## sipea2026028 — 1. Recent Reforms to the Pension System and Family Benefits

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### A. Fiscal context and rationale for reforms
- Slovakia’s fiscal trajectory has deteriorated markedly over the past 15 years, driven by persistent fiscal deficits and rising public debt.
- Between 2010 and 2024:
  - Slovakia experienced a 17 percentage point increase in debt as a share of GDP, compared with a 0.5 percentage point average increase in other Visegrád countries.
- Public expenditure:
  - Has now reached 48 percent of GDP.
  - Slovakia’s public spending rose by 8 percentage points since 2010, from 41 percent of GDP to 49 percent in 2023.
- Policy focus given limited scope for additional revenue-based consolidation:
  - Containing public spending.
  - Improving spending efficiency and reallocating resources toward growth-enhancing areas.

### B. Composition of public expenditure and role of social protection
- Social protection:
  - Explains more than half of the overall rise in public expenditure since the Global Financial Crisis.
  - Accounts for 37 percent of total expenditure in Slovakia.
  - Slovakia’s public expenditure increase contrasts with a modest 0.8 percentage point increase in other Visegrád countries and a decline among EU countries (2010–2023).
- Key contributors since 2010:
  - Social protection and expenditure on economic affairs.

### C. Pensions — magnitude, recent changes, and drivers
- Size and dynamics:
  - Pension spending accounts for more than 50 percent of total social protection expenditure across all Visegrád countries.
  - Pension spending in Slovakia has increased by 2.3 percentage points of GDP since 2010, compared with a 0.3 percentage point average increase in other Visegrád countries.
- Replacement rates and demographics:
  - Gross replacement ratios reached 77 percent in 2024, above the EU average of 60 percent.
  - Net replacement rates for males in Slovakia in 2024 were 76 percent compared to 68 percent on average in the EU and 58 percent on average in other Visegrád countries.
  - The share of the population aged 65+ is expected to reach 30 percent by 2060.
- Recent behavioral effects:
  - The pension reform of 2023 induced a spike in early retirements; early retirements in 2024 more than doubled compared to the year before.
  - Number of pensions paid has risen noticeably in the 2010–2024 period.

### D. Pension system structure and recent reforms (Box summary of measures)
- System architecture:
  - Composed of a PAYGO defined-benefit first pillar and a voluntary defined-contribution second pillar.
  - First pillar includes old-age, early old-age, disability and survivor benefits.
- 2023 pension reform features:
  - Loosened early retirement options: anyone with at least 40 years of work may retire, with a pension cut of approximately 4 percent a year relative to retiring at the statutory age.
  - The 13th pension amount was set equal to the average pension of the previous year, removing the former €300 cap, and made available to all pensioners.
  - Pension indexation based on the previous year’s average inflation.
- 2024 changes:
  - Tightened early retirement rules by linking early retirement age to life expectancy and reinstated the pension reduction penalty to previously higher levels.
  - Eligibility for the 13th pension was changed so that only pensioners with at least ten years of employment in Slovakia qualify.
  - A temporary two-step indexation process in 2024:
    - Pensions awarded before 2024 were adjusted according to past inflation.
    - New pensions granted in 2024 received a 14.5 percent increase to account for high inflation in 2023.
    - An extraordinary 5.22 percent increase was applied to all pensions in July 2024.
  - Newly granted pensions receive an initial immediate valorization that adjusts them for inflation.

### E. Family benefits — design, scale, and reform adjustments
- Size and composition:
  - Family and child benefits total 3.4 percent of GDP and account for almost 20 percent of total social protection spending in Slovakia.
  - More than 90 percent of total family benefits are provided as direct cash transfers.
  - Less than 1 percent of total spending on family benefits is means-tested in Slovakia, compared with more than 25 percent in the EU and around 5.5 percent in the Czech Republic, Hungary and Poland.
  - In-kind benefits account for around 7 percent of family benefits in Slovakia; peer countries and the EU allocate a larger share to in-kind services.
- Service provision and labor market effects:
  - Low provision of childcare services contributes to lower employment rates of mothers with young children relative to the EU average.
  - Parental leave, including paid home care leave, is one of the longest in the OECD, with a maximum of almost 3 years.
- Recent policy moves:
  - The 2022–2023 “Family Package” increased child allowances and tax benefits to mitigate inflation and support families.
  - Adjustments in 2024 and 2025 included cuts to child tax bonuses and tightening of income eligibility thresholds as part of fiscal consolidation.
  - Many benefits are automatically indexed for inflation.

### F. Spending efficiency measurement and implications
- Definition and objectives:
  - Technical efficiency measures the gap between actual quality of public service delivery and outcomes achievable via international best practices.
  - Two perspectives: maximizing outputs from fixed spending; achieving fiscal savings while maintaining outputs.
- Methodology:
  - Uses IMF (2025) measures based on stochastic frontier analysis, with standardized efficiency scores for infrastructure, education, health, and R&D ranging from zero (fully efficient) to one (fully inefficient).
  - Multi-output distance functions and sector-specific outcome variables underpin sectoral analysis.
- Policy relevance:
  - Identifying technical efficiency gaps highlights potential areas for fiscal savings by narrowing gaps vis-à-vis international benchmarks.
  - Combined technical and allocative efficiency improvements can lower fiscal pressures and support long-term debt sustainability.

### G. Economy-wide efficiency gaps and sectoral highlights (2023 data)
- Magnitude of gaps:
  - Slovakia’s efficiency gap vis-à-vis the frontier ranges from 30 percent in spending on education and health to around 40 percent in spending on infrastructure and R&D.
  - Interpretation: operating at the efficiency frontier could allow delivering the same level of public services while reducing expenditure by 30–40 percent; estimates are an upper bound and closing gaps would likely take years.
- Cross-country and temporal patterns:
  - Efficiency gaps in infrastructure spending have reduced and are now very similar across Slovakia, the Czech Republic, Hungary, and Poland.
  - Efficiency gaps have increased in education, R&D and particularly in health in all Visegrád countries.
- Health sector specifics:
  - Slovakia’s efficiency gap in healthcare is larger than in peer Visegrád countries and is at the higher end of the EU range.
  - Health care spending accounts for approximately 6.6 percent of GDP in Slovakia.
  - R&D spending: as of 2023 Slovakia spent approximately 1 percent of GDP on R&D, while other Visegrád countries spent around 1.4 percent or more.

### H. Drivers of inefficiency in the health sector
- System design:
  - Public health insurance system financed mainly through mandatory contributions and administered by multiple insurance funds; insurers negotiate contracts, set reimbursement rates, and decide reimbursement lists.
- Price and procurement issues:
  - Slovakia’s largest public health insurance fund (VšZP) pays significantly higher prices for identical healthcare services compared to smaller funds.
  - Lack of central procurement of pharmaceuticals, hospital supplies, and technology reduces bargaining power and contributes to higher unit prices.
- Hospital management:
  - Hospitals face inefficient management, indebtedness, lack of budget compliance, and infrastructure investment needs.
- Domestic reviews referenced:
  - Healthcare Spending Review, 2022, Ministry of Finance of the Slovak Republic.
  - Spending Review of Hospitals, 2025, Ministry of Finance of the Slovak Republic.

### I. Allocation dynamics, public wage bill, and subsidies
- Recurrent vs capital spending:
  - Growing share of public expenditure allocated to recurrent rather than capital spending.
  - Slovakia spends more on compensation of employees as a share of GDP than the EU average and peer countries.
  - Spending on compensation of employees has increased by almost 2.5 percent of GDP since 2010; together with energy subsidies introduced in 2022, these account for most of the increase in public expenditure since 2010.
- Public investment trends:
  - Compared to the Czech Republic, Poland and Hungary, Slovakia is allocating a declining share of its total expenditure to public investment.
- Public wage bill dynamics:
  - Rapid increase over the last ten years mostly reflects increasing public wages rather than rapid expansion of public sector employment; public wage bill increased particularly fast after 2015.
  - Wages in public administration have recorded the highest cumulative growth, surpassing wage increases in all private sector industries.
  - Sectoral nominal monthly wages (index 2015=100) show public vs private differences by NACE1 sectors: public sector wages exceed private in manufacturing, construction, wholesale, and transportation; private sector employees in ICT and finance earn roughly 30 percent more than public counterparts.
- Energy subsidies:
  - Approximately 80 percent of Slovakia’s subsidies are directed toward energy-related support (considered temporary).
  - Excluding energy support, overall subsidies are broadly in line with neighboring Visegrád countries.
  - About 90 percent of Slovakia’s population will still receive energy subsidies in 2026.

### J. Growth implications of spending choices
- Direct channel:
  - Increasing public spending on physical and human capital strengthens production capacity.
- Indirect channel:
  - Crowd in private investment via co-financing, public procurement, and tax incentives—effective when targeting projects with social returns that exceed private returns.
- Reallocation evidence:
  - IMF (2025) findings cited: reallocating 1 percent of GDP from government consumption to public investment in human capital can increase output by 3 percent over the long-term in advanced economies; reallocations towards infrastructure can lift output by 1.5 percent.

### K. Policy recommendations and targeted reforms
- Overarching spending-side priorities:
  - (i) Enhance efficiency of public expenditure.
  - (ii) Better target social transfers.
  - (iii) Reallocate resources toward more growth-enhancing areas.
- Health sector reforms (implement priorities from 2022 Healthcare Spending Review and 2025 Hospitals Spending Review):
  - Optimize pricing for outpatient and specialized healthcare services and extend central procurement of pharmaceuticals.
    - Renegotiate contracts between VšZP and major providers to align prices with those paid by other private insurers.
    - Expand central procurement to leverage economies of scale, increase bargaining power, reduce administrative costs.
    - Promote use of generic or biosimilar medicines and ensure their inclusion in appropriate reimbursement categories.
  - Encourage use of primary and preventive care.
    - Strengthen primary care to reduce overuse of expensive specialist services.
  - Adopt digital technologies.
    - Health information technologies for collecting, storing, and sharing patient data can improve outcomes and lower costs.
  - Benchmark costs and strengthen hospital budget management.
    - Benchmark costs, centralize procurement for supplies and technology, align budgets to actual costs, introduce management targets, and increase transparency in staff selection and compensation.
- Public infrastructure investment efficiency:
  - Integrate investment plans with the budget process: clarify institutional responsibilities, standardize project appraisal methodologies, integrate investment planning into multiyear budgets, and improve monitoring and evaluation systems.
  - Develop and implement a national investment plan to guide selection and prioritization of projects.
- Social transfers and family benefits:
  - Increase the use of mean-testing for family benefits—Slovakia currently has the lowest share of means-tested family benefits among peers.
  - Strengthen incentives to return to work by partly reallocating direct cash transfers toward building childcare facilities to boost female labor supply and child development.
  - Gradually phase out energy subsidies and redirect support to the most vulnerable.
  - Tighten eligibility criteria for the 13th pension; consider reversing recent increases or limiting the benefit to low-pensioners.
  - Emphasize effective and strategic communication to build public support.
- Reallocating toward pro-growth areas:
  - Increase the share of public expenditure allocated to human capital and R&D and spend it more efficiently.
    - Within a fixed envelope, reallocate from recurrent expenditures toward human capital and R&D.
    - Redirecting direct R&D spending to tax incentives for firms could stimulate firm-level innovation.
  - Set explicit medium-term targets for compensation spending as a share of GDP.
    - Establish clear targets for public workforce size and average pay levels.
    - Implement regionally differentiated wage-bargaining frameworks to reduce public–private wage disparities in low-cost regions and sustain attractiveness of public jobs in high-cost areas.

*Source: sipea2026028 — 1. Recent Reforms to the Pension System and Family Benefits (PDF chapter).*

### 1. Recent Reforms to the Pension System and Family Benefits  __________________________ 7

### 1. Recent Reforms to the Pension System and Family Benefits

### A. Introduction: Fiscal pressures and the need to enhance spending efficiency
- Slovakia’s fiscal trajectory has deteriorated markedly over the past 15 years, driven by persistent fiscal deficits and rising public debt.
- Between 2010 and 2024:
  - Slovakia experienced a 17 percentage point increase in debt as a share of GDP, compared with a 0.5 percentage point average increase in other Visegrád countries.
- Public expenditure:
  - Has now reached 48 percent of GDP.
  - Slovakia’s public spending rose by 8 percentage points since 2010, from 41 percent of GDP to 49 percent in 2023.
- Given limited scope for additional revenue-based consolidation (labor and capital taxes are already relatively high), policy focus needs to shift to:
  - Containing public spending.
  - Improving spending efficiency and reallocating resources toward growth-enhancing areas.

### B. Unpacking public expenditure: The dominant role of social protection
- Overall findings:
  - Social protection explains more than half of the overall rise in public expenditure since the Global Financial Crisis.
  - Social protection accounts for 37 percent of total expenditure in Slovakia.
  - Slovakia’s public expenditure increase contrasts with a modest 0.8 percentage point increase in other Visegrád countries and a decline among EU countries (2010–2023).
- Composition shifts since 2010:
  - Key contributors to the increase in public expenditure: social protection and expenditure on economic affairs.

### C. Pensions and family benefits: drivers of rising social protection spending
- Pensions:
  - Pension spending accounts for more than 50 percent of total social protection expenditure across all Visegrád countries.
  - Pension spending in Slovakia has increased by 2.3 percentage points of GDP since 2010, compared with a 0.3 percentage point average increase in other Visegrád countries.
  - Gross replacement ratios reached 77 percent in 2024, above the EU average of 60 percent.
  - Net replacement rates for males in Slovakia in 2024 were 76 percent compared to 68 percent on average in the EU and 58 percent on average in other Visegrád countries (OECD source referenced).
  - Demographics: the share of the population aged 65+ is expected to reach 30 percent by 2060.
  - Recent early retirements: the pension reform of 2023 induced a spike in early retirements; early retirements in 2024 more than doubled compared to the year before.
  - Number of pensions paid has risen noticeably in the 2010–2024 period (time series shown).
- Family benefits:
  - Family and child benefits total 3.4 percent of GDP and account for almost 20 percent of total social protection spending in Slovakia.
  - More than 90 percent of total family benefits are provided as direct cash transfers.
  - Less than 1 percent of total spending on family benefits is means-tested in Slovakia, compared with more than 25 percent in the EU and around 5.5 percent in the Czech Republic, Hungary and Poland.
  - In-kind benefits account for around 7 percent of family benefits in Slovakia; peer countries and the EU allocate a larger share to in-kind services (childcare facilities, housing assistance, school supplies).
  - Low provision of childcare services contributes to lower employment rates of mothers with young children relative to the EU average.
- Policy implication highlighted:
  - Targeting family assistance based on household income and wealth could create fiscal space while protecting the vulnerable.
  - Expanding in-kind benefits—such as childcare infrastructure—may be more effective than cash transfers in supporting women’s labor force participation.

### D. Box: Recent reforms to the pension system and family benefits (summary of measures)
- Pension system structure:
  - Composed of a PAYGO defined-benefit first pillar and a voluntary defined-contribution second pillar.
  - First pillar includes old-age, early old-age, disability and survivor benefits.
- 2023 pension reform:
  - Loosened early retirement options: anyone with at least 40 years of work may retire, with a pension cut of approximately 4 percent a year relative to retiring at the statutory age.
  - The 13th pension amount was set equal to the average pension of the previous year, removing the former €300 cap, and made available to all pensioners.
  - Pension indexation based on the previous year’s average inflation.
- 2024 pension changes:
  - Tightened early retirement rules by linking early retirement age to life expectancy and reinstated the pension reduction penalty to previously higher levels.
  - Eligibility for the 13th pension was changed so that only pensioners with at least ten years of employment in Slovakia qualify.
  - A temporary two-step indexation process in 2024:
    - Pensions awarded before 2024 were adjusted according to past inflation.
    - New pensions granted in 2024 received a 14.5 percent increase to account for high inflation in 2023.
    - An extraordinary 5.22 percent increase was applied to all pensions in July 2024.
  - Newly granted pensions receive an initial immediate valorization that adjusts them for inflation.
- Family benefits reforms:
  - Slovakia’s family benefits emphasize universal cash transfers (child tax benefit, child/maternity/parental allowances).
  - Parental leave, including paid home care leave, is one of the longest in the OECD, with a maximum of almost 3 years.
  - The 2022–2023 “Family Package” increased child allowances and tax benefits to mitigate inflation and support families.
  - Adjustments in 2024 and 2025 included cuts to child tax bonuses and tightening of income eligibility thresholds as part of fiscal consolidation.
  - Many benefits are automatically indexed for inflation.

### E. Spending efficiency gaps: methodology and implications
- Definition and objectives:
  - Technical efficiency measures the gap between actual quality of public service delivery and outcomes achievable via international best practices.
  - Two perspectives of technical efficiency:
    - Maximizing outputs from a fixed level of spending.
    - Achieving fiscal savings while maintaining the same level of outputs.
- Methodology notes:
  - Estimation challenges include aggregating multiple outputs (e.g., education affects enrollment, pupil-to-teacher ratios, literacy) and separating structural capacity from transitory shocks.
  - The paper relies on IMF (2025) measures based on stochastic frontier analysis, which:
    - Assumes a stochastic production function relationship between government spending and outcomes.
    - Separates inefficiencies within government control from external shocks.
    - Provides standardized efficiency scores for infrastructure, education, health, and R&D across countries, ranging from zero (fully efficient) to one (fully inefficient).
- Policy relevance:
  - Identifying technical efficiency gaps across key spending categories highlights potential areas where Slovakia could generate fiscal savings by narrowing the gap vis-à-vis international benchmarks.
  - Combined technical and allocative efficiency improvements can lower fiscal pressures and support long-term debt sustainability.

_Italic: Source — sipea2026028 - 1. Recent Reforms to the Pension System and Family Benefits (PDF chapter)_

### 10. Compared to the frontier, Slovakia exhibits large efficiency gaps across all government

### 10. Compared to the frontier, Slovakia exhibits large efficiency gaps across all government sectors.

### Efficiency gaps: overview
- Latest cross-country data for 2023 indicates Slovakia’s efficiency gap vis-à-vis the frontier ranges from 30 percent in spending on education and heath to around 40 percent in spending on infrastructure and R&D.
- Interpretation: If Slovakia operated at the efficiency frontier, it could deliver the same level of public services while reducing expenditure by 30–40 percent; these estimates are an upper bound and closing the gaps would likely take years.
- Methodology note: The analysis uses multi-output distance functions and sector-specific outcome variables (e.g., teacher-pupil ratios, school enrollment rates, average years of schooling for education; number of researchers per inhabitants, number of patent applications, number of patent citations for R&D). (See IMF (2025) Online Annex referenced in text.)

### Comparison with Visegrád peers and EU range
- Over time:
  - Efficiency gaps in infrastructure spending have reduced and are now very similar across Slovakia, the Czech Republic, Hungary, and Poland.
  - Efficiency gaps have increased in education, R&D and particularly in health in all Visegrád countries.
- Slovakia’s health sector:
  - Slovakia’s efficiency gap in healthcare is larger than in peer Visegrád countries and is at the higher end of the EU range (whiskers capture min and max of EU27 countries).
  - Health care spending accounts for approximately 6.6 percent of GDP in Slovakia, higher than spending on education, R&D and infrastructure; due to its size, even relatively small efficiency improvements can yield substantial savings comparable to larger efficiency gains elsewhere.
- R&D spending:
  - As of 2023 Slovakia spent approximately 1 percent of GDP on R&D, while other Visegrád countries spent around 1.4 percent or more (OECD2025).

### Drivers of inefficiency in health sector
- System features:
  - Slovakia operates a public health insurance system financed mainly through mandatory contributions and administered by multiple insurance funds; insurers negotiate contracts, set reimbursement rates, and decide reimbursement lists.
- Price and procurement issues:
  - Slovakia’s largest public health insurance fund (VšZP) pays significantly higher prices for identical healthcare services compared to smaller funds, indicating scope for savings through contract renegotiation and price alignment with market averages.
  - Lack of central procurement of pharmaceuticals, hospital supplies, and technology reduces bargaining power and contributes to higher unit prices and cost challenges.
- Hospital management issues:
  - Hospitals face inefficient management, indebtedness, lack of budget compliance, and infrastructure investment needs.
- References to domestic reviews:
  - Healthcare Spending Review, 2022, Ministry of Finance of the Slovak Republic.
  - Spending Review of Hospitals, 2025, Ministry of Finance of the Slovak Republic.

### Allocation of public spending and investment dynamics
- Shift toward recurrent spending:
  - Growing share of public expenditure allocated to recurrent rather than capital spending.
  - Slovakia spends more on compensation of employees as a share of GDP than the EU average and peer countries.
  - Spending on compensation of employees has increased by almost 2.5 percent of GDP since 2010; together with energy subsidies introduced in 2022, these account for most of the increase in public expenditure since 2010.
- Public investment trends:
  - Compared to the Czech Republic, Poland and Hungary, Slovakia is allocating a declining share of its total expenditure to public investment.
- Public wage bill:
  - The rapid increase in the public wage bill over the last ten years mostly reflects increasing public wages rather than a rapid expansion of public sector employment; public wage bill increased particularly fast after 2015.
  - Wages in public administration have recorded the highest cumulative growth, surpassing wage increases in all private sector industries.
  - Sectoral nominal monthly wages (index 2015=100) show public vs private differences by NACE1 sectors: public sector wages exceed private in manufacturing, construction, wholesale, and transportation; private sector employees in ICT and finance earn roughly 30 percent more than public counterparts.
- Energy subsidies:
  - Approximately 80 percent of Slovakia’s subsidies are directed toward energy-related support (considered temporary). Excluding energy support, overall subsidies are broadly in line with neighboring Visegrád countries.
  - About 90 percent of Slovakia’s population will still receive energy subsidies in 2026.

### Growth implications of public spending choices
- Channels for supporting medium-term growth:
  - Direct: increasing public spending on physical and human capital (e.g., new infrastructure projects, expanding education programs) strengthens production capacity.
  - Indirect: crowding in private investment via co-financing, public procurement, and tax incentives—effective when targeting projects with social returns that exceed private returns (e.g., digital infrastructure, R&D).
- Reallocation evidence:
  - IMF (2025) findings cited: reallocating 1 percent of GDP from government consumption to public investment in human capital can increase output by 3 percent over the long-term in advanced economies; reallocations towards infrastructure can lift output by 1.5 percent.

### Policy recommendations (Conclusions and targeted reforms)
- Overall spending-side focus:
  - Reforms should focus on (i) enhancing efficiency of public expenditure; (ii) better targeting of social transfers; and (iii) reallocating resources toward more growth-enhancing areas.
- Health sector efficiency (implement reform priorities from 2022 Healthcare Spending Review and 2025 Hospitals Spending Review):
  - Optimize pricing for outpatient and specialized healthcare services and extend central procurement of pharmaceuticals.
    - Renegotiate contracts between VšZP and major providers to align prices with those paid by other private insurers.
    - Expand central procurement to leverage economies of scale, increase bargaining power, reduce administrative costs.
    - Promote use of generic or biosimilar medicines and ensure their inclusion in appropriate reimbursement categories.
  - Encourage use of primary and preventive care.
    - Slovak patients visit specialist doctors more often and general doctors less often than V3 countries; strengthening primary care can reduce overuse of expensive specialist services and yield substantial savings.
  - Adopt digital technologies.
    - Health information technologies for collecting, storing, and sharing patient data can improve outcomes and lower costs; case studies from Australia, Canada, the Netherlands, Spain, Sweden, and the United States illustrate potential advantages (OECD 2010).
  - Benchmark costs and strengthen hospital budget management.
    - Benchmark costs across hospitals and programs, centralize procurement for supplies and technology, align budgets to actual costs, introduce management targets (e.g., compliance with financial plans), and increase transparency in staff selection and compensation.
- Public infrastructure investment efficiency:
  - Better integrate investment plans with the budget process by clarifying institutional responsibilities, standardizing project appraisal methodologies, integrating investment planning into multiyear budgets, and improving monitoring and evaluation systems.
  - Authorities are developing a national investment plan to guide selection and prioritization of projects, and efforts to standardize project milestones and monitoring are underway.
- Social transfers targeting:
  - Increase the use of mean-testing for family benefits—Slovakia currently has the lowest share of means-tested family benefits among peers.
  - Strengthen incentives to return to work by partly reallocating direct cash transfers toward building childcare facilities to boost female labor supply and child development.
  - Gradually phase out energy subsidies and redirect support to the most vulnerable to strengthen public finances with minimal impact on inequality; Türkiye is cited as an example for an integrated social registry and payment/monitoring system (World Bank 2022).
  - Tighten eligibility criteria for the 13th pension (currently everyone receives an additional December payment equal to the previous year’s average pension); reverse recent increases or limit the benefit to low-pensioners to improve long-term sustainability while protecting against old-age poverty.
  - Emphasize effective and strategic communication to build public support for these measures.
- Reallocating toward pro-growth areas:
  - Increase the share of public expenditure allocated to human capital and R&D and spend it more efficiently.
    - Within a fixed envelope, reallocate from recurrent expenditures (e.g., administrative overhead) toward human capital and R&D to boost long-term growth potential.
    - Redirecting direct R&D spending to tax incentives for firms could stimulate firm-level innovation.
  - Set explicit medium-term targets for compensation spending as a share of GDP.
    - Establish clear targets for public workforce size and average pay levels to stabilize compensation spending.
    - Implement regionally differentiated wage-bargaining frameworks that track regional price differences to reduce public–private wage disparities in low-cost regions and sustain attractiveness of public jobs in high-cost areas.

*Source: IMF Selected Issues Paper (sipea2026028), chapter text provided.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026028.pdf_