After the pandemic: Optimal fiscal policies for Slovenia

This paper derives implementable medium-run fiscal instrument paths for Slovenia, a small Euro-Area economy, in response to plausible transitory external shocks. We combine the macroeconometric model SLOPOL12 with a stochastic optimal-control framework in which the objective function is operationalized from a survey of Slovenian policy makers’ macroeconomic priorities. Approximately optimal policies are computed using the OPTCON algorithm in relation to a baseline forecast and alternative shock scenarios. The results highlight a systematic trade-off between stabilizing output and employment and maintaining fiscal sustainability in terms of the deficit and public debt. Across scenarios, instruments that influence both the demand side and potential output, most notably direct taxes and public investment in physical and human capital (including R&D-related spending), are optimal for cyclical stabilization while instruments with predominantly demand-side or budgetary effects, such as VAT, government consumption, and residual revenues, primarily assigned to budgetary consolidation. The qualitative patterns are robust across shocks and clarify how differential instrument effectiveness shapes the optimal timing and composition of policy adjustment under explicit constraints and stated policy objectives.