Development Report 2023: Slowdown of the high post-COVID-19 economic growth; key further measures to accelerate the transformation to a smart and green economy

The Slovenian economy recovered quickly from the epidemic, supported by an expansionary fiscal policy. GDP per capita in purchasing power standards reached 92% of the EU average last year, the highest level ever recorded. The measures taken to support the population during the epidemic and the period of rising energy prices significantly mitigated the impact of both crises on the social and material situation of the population. The fiscal position gradually improved in 2021–2022 after the measures to mitigate the consequences of the epidemic were lifted and the economy experienced a robust recovery, but the deficit was still 3% of GDP last year. In 2022, high post-COVID-19 economic growth weakened due to the energy crisis and rising uncertainty in the international environment while energy and commodity supply shocks pushed up inflation against a backdrop of strong post-COVID-19 private consumption and labour shortages. In the Development Report, an annual report monitoring the implementation of the Slovenian Development Strategy 2030, we emphasise that the priority actions of development policy for long-term sustainable and inclusive development should focus on accelerating the structural (smart and green) transformation of the economy. In this context, setting strategic priorities is particularly important at a time when the fiscal framework is becoming much more restrictive with the reactivation of fiscal rules than in recent years when the rules were suspended due to major economic shocks. The need for structural transformation of the economy should also be taken into account in the design of temporary measures to mitigate the impact of the energy crisis, which should gradually move from general to more targeted measures to ensure adequate price signals for energy consumption.

The large development gap in the area of productivity is only gradually narrowing because of the sluggish pace of smart and green transformation of the economy. Low productivity, which reached 86% of the EU average in 2022, fully explains Slovenia’s development gap in GDP per capita (in purchasing power standards). The slow productivity progress is the result of the low level of investment. Despite gradual growth in recent years, investment in R&D, ICT and other machinery and equipment, which is closely related to smart transformation, is low compared to both innovation leaders and Visegrad countries. Although there has been some progress in innovation since 2016, companies often take too superficial an approach to modernisation and digital and green transformation, fail to make comprehensive organisational changes, and are often insufficiently aware of the benefits and urgency of ecosystem integration. In view of the labour shortage, it is also becoming increasingly urgent to accelerate the automation and restructuring of work processes. Investment in green transformation is also insufficient. Slovenia has made some progress in this context in recent years only in the area of energy consumption and managed to narrow the gap with the EU average in energy productivity to 8% (2021). The gaps in emissions and resource productivity have long been around 10%. Slovenia is even less successful when it comes to renewable energy sources. Their share in total energy consumption has increased the least of all EU Member States since 2005 and the 2020 target has not been met.

The epidemic has interrupted a long-standing improving trend in the health status of the population, and building a financially sustainable and resilient health and long-term care system remains an important development task for Slovenia. Key population health indicators (life expectancy, premature mortality, healthy life years) had improved in the decade before the epidemic and the number of healthy life years is higher than the EU average according to recent data. The epidemic led to a significant increase in excess mortality and affected access to health services, which was already a serious problem before the epidemic due to the lack of general practitioners and long waiting times. At the same time, the share of out-of-pocket expenditure in household consumption has also increased. Patients with chronic non-communicable diseases were most affected by limited access to health services, leading to an increase in health inequalities. The epidemic has also led to a significant increase in mental health problems, especially among children and adolescents, which were already on the rise before the epidemic hit. The situation in long-term care has further deteriorated, mainly due to staff shortages in nursing homes and poorly developed home care. Despite accelerated growth in recent years, public expenditure on long-term care still lags behind the EU average, while public expenditure on healthcare has almost reached the EU average in recent years (both as a share of GDP). Temporary and medium-term measures, supported by higher public expenditure, have been taken in 2020–2022 to mitigate problems in the health care and long-term care system, with significant funding earmarked for investment in the health sector. However, improving accessibility by ensuring sufficient staff, reducing waiting times, introducing digitalisation and creating sustainable financing for both systems remain key challenges in both systems.

Image showing Slovenia’s priority areas for action analysed in the Development Report 2023

The priority areas for action analysed in the Development Report 2023, which we consider crucial for the long-term sustainable development of Slovenia and higher quality of life, relate to the following challenges:

accelerating productivity growth by (a) increasing human resource development and adapting social and economic systems to persistent labour shortages (through automation and reorganisation of work, adaptation of education and training systems to future needs, an ambitious retraining programme, activation of the inactive, attracting talent and active integration of immigrants into society); (b) accelerating government and business investment in smart (including digital and organisational) and green transformation; (c) improving the quality of the science and research system, promoting mobility of researchers, internationalisation and networking between knowledge institutions and businesses; (d) fostering the emergence of innovative start-ups; (e) creating a stable, predictable, agile and simplified business environment that enables close cooperation between the state, businesses and other stakeholders;

accelerated transition to a low-carbon circular economy by (a) taking more decisive action to increase the generation of energy from renewable sources, in particular by prioritising the siting of new projects; this will also help to increase the resilience of the energy system and reduce energy dependency, given the challenges related to the new geostrategic situation in the world and the need to increase energy efficiency; (b) promoting sustainable, smart and resilient mobility, in particular through measures to reduce greenhouse gas emissions from all modes of transport and by upgrading and developing the necessary infrastructure; (c) introducing new low-carbon circular business models, including more efficient waste management, thereby reducing environmental impacts and the use of limited natural resources; and (d) targeted systemic shifts in the development and use of new knowledge, innovation and sustainable investment in clean technologies;

ensuring an inclusive, healthy and active society by (a) improving access to health services, investing more in prevention and ensuring sustainable financing of the health system; (b) comprehensive pension reform to ensure decent pensions and fiscal sustainability of the pension system; (c) adequate regulation of financing and capacity building of the long-term care system, especially home care; (d) more ambitious planning to reduce the risk of long-term poverty and social exclusion in the context of social policy reform; (e) adapting workplaces for older people to remain active longer and better integrate into society, and by strengthening lifelong learning; (f) ensuring quality jobs, health and safety at work and facilitating access to the labour market for young people and other hard-to-place people;

strengthening the developmental role of the government and its institutions by (a) improving the strategic governance of public institutions to ensure timely identification and coordinated and effective management of development challenges; (b) ensuring a high-quality legal framework and a reduction in government regulation to increase the competitiveness of the economy and simplify the lives of citizens; and (c) restructuring general government revenues and expenditures by strengthening their developmental role, whereby it is crucial to strike the right balance between economic growth and sufficient support for economic transformation to boost productivity and address the challenges of climate change and the sustainability of public finances.

Setting strategic priorities to effectively address Slovenia’s key development challenges is particularly important due to the reactivation of fiscal rules (and thus the tightening of the fiscal framework). This requires better coordination and targeting of measures and, in particular, a reconsideration of and agreement on priority areas for the expenditure of budgetary and EU funds under the cohesion policy and the Recovery and Resilience Plan.