title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Romania and delivering a Council opinion on the 2019 Convergence Programme of Romania

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/135

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Romania and delivering a Council opinion on the 2019 Convergence Programme of Romania
      (2019/C 301/23)
      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 policies (1), and in particular Article 9(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 imbalances (2), and in particular Article 6(1) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Romania as one of the Member States for which an in-depth review would be carried out.

                  (2)

                  The 2019 country report for Romania was published on 27 February 2019. It assessed Romania’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (3), the follow-up given to the country-specific recommendations adopted in previous years and Romania’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019. The Commission’s analysis led it to conclude that Romania is experiencing macroeconomic imbalances. In particular, vulnerabilities are linked to diminishing cost-competitiveness and a widening current account deficit in a context of an expansionary fiscal policy and an unpredictable business environment. Recent legislative initiatives create risks for the functioning of the financial sector and may harm private investment.

                  (3)

                  Romania submitted its 2019 National Reform Programme on 9 May 2019 and its 2019 Convergence Programme on 8 May 2019. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (4)

                  Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (‘ESI Funds’) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), 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 that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance.

                  (5)

                  Romania is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Convergence Programme, the government plans a headline deficit of 2,8 % of gross domestic product (GDP) in 2019, and its gradual reduction thereafter, to 2,0 % of GDP in 2022. Based on the recalculated structural balance (5), the medium-term budgetary objective, set at a structural deficit of 1 % of GDP, is not planned to be achieved over the programme horizon. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to remain below 40 % by 2022. The macroeconomic scenario underpinning those budgetary projections is favourable. Moreover, the measures needed to support the planned deficit targets have not been sufficiently specified.

                  (6)

                  On 22 June 2018, the Council found in accordance with Article 121(4) of the Treaty that a significant observed deviation from the adjustment path towards the medium-term budgetary objective occurred in Romania in 2017. In view of the established significant deviation, on 22 June 2018 the Council issued a Recommendation (6), recommending that Romania take the necessary measures to ensure that the nominal growth rate of net primary government expenditure (7) did not exceed 3,3 % in 2018 and 5,1 % in 2019, corresponding to an annual structural adjustment of 0,8 % of GDP in each year. On 4 December 2018, the Council adopted Decision (EU) 2018/2020 (8), establishing that Romania had not taken effective action in response to its Recommendation of 22 June 2018, and issued a revised Recommendation (9). In the Recommendation of 4 December 2018, the Council asked Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 4,5 % in 2019, corresponding to an annual structural adjustment of 1,0 % of GDP. On 14 June 2019, the Council adopted Decision (EU) 2019/1002 (10), establishing that Romania had not taken effective action in response to the Council Recommendation of 4 December 2018. Moreover, based on 2018 outturn data, Romania was found to be in significant deviation from the recommended adjustment in 2018. In line with Article 121(4) of the Treaty and Article 10(2) of Regulation (EC) No 1466/97, the Commission issued a warning to Romania on 5 June 2019 that a significant deviation from the adjustment path towards the medium-term budgetary objective was observed in 2018. On 14 June 2019, the Council adopted a subsequent Recommendation (11), confirming the need for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 4,5 % in 2019, corresponding to an annual structural adjustment of 1,0 % of GDP. Based on the Commission 2019 spring forecast, there is a risk of a deviation from that Recommendation in 2019.

                  (7)

                  In its Recommendation of 14 June 2019, the Council recommended Romania to take the measures necessary to ensure that the nominal growth rate of net primary government expenditure does not exceed 5,1 % in 2020, corresponding to an annual structural adjustment of 0,75 % of GDP. Based on the Commission 2019 spring forecast under unchanged policies, there is a risk of a deviation from that requirement in 2020. In addition, the Commission 2019 spring forecast projected a general government deficit above the 3 %-of-GDP Treaty reference value in 2019 and in 2020. Overall, the Council is of the opinion that significant further measures will be needed as of 2019 to comply with the provisions of the Stability and Growth Pact, in light of a strongly deteriorating fiscal outlook, in line with the Council Recommendation of 14 June 2019, with a view to correcting the significant observed deviation from the adjustment path towards the medium-term budgetary objective.

                  (8)

                  Romania’s budgetary planning regularly ignores the provisions of the national fiscal framework. The national structural deficit rule requires compliance or convergence with the medium-term budgetary objective of a structural deficit not exceeding 1 % of GDP. In 2016 Romania departed from the medium-term budgetary objective and has been on a divergent path since then, in breach of the national deficit rule. The two 2018 budget amendments adopted in autumn 2018, departed once again from several auxiliary rules prohibiting increases in deficit and expenditure ceilings during the ongoing fiscal year. The 2019 budget, adopted by the government in February 2019 and approved by the Parliament in March, again departed from multiple fiscal rules, including the structural deficit rule. Moreover, as in previous years, the authorities did not send an update of the medium-term fiscal strategy to Parliament by the statutory August deadline, thereby undermining its guiding role. Also, as in previous years, the authorities did not comply with the requirement to sign a statement that the 2019 budget and the fiscal strategy respect the fiscal rules and principles of fiscal responsibility.

                  (9)

                  Tax compliance remains low. As regards value added tax, the difference between theoretically expected and actually collected revenues remains very high. The large informal economy represents an additional challenge for tax compliance, while the high levels of undeclared work deprive the State budget of significant resources. Furthermore, the prevalence of cash payments facilitates tax evasion. In the past year, Romania has achieved limited progress in addressing the repeated country-specific recommendation to strengthen tax compliance and collection. The introduction of electronic cash registers connected to the tax administration’s IT system is progressing rather slowly. The tax administration is taking steps to set up a risk assessment system for auditing taxpayers.

                  (10)

                  After several years of continued efforts to consolidate the financial sector, financial stability was again strained in 2018 by a set of government and parliamentary legislative initiatives. The tax on banks’ assets adopted by the government via an emergency ordinance at the end of December 2018, without impact assessment or stakeholder consultation, raised a number of serious concerns related to its negative impact on banks’ prudential situation, the conduct of monetary policy and ultimately investment and economic growth. The manner of its adoption and its provisions have had a significant adverse effect on the exchange rate, the government’s ability to borrow on the market and ultimately on stakeholders’ perception of operational risks. While some controversial aspects of the tax were amended in March 2019, the changes were again adopted via a government emergency ordinance and without an impact assessment. The most challenging aspects of the bank tax on total assets were removed. However, under the new formulation the tax may distort credit incentives, which could result in a misallocation of credit to the economy. The potential implications of these changes for monetary policy transmission should be assessed. Several legislative initiatives adopted by Parliament at the end of 2018, although declared unconstitutional by the Constitutional Court in March 2019, have put additional strain on the banking sector and reinforced the overall perception of an unpredictable legal framework. Past experience shows that such initiatives could be put forward again by the legislature.

                  (11)

                  The new pension law, adopted by Parliament in December 2018, is likely to pose risks to the sustainability of public finances. The pension point, i.e. the main parameter used for pension indexation, is set to increase by 15 % in September 2019 and by 40 % in September 2020. The pension law would change several parameters used to calculate pension benefits. In particular, the pension point value is set to rise, as the indexation factor for existing pensions would no longer converge towards prices but would instead remain permanently composed of wages and prices. Moreover, the contributory period used to calculate a person’s pension will be shortened, leading to higher pension expenditure for new pensions. However, the abolishment of the correction index for new pensions (which used to partly link the first pension to wages) will mitigate the overall pension expenditure increase caused by the other parameters. Some structural challenges that affect pension adequacy remain unaddressed. The effective average retirement age is close to the Union average, but is not equal between women and men. Coupled with shorter contributory periods for women, this results in a considerable pension gender gap.

                  (12)

                  The reform of the pension system introduced in 2008 has been gradually rolled back. After repeated postponements of the scheduled increases in contributions to the second-pillar pension funds, which should have reached 6 % of gross wages by 2016, contributions were reduced to 3,75 % of gross wages as of 2018. Second-pillar pension funds were further weakened by a set of measures adopted by the government via an emergency ordinance at the end of 2018. Contributions to these funds were made optional after a minimum contributory period of five years. The minimum capital requirements for second-pillar pension-fund management companies were increased significantly, triggering a risk of exits by fund management companies from the Romanian market. The administrative fees levied on gross contributions were also significantly cut, thus potentially affecting the financial results of fund management companies and increasing the likelihood of market exits. This could have negative implications for the development of the local capital market and the pool of institutional investors, as well as depriving the economy of a much needed source of long-term investment. Furthermore, the weakening or undoing of the second pillar will result in less diversified retirement income and expose pensions to higher political and demographic risks. In March 2019, via an emergency ordinance, the government maintained the new minimum capital requirements for fund management companies, but postponed the deadline for paying the entire additional capital until December 2019. In May 2019 the government significantly decreased the minimum capital requirements for pension-fund management companies, which partly offset the increase decided in December 2018. Other provisions in the December 2018 emergency ordinance that endanger the viability of second-pillar pension funds remain unchanged.

                  (13)

                  Challenges linked to the quality and inclusiveness of the education and training system have a negative impact on Romania’s inclusive growth potential. Although the budget increased in 2019, spending on education remains one of the lowest in the Union, particularly at levels of education that are key to preventing early school leaving (which remains high), ensuring equal opportunities and tackling inequalities later in life. Participation in quality early education and care remains below the Union average, partly due to lack of facilities. This has implications for the labour-market participation of women as well as the early acquisition of skills. Modernisation of the school network and optimisation to address demographic trends is lagging behind, with 10 % of schools being overcrowded, while 58 % have excess capacities. The acquisition of basic and digital skills faces significant challenges. Teachers’ abilities to apply a learner-centred approach are not sufficiently developed. Rural-urban disparities persist and vulnerable groups, including the Roma, continue to have limited access to high-quality, inclusive education.

                  (14)

                  The labour market has been under increasing pressure, as the unemployment rate (4,2 % in 2018) is very low, while the labour force is declining and skills shortages persist. Women’s activity rate, particularly for the young and middle-aged, is low. This is mainly due to personal and family responsibilities and the low participation of children aged 0-3 in formal childcare. Active labour market policies provide a limited response to labour market needs, with measures focused mainly on financial incentives rather than on tailor-made and comprehensive approaches. The delay of the planned reform for the public employment service remains a significant barrier for modernised service-delivery to employers and the unemployed. Upskilling and integrated services delivery is also weak. Skills are not evolving in line with the needs of expanding economic sectors, with 81 % of employers having difficulties filling job vacancies. The ICT sector is growing, while the number of Romanians aged 20-29 holding a degree in science, technology, engineering or maths fell between 2014 and 2016. At present there is no global or sector-level assessment of skills needs, and the forecasting of skills remains unused, hampering the adaptation of the education and training system to labour market needs. The roll-out of dual vocational education and training to address skills shortages has started. However, vocational education and training is still considered a second-rate option by students and parents, and the relatively low employment rate for recent vocational education and training graduates indicates that labour market relevance is a challenge. Higher education is not sufficiently aligned with the labour market. Although tertiary educational attainment has doubled over the decade, it remains low.

                  (15)

                  Despite recent improvements, poverty and income inequality remain high, and regional disparities are deepening. One in three Romanians is still at risk of poverty and social exclusion, with particular groups such as children, the Roma, people with disabilities and the elderly being more affected. Social services have insufficient quality and coverage, and uneven geographical distribution, not correlated with communities’ specific needs. Only around 20 % of administrative territorial units have licensed social services. Services are usually concentrated around richer or urban areas, while needs are more pressing in poorer, rural areas and regions. The limited integration of employment, education, health and social services does not allow for the sustainable inclusion of various disadvantaged groups. People with disabilities are given only limited support for independent living and accessing employment. The situation of the Roma community shows very little progress. Housing deprivation is the highest in the Union and is detrimental to social inclusion. Housing policies are being decentralised without a strategic framework, and poor communities often lack financial resources. The social reference index used as a basis for most social benefits has not been updated since 2008 and has also depreciated considerably in relation to the minimum wage. As a result, poverty rates for people with low and very low work intensity have increased by half since 2010. Furthermore, social security for atypical workers is inadequate. One in three atypical workers is at risk of severe material deprivation. Daily and seasonal workers do not have formal access to social security rights covering unemployment, maternity leave, accidents and occupational injuries. The implementation of the minimum inclusion income reform initiated in 2016, which would increase the coverage and adequacy of social assistance, was further postponed to 2021.

                  (16)

                  Social dialogue is characterised by low collective agreement coverage, in particular at sectoral level, also due to the current definition of sectors. The authorities have initiated plans to revise the definitions of economic sectors but no agreement has yet been reached. Beyond the collective bargaining framework, the timely and meaningful involvement of social partners on policy issues and reforms is limited. Most social dialogue takes place formally, within the Economic and Social Council and the Social Dialogue Committees. However, despite the established framework of dialogue and consultations, the stability and the role of these institutions has weakened over the last year.

                  (17)

                  After years of moderate wage growth, Romania is experiencing one of the fastest rates of wage growth in the Union. This is driven by government policies increasing public and minimum wages, record-low unemployment rate and structural labour supply shortages. The minimum wage continues to be set in a non-systematic manner, without an objective mechanism. Consecutive increases over the years resulted in one in three employees earning the minimum wage in 2017, a rate almost four times higher than in 2011.

                  (18)

                  The healthcare system faces many challenges. Low funding, inefficient use of public resources and the lack of reform limit the effectiveness of the health system. Continued emigration has resulted in a sizeable shortage of doctors and nurses. Health infrastructure and the prevalence of informal payments remain sources of concern. Access to healthcare services for those living in rural areas and vulnerable groups is limited. These factors in turn have a negative impact on people’s health, which remains below the Union average despite recent improvements. Improvements in community care are much needed but are delayed. The pilot project for setting up community care centres has started with a delay, impacting the roll-out of integrated care services. The long-term care sector is not ready to deal with a rapidly ageing population. There are very few at-home and day-care services, mainly concentrated in areas with higher income. Coverage and public spending on long-term care are among the lowest in Union and access to long-term care, rehabilitation and palliative care is poor.

                  (19)

                  The quality of infrastructure, including in the transport, energy, waste and wastewater sectors remains poor and limits Romania’s growth prospects. Despite significant public investment after Romania joined the Union, its physical infrastructure remains underdeveloped. The general condition and reliability of the road and rail networks are very poor. The infrastructure is not keeping up with the traffic demand generated by an expanding economy. The road network is among the least developed in the Union, and the reform of the railway sector is lagging behind. Greenhouse gas emissions from road transport have increased strongly over the last five years. Moreover, heavy underinvestment in maintenance has reduced train speed and affected delivery times of rail freight transport. Urban transport suffers from chronic underfinancing, poor sector organisation and the weak administrative capacity of local providers. In addition, energy, waste, water and wastewater infrastructure and energy interconnections continue to show deficiencies. The waste management system continues to be charac-terised by very low recycling of municipal waste and very high landfill rates. Challenges remain to achieve the energy efficiency target, in particular there is still a wide margin to improve energy efficiency in buildings.

                  (20)

                  Romania’s overall innovative capacity remains low and its future competitiveness is challenged by the large productivity and innovation gap between foreign-owned and domestic firms. Romania’s investment in research and development is the lowest in the Union (0,5 % of GDP), and public research and development expenditure further declined from 0,32 % of GDP in 2011 to 0,21 % of GDP in 2017, impeding any capacity building. As a consequence, the quality of the public science base remains very low and science-business links underdeveloped. As the number of tertiary graduates in science, technology, engineering and mathematics has also further declined, skills shortages pose a great challenge to the innovative potential of the Romanian economy. Digitalisation is a key challenge if Romanian innovation and competitiveness are to improve. Romania scores poorly on many components of the Digital Economy and Social Index, including digital public services, digital skills of the overall population and digitalisation of businesses.

                  (21)

                  Romania achieved limited progress in addressing a country specific recommendation to strengthen project priori-tisation and preparation in public investment. The Ministry of Finance is in charge of preparing a priority list of public investment projects above RON 100 million (EUR 21 million) and monitoring their implementation, but the projects are managed by the line ministries. The list of priority projects currently includes 136 projects, mostly in the transport area. Most of these priority projects could be co-financed by Union funds. The uptake of Union funds is held back by factors like limited administrative capacity to prepare, prioritise and implement large investment projects. Even though recently large infrastructure projects are being prepared and sent to the European Commission for approval, some important projects such as the Sibiu-Pitești motorway (ensuring the connectivity with the TEN-T Rhine-Danube and Orient-East Mediterranean corridors) are still missing and implementation in general continues to lag behind. Moreover, the absorption of Union funds has so far been driven by projects prepared for the previous programming period, whereas a pipeline of new projects for the current period is yet to be fully developed.

                  (22)

                  Efficient public procurement is key to achieving important policy objectives in Romania, including efficient public spending, the modernisation of public administration and promoting innovation, sustainable and inclusive growth. Romania has made limited progress in addressing the country-specific recommendation to improve the transparency of public procurement. The efficiency of public procurement continues to be an issue, while the irreversibility of certain measures, notably the streamlining of the ex-ante control, is at stake. The national public procurement strategy stresses the importance of a unitary ex-ante control performed by the National Agency for Public Procurement. Recurrent legislative initiatives risk undermining the achievement of the objectives in the strategy. The predictability and stability of the public procurement legislation remain important challenges and the national public procurement strategy is not fully implemented.

                  (23)

                  The conduct of public policy making has become increasingly unpredictable, weighing on the business environment. A recent example is the adoption through government emergency ordinance of a set of far-reaching measures affecting the functioning of the banking sector, the second-pillar pension-fund managers, and energy and telecommunication companies, without stakeholder consultation or impact assessment. Regulatory impact assessments remain a formality, while their quality and actual use vary substantially across sectors. There is only limited quality control of regulatory impact assessments and policy design. There is no sustainable policy monitoring mechanism with a transparent reporting system and ex-post evaluations. Important legislative initiatives are often announced just before adoption. The involvement of stakeholders in designing and implementing reforms is weak, and genuine dialogue rarely exists, although the institutional structures for it are available. Cumbersome administrative procedures particularly affect small and medium-sized businesses. For example, burdensome administrative procedures for setting up businesses as well as regulatory requirements imposed on services providers, including regulated professions, impede further market development. The adoption of relevant legislation on human resource management in public administration is still delayed. High fragmentation of responsibilities and resources affects the consistency and availability of public services provided, especially at local level. National and regional strategies for different public services are not well translated into integrated measures at regional and local level. Funding of public services is uneven across the country and often does not correspond to local needs. Factors like a unified strategic approach per type of service, existing gaps and needs to develop new services are overlooked. Local authorities’ revenues lack stability and predictability. Limited action has been taken to improve the balance between responsibilities to be decentralised and the allocation of financial resources to allow local authorities to deliver quality services. Additional actions are needed to increase administrative capacity at local level.

                  (24)

                  State-owned enterprises have a key role in critical infrastructure sectors such as energy and rail transport. Their economic and financial performance has recently improved, on the back of a favourable macroeconomic environment. However, transparency and disclosure of financial and operational results have not improved and corporate governance rules continue to be only sparsely applied. Specific examples include the repeated appointment of interim boards, departing from the spirit of the law, and the non-use of enforcement tools available under the legislation for non-compliant companies. Risks that the legislation on State-owned enterprises could be substantially weakened have not abated. This amounts to a reversal of progress made on country-specific recommendations from 2015 and 2016. As a result, key conditions for promoting the efficient use of public resources are being impaired, and space is allowed for distorted investment decisions. The transfer of the ownership of several of the larger State-owned enterprises to the new Sovereign Development and Investment Fund will require a thorough implementation of strong corporate governance rules both for the Fund and for the companies in its portfolio.

                  (25)

                  Developments throughout the past year have raised concerns with regard to the rule of law and strengthened previous serious concerns regarding the irreversibility and sustainability of Romania’s earlier progress on reforming its judicial system and tackling high-level corruption. These issues are the subject of monitoring under the Cooperation and Verification Mechanism. Amendments to three justice laws are now in force and contain a number of measures weakening the legal guarantees for judicial independence. These are likely to undermine both the effectiveness of daily work by judges and prosecutors and public confidence in the judiciary. Pressure is being put on judicial institutions and on individual magistrates, including by setting up a specialised prosecution section for crimes allegedly committed by magistrates. Ongoing steps to amend the criminal code and the criminal procedure code would have a negative impact on the effectiveness of criminal investigations and trials and also reduce the scope of corruption as an offence. Further concerns relate to the processes for dismissing and appointing high-level magistrates. Recent announcements suggest that measures related to the reform of the justice system may be reconsidered.

                  (26)

                  Under the Cooperation and Verification Mechanism, the Commission continues to monitor the judicial reform and the fight against corruption in Romania. These areas are therefore not covered in the country-specific recommendations for Romania, but are relevant for developing a positive socioeconomic environment in the country.

                  (27)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Romania to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

                  (28)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Romania’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Romania in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Romania, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (29)

                  In the light of this assessment, the Council has examined the 2019 Convergence Programme and its opinion (12) is reflected in particular in recommendation (1) below.

                  (30)

                  In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Convergence Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (2), (3) and (5) below. The fiscal policies referred to in recommendation (1) below contribute, inter alia, to addressing imbalances linked to competitiveness and the external position,

            HEREBY RECOMMENDS that Romania take action in 2019 and 2020 to:

         1.

            Ensure compliance with the Council Recommendation of 14 June 2019 with a view to correcting the significant deviation from the adjustment path towards the medium-term budgetary objective. Ensure the full application of the fiscal framework. Strengthen tax compliance and collection.

         2.

            Safeguard financial stability and the robustness of the banking sector. Ensure the sustainability of the public pension system and the long-term viability of the second-pillar pension funds.

         3.

            Improve the quality and inclusiveness of education, in particular for Roma and other disadvantaged groups. Improve skills, including digital, in particular by increasing the labour market relevance of vocational education and training and higher education. Increase the coverage and quality of social services and complete the minimum inclusion income reform. Improve the functioning of social dialogue. Ensure that the minimum wage is set on the basis of objective criteria, consistent with job creation and competitiveness. Improve access to and cost-efficiency of healthcare, including through the shift to outpatient care.

         4.

            Focus investment-related economic policy on transport, in particular on its sustainability, low-carbon energy and energy efficiency, environmental infrastructure as well as innovation, taking into account regional disparities. Improve the preparation and prioritisation of large projects and accelerate their implementation. Improve the efficiency of public procurement and ensure the full and sustainable implementation of the national public procurement strategy.

         5.

            Ensure that legislative initiatives do not undermine legal certainty by improving the quality and predictability of decision-making, including by appropriate stakeholder consultations, effective impact assessments and streamlined administrative procedures. Strengthen the corporate governance of State-owned enterprises.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  OJ L 306, 23.11.2011, p. 25.

         (3)  OJ C 320, 10.9.2018, p. 98.

         (4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

         (5)  Cyclically adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

         (6)  Council Recommendation of 22 June 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania (OJ C 223, 27.6.2018, p. 3).

         (7)  Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a four-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

         (8)  Council Decision (EU) 2018/2020 of 4 December 2018 establishing that no effective action has been taken by Romania in response to the Council Recommendation of 22 June 2018 (OJ L 323, 19.12.2018, p. 16).

         (9)  Council Recommendation of 4 December 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania (OJ C 460, 21.12.2018, p. 1).

         (10)  Council Decision (EU) 2019/1002 of 14 June 2019 establishing that no effective action has been taken by Romania in response to the Council Recommendation of 4 December 2018 (OJ L 163, 20.6.2019, p. 62).

         (11)  Council Recommendation of 14 June 2019 with a view to correcting the significant observed deviation from the adjustment path towards the medium-term budgetary objective in Romania (OJ C 210, 21.6.2019, p. 1).

         (12)  Under Article 9(2) of Regulation (EC) No 1466/97.


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Slovenia and delivering a Council opinion on the 2019 Stability Programme of Slovenia

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/143

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Slovenia and delivering a Council opinion on the 2019 Stability Programme of Slovenia
      (2019/C 301/24)
      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 policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission also adopted the Alert Mechanism Report, in which it did not identify Slovenia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’), which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (2)

                  As a Member State 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 2019 Recommendation for the euro area, as reflected in recommendations (1) to (3) below. In particular, reducing regulatory restrictions will help address the first euro-area recommendation as regards resilient product and services markets, and focusing economic policy related to investment in the specified areas will help address the second euro-area recommendation as regards supporting investment.

                  (3)

                  The 2019 country report for Slovenia was published on 27 February 2019. It assessed Slovenia’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (4), the follow-up given to the country-specific recommendations adopted in previous years and Slovenia’s progress towards its national Europe 2020 targets.

                  (4)

                  Slovenia submitted its 2019 National Reform Programme on 15 April 2019 and its 2019 Stability Programme on 26 April 2019. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (5)

                  Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (‘ESI Funds’) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (5), 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 that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance.

                  (6)

                  Slovenia is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2019 Stability Programme, the government expects that the headline surplus will increase to 0,9 % of gross domestic product (GDP) in 2019 and then reach 1,2 % of GDP in 2022. Based on the recalculated structural balance, the medium-term budgetary objective – which has been changed from a structural surplus of 0,25 % of GDP in 2019 to a structural deficit of 0,25 % of GDP from 2020 – is planned to be achieved by 2021 (6). According to the 2019 Stability Programme, the general government debt-to-GDP ratio is projected to continue to fall to 65,4 % of GDP in 2019 and to 54,7 % of GDP in 2022. The macroeconomic scenario underpinning those budgetary projections is favourable.

                  (7)

                  On 13 July 2018, the Council recommended Slovenia to ensure that the nominal growth rate of net primary government expenditure (7) does not exceed 3,1 % in 2019, corresponding to an annual structural adjustment of 0,65 % of GDP. Based on the Commission 2019 spring forecast, there is a risk of a significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2019.

                  (8)

                  In 2020, Slovenia should achieve its medium-term budgetary objective. Based on the Commission 2019 spring forecast, this is consistent with a maximum nominal growth rate of net primary government expenditure of 4,0 %, corresponding to a structural adjustment of 0,5 % of GDP. Based on the Commission 2019 spring forecast under unchanged policies, Slovenia is forecast to be close to its medium-term budgetary objective in 2020. Thus, the current assessment indicates a risk of some deviation in 2020. While the projected nominal growth rate of net primary government expenditure would currently point to a risk of some deviation from the requirement in 2020, it would point to a risk of significant deviation from the requirement over 2019 and 2020 taken together. If the structural balance is no longer projected to be close to the medium-term budgetary objective, in future assessments an overall assessment would need to take into account a possible deviation from the requirement. Slovenia is forecast to comply with the debt rule in 2019 and 2020. Overall, the Council is of the opinion that the necessary measures should be taken in 2019 and that Slovenia needs to stand ready to take further measures as of 2020 to comply with the provisions of the Stability and Growth Pact.

                  (9)

                  Population ageing will increasingly strain Slovenia’s healthcare and long-term care systems. The financing for the healthcare system is not adapted to face the expected cost increases from population ageing. To date Slovenia has not adopted comprehensive measures to ensure quality, accessibility and long-term fiscal sustainability of healthcare in Slovenia. A draft long-term care act is being drawn up as part of Slovenia’s active ageing strategy. However, it remains still unclear how the envisaged measures will improve cost-effectiveness, accessibility and quality of care except that public procurement in healthcare is expected to become more cost-efficient through improved coordination. Investments in health and long-term care structures and equipment could help easing future pressure on the care systems.

                  (10)

                  Challenges regarding the long-term sustainability and adequacy of the pension system are becoming increasingly pressing as the Slovenian population is ageing faster than the population of most other Member States. In the document ‘Starting points for the modernisation of the Pension and Disability Insurance System in the Republic of Slovenia’, adopted in 2017 by the Economic and Social Council, it was foreseen by the social partners and the previous government to adopt a reform by 2020 and the National Reform Programme 2019-2020 mentions the possibility of an overhaul of the pension system to support the medium to long-term sustainability of the system and appropriate levels of pensions. It also sets the objective of extending working lives and providing better opportunities for exploiting the human resources of older workers, but it does not specify how and when to achieve this objective. Adjusting the statutory pension age in line with increased life expectancy and promoting later retirement would make the system more sustainable. Ensuring adequate pensions remains a challenge, as some pension recipients are still at or below the poverty line. Almost 70 % of all self-employed people in Slovenia choose to pay social security contributions at the minimum level entitling them to the minimum old-age pension only. The adequacy of pensions could be further improved by boosting the coverage of the supplementary pension schemes, appropriately addressing changing career paths and by reducing old-age poverty risks.

                  (11)

                  Employment continued to rise and unemployment fell further in 2019. At the same time, long-term unemployment remains above pre-crisis levels and still represents almost half of all unemployment. Challenges persist in particular for low-skilled and older workers as their activity and employment rates remain among the lowest in the Union. Their participation in adult learning is very low. Evaluation of policies to encourage people into work or training shows that most existing programmes are performing well. However, spending in this field, and the participation rate of low-skilled and older unemployed people in the programmes remain limited. Therefore, investments in efficient measures to increase the employability of low-skilled and older workers, including in digital skills, is of particular importance. Increasing the employment rate of older workers will also help ease pressures on the pension system. While the 2013 labour market reform clearly helped certain vulnerable groups enter employment, temporary employment remains an issue. The rate of people at risk of poverty or social exclusion decreased but remains above the Union average for the elderly.

                  (12)

                  Signs of labour shortages are emerging in more and more sectors of the economy. A mismatch between the skills young people acquire during their education and the skills sought by employers appears to contribute to such shortages. Together with deficiencies in the functioning of the ecosystems for innovation, these shortages hinder industrial transformation in the priority areas of the smart specialisation strategy as defined in consultation with stakeholders. Developing digital skills in the future workforce is crucial to meet the needs of the economy.

                  (13)

                  Some measures have been or will be adopted to improve funding options for firms in Slovenia and to provide them with alternatives to bank loans. However, Slovenia’s businesses still heavily rely on bank loans and cash flow to meet their funding needs. Access to equity from private markets remains low. Venture capital provision is growing, but from a very low level. The market capitalisation of the stock exchange in Ljubljana is low and continues to shrink. The limited and underdeveloped capital market, combined with unfavourable framework conditions including the low financial literacy of smaller firms, hampers the inflow of equity and venture capital into the country. The difficult access to equity presents a growth barrier for innovative companies but also for established businesses which could benefit from a change in funding.

                  (14)

                  Slovenian businesses are held back by the country’s still high regulatory and administrative burden. This burden is considered a key problem for doing business in Slovenia. It relates to issues such as permits, reporting requirements, tax procedures and often lengthy commercial court proceedings. Difficulties in prosecuting economic and financial crime also impact the business environment. Slovenia has created tools to reduce administrative burden, including the SPOT portal (‘Slovenska poslovna točka’) and the ‘Single Document’, which address several of the identified burdens. However, many of the burden-reduction measures are still pending and the impact of some that have been implemented has been below expectations. Slovenia has also carried out some reforms to liberalise restrictive professional requirements. Nevertheless, some parts of the Commission’s recommendations from 2017 remain unaddressed, in particular as regards lawyers and real estate agents.

                  (15)

                  Despite some progress made, there are weaknesses regarding competition and transparency in public procurement in Slovenia, as indicated notably by the high ratio of contracts arranged through negotiated procedures (without a call). The safeguards against corruption and collusion among bidders, notably in procurement by local administrations and by State-owned enterprises, remain weak. Independent oversight of public procurement lacks sufficient legal safeguards against external pressure or interference, particularly regarding the disciplinary procedures and the proposal for appointing members of the National Review Commission. An action plan to increase the professionalisation of those involved in procurement has been put in place, but professionalisation is still low. While economic crime and corruption are estimated by the authorities to have caused significant damage in the past years, some anti-corruption reforms are still pending.

                  (16)

                  Despite the partial privatisation of 75 % minus one share of Slovenia’s largest bank, Nova Ljubljanska Banka, State involvement in the economy is still high, including in the financial sector. The previously published plans for privatisation have been implemented slowly. Proceeding with privatisations would increase the viability of companies in the long run and lower the risks for public finances as well as the risk of distorting competition and resource allocation. Further sales of shares in listed companies would also help develop Slovenia’s capital market.

                  (17)

                  The research, development and innovation ecosystem requires improvements to become fully functioning and support measures often lack coherence. Limited support for business education and technology transfer, and, more generally, weak cooperation between science and business, hinder the creation and scaling up of innovative companies. Most small and medium-sized enterprises in Slovenia have a low innovation capacity and the share of innovative companies in Slovenia is indeed decreasing and below the Union average. Slovenia’s slow digital transformation limits productivity growth. There are discrepancies in the innovation performance between Slovenia’s eastern and western regions, which hinder cooperation and networking. Slovenia is reversing its progress towards the 2020 research and development spending target at the same time as an increase in investment into research, development and innovation would strengthen the country’s growth potential. Slovenia attracts a low share of international students at all levels of post-secondary education, especially at the doctoral level while international mobility of researchers and mobility between academia and industry remain limited.

                  (18)

                  For the period until 2030, Slovenia has set out objectives in terms of energy infrastructure, energy efficiency and renewables in its draft national energy and climate plan, which all require appropriate investments. In particular, Slovenia’s economy is more carbon intensive than the Union average, and the share of renewables in total energy production is stagnating. The development of renewable energy sources other than wood and hydropower is particularly slow. Slovenia’s industry, services and residential sector all account for higher shares of total final energy consumption than the Union average. Moreover, existing energy storage capacity is underdeveloped and so fails to address the needs deriving from non-integrated local production of renewable energy sources.

                  (19)

                  Transport has become the biggest source of CO2 emissions: its share of total emissions is above the average share of this sector in the Union. Slovenia’s heavy reliance on road transport creates problems of high energy and carbon intensity, as well as air pollution and road accidents. There is significant scope for improvement in rail infrastructure as well as in low carbon energy and sustainable transport in general, which could help reducing these negative effects. Important investment gaps also remain in the area of natural resources to ensure a more sustainable development model. Slovenia’s economy depends on its natural environment, which is deteriorating. High dependence on imported raw materials, coupled with low recycling rates, hinder the transition to a circular economy. The state of the urban wastewater sector system, including collection and treatment infrastructure, does not fully meet Union requirements. Substantial parts of Slovenia’s economy are vulnerable to natural disasters, in particular floods.

                  (20)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Slovenia to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

                  (21)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Slovenia’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Slovenia in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Slovenia, but also their compliance with Union rules and guidance. This reflects the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (22)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and its opinion (8) is reflected in particular in recommendation (1) below,

            HEREBY RECOMMENDS that Slovenia take action in 2019 and 2020 to:

         1.

            Achieve the medium-term budgetary objective in 2020. Adopt and implement reforms in healthcare and long-term care that ensure quality, accessibility and long-term fiscal sustainability. Ensure the long-term sustainability and adequacy of the pension system, including by adjusting the statutory retirement age, restricting early retirement and other forms of early exit from the labour market. Increase the employability of low-skilled and older workers by improving labour market relevance of education and training, lifelong learning and activation measures, including through better digital literacy.

         2.

            Support the development of equity markets. Improve the business environment by reducing regulatory restrictions and administrative burden. Improve competition, professionalisation and independent oversight in public procurement. Carry out privatisations in line with the existing plans.

         3.

            Focus investment-related economic policy on research and innovation, low carbon and energy transition, sustainable transport, in particular rail, and environmental infrastructure, taking into account regional disparities.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  OJ C 320, 10.9.2018, p. 103.

         (5)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

         (6)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

         (7)  Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

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


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Slovakia and delivering a Council opinion on the 2019 Stability Programme of Slovakia

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/148

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Slovakia and delivering a Council opinion on the 2019 Stability Programme of Slovakia
      (2019/C 301/25)
      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 policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission also adopted the Alert Mechanism Report, in which it did not identify Slovakia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the Recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’), which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (2)

                  As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Slovakia should ensure the full and timely implementation of the 2019 Recommendation for the euro area, as reflected in recommendations (2) to (4) below. In particular, measures to tackle corruption and improving the justice system will help address the first euro-area recommendation as regards quality of institutions, focusing economic policy related to investment in the specified areas will help address the second euro-area recommendation as regards supporting investment, and measures to improve skills will help address the third euro-area recommendation as regards functioning of the labour market.

                  (3)

                  The 2019 country report for Slovakia was published on 27 February 2019. It assessed Slovakia’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (4), the follow-up given to the country-specific recommendations adopted in previous years and Slovakia’s progress towards its national Europe 2020 targets.

                  (4)

                  On 25 April 2019, Slovakia submitted its 2019 National Reform Programme and its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (5)

                  Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (‘ESI Funds’) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (5), 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 that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance.

                  (6)

                  Slovakia is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the government expects the headline balance to improve from a deficit of 0,7 % of gross domestic product (GDP) in 2018 to a balanced budget in 2019 and to remain unchanged out to 2022. Based on the recalculated structural balance (6), the medium-term budgetary objective — which has been changed from a structural deficit of 0,5 % of GDP in 2019 to 1 % of GDP as of 2020 — is planned to be achieved in 2020. According to the 2019 Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline from 47,5 % in 2019 to 44,4 % by 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2019 onwards have not been fully specified. The budget includes a non-specified category of expenditure called budgetary reserves (totalling 0,7 % of GDP), which reduces predictability in budget implementation.

                  (7)

                  On 13 July 2018, the Council recommended Slovakia to ensure that the nominal growth rate of net primary government expenditure (7) does not exceed 4,1 % in 2019, corresponding to an annual structural adjustment of 0,5 % of GDP. In view of the Commission autumn 2018 forecast, which projected a closer position to the medium-term objective in 2019, and consistent with the rules for unfreezing the required adjustment, the nominal growth rate of net primary government expenditure should not exceed 4,6 %, corresponding to an annual structural adjustment of 0,3 % in 2019. Based on the Commission 2019 spring forecast, there is a risk of significant deviation from the recommended fiscal adjustment over 2018 and 2019 taken together.

                  (8)

                  In 2020, Slovakia should achieve its medium-term budgetary objective. Based on the Commission 2019 spring forecast under unchanged policies, this is consistent with a maximum nominal growth rate of net primary government expenditure of 4,6 %, corresponding to a structural adjustment of 0,3 % of GDP. Based on the Commission 2019 spring forecast under unchanged policies, there is a risk of a significant deviation from that requirement over 2019 and 2020 taken together. Slovakia is forecast to comply with the debt rule in 2019 and 2020. Overall, the Council is of the opinion that the necessary measures should be taken as of 2019 to comply with the provisions of the Stability and Growth Pact.

                  (9)

                  Slovakia’s public finances face medium fiscal sustainability risks in the long term. According to the Commission’s 2018 Fiscal Sustainability Report, a cumulated improvement of 2,5 percentage points of GDP in the structural primary balance would be required to stabilise the debt-to-GDP ratio over the long term, relative to the no-policy-change scenario. This is due to the projected increase in pension and healthcare expenditure that is driving up ageing costs (joint contribution of 1,8 percentage points of GDP). As birth rates are low while life expectancy in Slovakia is expected to increase further, the old-age dependency ratio (comparing elderly people with the active population — the share of the population in work of training) is projected to almost triple by 2060. And, while in 2016 there were only about three inactive people above 65 for every ten employed persons, this is projected to rise to more than seven for every ten employed by 2060 (economic old-age dependency ratio). Introducing automatic adjustments of the retirement age to life expectancy had gradually improved the long-term sustainability of the pension system. This was seen as an important tool to ensure intergenerational fairness and long-term sustainability. Concerns over the long-term fiscal sustainability of the pension systems have heightened following the adoption by Parliament on 28 March 2019 of a constitutional amendment instituting retirement age caps (64 for men and women without children, with half a year reductions for women for each of the first three children) which implies that the automatic adjustments linked to life expectancy will not be applied any more once the cap is reached. According to Slovakia’s Fiscal Council, the cap will bring an additional expenditure increase of 1,6 % of GDP, from 8,6 % in 2016 to 11,4 % in 2070 compared to the increase to 9,8 % projected in the 2018 Ageing Report. This will significantly increase sustainability risks. No counterbalancing measures have been put forward at this moment and the impact on old age income and poverty has not been calculated.

                  (10)

                  Despite some progress in fighting tax evasion, tax compliance remains a challenge and the VAT compliance gap was more than twice the Union average in 2016. While measures planned under the Third Action Plan are expected to bring positive results, some of them are still pending implementation. For instance, the introduction of electronic tax returns is likely to reduce the administrative burden on taxpayers, but a failure to implement all planned measures risks diminishing the overall effect. At the same time, a structured framework of policy measures can help to reduce frequent changes in the tax code and encourage its simplification. Finally, the revenue potential of environmental and property taxation is underused relative to other Member States.

                  (11)

                  Positive developments in the labour market continue, marked by increasing employment and historically low levels of unemployment. There has been good progress in implementing the Action plan for the long-term unemployed, which has helped reduce the number of long-term unemployed by one third over two years. Nevertheless, the long-term unemployment rate remains above the Union average, affecting in particular low-skilled people, young people and Roma. In contrast to falling unemployment rates, reports of skilled labour shortages have become a major issue. Severe regional disparities in the labour market continue to be observed, with higher unemployment concentrated in three regions of eastern Slovakia and labour shortages concentrated in the western part of the country. Continued capacity building for employers and trade unions is needed to promote their more active involvement.

                  (12)

                  The range and effectiveness of policies to improve employability is limited. Training and requalification programmes have been strengthened, but are still insufficient and do not target fully the long-term unemployed and disadvantaged groups. The education system does not sufficiently contribute to socioeconomic development and is underfunded at all levels. The low quality of educational results, the participation of Roma in inclusive mainstream education as of early childhood and the effective integration of pupils from socioeconomically disadvantaged backgrounds in education and training (given the increasing early school leaving rate) are pressing challenges. Educational results and the level of basic skills remain weak by international standards, strongly affected by the pupils’ socioeconomic background. Ensuring the Slovak population is equipped with better sets of skills for a changing economy and society is a challenge. Despite progressive salary increases until 2020, the teaching profession remains unattractive and faces increasing shortages. In addition, the quality and relevance of initial training and opportunities for professional development of teachers are limited. Current measures to foster equity and inclusive education have so far fallen short of expectations, and no real progress on desegregation of Roma students was observed. The government has adopted the ‘National reform plan for education and upbringing’ (2018–27) and the first Action Plan (2018-19) (together with an estimated budget), as well as new legislation on quality assurance in higher education. It will be crucial that these measures are effectively implemented and monitored to see if they bring the expected results.

                  (13)

                  The low employment rate for women reflects the fact that long parental leave is rarely taken up by men and is further accentuated by limited access to and low availability of affordable childcare and long-term care facilities. For children under the age of three in particular, the overall enrolment rates in childcare are extremely low. The government adopted a new decision on mandatory participation in early childhood education and care from the age of five, with effect from 2020. However, further investment and encouraging attendance in childcare and pre-school facilities is needed.

                  (14)

                  Even though the share of people at risk of poverty or social exclusion is below the Union average, levels are considerably higher in a number of districts in Southern and Eastern Slovakia. A considerable bottleneck exists in access to high-quality and inclusive education, where the regional disparities translate into particularly pronounced early school leaving rates. Other bottlenecks concern access for disadvantaged groups, in particular for Roma, as well as people with disabilities and people that suffer from homelessness and housing exclusion, to healthcare, long-term care, social housing and other essential services. An integrated approach is essential in order to foster social inclusion for these groups.

                  (15)

                  Reforms aimed at improving the cost-effectiveness of the healthcare system are gaining momentum, although the degree of implementation has varied across different care areas. Policy measures carried out in the context of the health spending review achieved some positive results, mainly following a series of cost containment measures in the areas for pharmaceuticals and medical devices. However, there is still room for increasing efficiency and delivering better-value care by strategically reallocating resources between areas of care. Health service delivery remains excessively reliant on hospitals, which, despite regular debt relief, continue to accumulate debt and struggle to fund the investments required to improve efficiency and quality of care. While strengthening primary care is key to reducing avoidable use of hospital services, the low number of general practitioners and the limited scope of services offered in primary care act as a bottleneck to improving the efficiency of the health system. As the government has initiated measures to tackle health workforce shortages, it will be important to fit these efforts into a longer-term strategy aimed at gradually decentralising services from acute care, strengthening primary care and reinforcing preventive services.

                  (16)

                  A fragmented research system undermines the effectiveness of public research and development (R & D) investment in raising scientific research quality and does not attract private funding. Research and innovation policy suffers from ineffective coordination among ministries and other actors, leading to delays and failures of major reforms. The suboptimal transformation process of the Slovak Academy of Sciences raised concerns about the continuity of its operations, which led to the collapse of the whole process. A lack or failure of targeted measures, together with limited engagement by research institutions and limited research capacity, all contribute to low private R & D expenditure. Overall, business R & D remains one of the lowest in the Union and is centred on medium/high-tech manufacturing, areas dominated by multinational firms. Measures to stimulate knowledge transfer, strengthen innovative capacities in industry and improve cooperation between businesses and academia are advancing slowly.

                  (17)

                  To increase Slovakia’s productivity and maintain the convergence process, sustained investment efforts are also needed in digital and transport infrastructure, and energy efficiency. There is a need to improve basic fixed broadband and 4G coverage and take-up of ultrafast broadband. Investing into energy efficiency, in particular in the buildings sector, and environmental technology can be a source of green growth and will help preserve scarce environmental resources. In addition, to allow less developed regions to catch up and become more knowledge-based, competitive and productive, more strategic investment is needed to fill in the infrastructure gaps and to improve transport networks. Slovakia is lagging behind with regard to completing both the core road and railway network under the Trans-European Transport Network, such as in the Rhine-Danube corridor. Weaknesses in the transport network could be tackled by enhancing the interconnectivity, multimodality and interoperability of the existing public and urban transport network, and by promoting sustainable modes of transport.

                  (18)

                  A heavy administrative and regulatory burden may negatively affect investment and innovation, especially for small and medium-sized enterprises (‘SMEs’). Despite government efforts, administrative burden is not being reduced enough and the Slovak business environment is losing ground in international comparisons. Quality of legislation and lack of predictability are a concern for businesses. These challenges should be addressed by the full deployment of Slovakia’s Better Regulation Strategy (RIA2020) and the strengthening of the Better Regulation Centre and analytical capacities within the State administration. The Slovak professional services sector remains highly regulated. The restrictiveness of regulation is above the weighted Union average for lawyers, patent agents, civil engineers, architects, accountants, tourist guides and estate agents.

                  (19)

                  The government is substantially reforming public procurement practices by overhauling the legal framework to simplify procedures and reduce transaction costs. A new focus on professionalisation is welcome; however, general benefits are only emerging slowly. In the context of distrust towards public institutions, public buyers need to make more effort to regain confidence from businesses, media and the public at large. This hinders the introduction of much needed novel practices. Efforts to increase the use of quality criteria need to be stepped-up to achieve better value for money and improve strategic use of public procurement.

                  (20)

                  Slovak public administration still faces inefficiencies and bottlenecks caused in particular by ineffective cooperation between government departments. The lack of capacity and strategic planning as well as administrative ineffi-ciencies hamper a smooth delivery of ESI Funds. As a result, Slovakia lost EUR 120 million of funding from the 2014-2020 period, while distribution of funds to final beneficiaries remains low. In addition, sub-optimal prepa-ration of projects funded by ESI Funds led to delayed investment and resulted in tight deadlines for public procurement procedures, increasing the risk of irregularities.

                  (21)

                  Corruption continues to pose a challenge and there has been only limited determination to prosecute high-level corruption cases. Efforts to combat corruption are hindered by organisational and procedural weaknesses at the police and prosecutor’s level, and weak protection for whistle-blowers. Also, improving the effectiveness of the justice system, including its independence, remains a challenge. Despite some improvements in terms of efficiency and quality, concerns about the independence of the judiciary persist and the delay in the process for appointing judges to the constitutional court could affect the functioning of the justice system.

                  (22)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Slovakia to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening Slovakia’s administrative capacity for the management of these funds is an important factor for the success of this investment.

                  (23)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Slovakia’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Slovakia in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Slovakia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (24)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and its opinion (8) is reflected in particular in recommendation (1) below,

            HEREBY RECOMMENDS that Slovakia take action in 2019 and 2020 to:

         1.

            Achieve the medium-term budgetary objective in 2020. Safeguard the long-term sustainability of public finances, in particular that of the healthcare and pension systems.

         2.

            Improve the quality and inclusiveness of education at all levels and foster skills in line with labour market needs. Enhance access to affordable and quality childcare and long-term care. Promote integration of disadvantaged groups, in particular Roma.

         3.

            Focus investment-related economic policy on healthcare, research and innovation, transport, in particular on its sustainability, digital infrastructure, energy efficiency, competitiveness of SMEs, and social housing, taking into account regional disparities. Increase the use of quality related and lifecycle cost criteria in public procurement operations.

         4.

            Continue to improve the effectiveness of the justice system, focusing on strengthening its independence, including on judicial appointments. Increase efforts to detect and prosecute corruption, in particular in large-scale corruption cases.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  OJ C 320, 10.9.2018, p. 107.

         (5)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

         (6)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

         (7)  Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a four-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

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