ZPKS Act on Restructuring of KAD (Pension Fund Management) and SOD (Slovenian Compensation Company); ZPOGD Act regulating Guarantees of the Republic of Slovenia for the Obligations of Companies originating from the Restructuring of Debts; ZNJS Non-commercial Public Utilities Act; ZUNPD Act on the Management of Immovable State Property; ZUAJN Act establishing the Public Procurement Agency; ZZFP Act amending the Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act; ZIZ Act amending the Execution of Judgments in Civil Matters and Insurance of Claims Act ; ZDR Act amending the Employment Relationship Act; ZUTD Act on Labour Market Regulation; ZMD Act on Small Work; ZMP Act regulating the Minimum Wage; ZŠ Scholarship Act; ZPIZ Pension and Disability Insurance Act; ZDOZ Long-term Care and Insurance for Long-term Care Act; ZUPJS Exercise of Rights to Public Funds Act; ZSP Act on Social Security; Benefits Act on Financial Social Assistance); ZSV Social Security Act (Act on Social Security Services); ZZD Health Services Act; ZZVZZ Health Care and Health Insurance Act; ZDARS Act amending the Slovenian Motorways Company Act; ZŽP Act amending the Railway Transport Act ; ZPEV Act on Transport, Energy and Water Infrastructure Spatial Planning; ZPSClimate Change Act

27 Key policy dilemmas remain … Consolidation vs. growth Long-term vs. short-term effects Tackling imbalances: fiscal balance, current account Tackling structural issues: productivity, competitiveness, governance Adjustment timeframe and commitment Structural measures contribution to growth? ARE WE OPTIMISING TOO MUCH?

28 The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man. George Bernard Shaw (1856-1950), Man and Superman (1903) "Maxims for Revolutionists"


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