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8 November 2024
Assessment of the Revised Fiscal Strategy for 2025 with projections for 2026 and 2027
The most important change in the Revised Fiscal Strategy for the 2025-2027 period compared to the draft of this document is the relatively strong increase in public expenditures in the medium term, exceeding the expected growth of public revenues, which will result in an increase in the fiscal deficit in the next three years to 3% of GDP. In addition to the announcement of a more expansionary fiscal policy in the medium term, an important change in the Revised Fiscal Strategy is that the calculation of fiscal aggregates that are usually measured in relation to GDP (public debt, deficit, expenditures for pensions and salaries in the public sector, etc.) has switched to a revised and significantly increased estimate of Serbia's GDP. The Fiscal Council assesses that the additional increase in the deficit in the medium term was not necessary – especially since it is mostly due to the growth of current budget expenditures, and not public investments. However, we estimate that the planned increase in the deficit should not jeopardize macroeconomic stability and the sustainability of public finances. A significant improvement of this strategic document is that for the first time it contains an overview of large investment projects from the republic budget. Despite this, the state's strategic plans in the area of public investment remain unclear. The Revised Fiscal Strategy brings limited and insufficient progress in the segment of structural reforms compared to the draft of this document from June of this year.
2 October 2024
Assessment of the Proposed Supplementary Budget of the Republic of Serbia for 2024
The supplementary budget proposes a shift in fiscal policy, increasing the projected 2024 fiscal deficit from 2.2% to 2.9% of GDP. This increase is primarily driven by a substantial rise in public expenditure, which have grown by RSD 198 billion (nearly EUR 1.7 billion) compared to the original budget plan. While the supplementary budget includes a significant increase in public revenue (RSD 133 billion, or more than EUR 1.1 billion), this increase is insufficient to offset the surge in spending. The Fiscal Council cautions that this expansionary fiscal stance may be ill-timed, given the current macroeconomic environment of robust economic growth and persistent inflation. In our view, the prevailing economic conditions would have been more conducive to further deficit reduction. Furthermore, the unfavorable terms currently associated with government borrowing amplify the risks associated with this fiscal expansion. Despite these concerns, the Fiscal Council acknowledges that the planned deficit increase is unlikely to jeopardize Serbia's macroeconomic stability, particularly as this widening is mainly driven by additional increase in public investments while the rise in current expenditure is mainly not considered to be structural in nature.
25 September 2023
Assessment of the Proposed Supplementary Budget of the Republic of Serbia for 2023
The good side of the proposed Supplementary Budget of the Republic of Serbia for 2023 is that the basic fiscal flows did not get out of control. The planned budget deficit of 2.8% of GDP is undeniably high – although, objectively speaking, it cannot be considered as alarming. However, the main feature of the Supplementary Budget are new and large expenditure measures, which will be funded through the new borrowing and tax increases. The key measures are: 1) an increase in subsidies for agriculture; 2) an extraordinary increase in pensions; 3) an increase in wages for employees in education and the health sector; and 4) a one-time payment of 10,000 dinars for each child up to 16 years of age. In addition to these measures, state officials announced a new payment to pensioners in 2023, RSD 20,000 per person, amounting to EUR 285 million in total. This measure was made public two days after the Supplementary Budget for 2023 was adopted by the Parliament. On the revenue side, the most important change is the increase of almost all excises by 8% starting from October 2023. One of our main objections to Supplementary Budget refers to missed opportunity to reduce the fiscal deficit to below 1.5% of GDP, thus significantly reducing the country's indebtedness and bringing public finances into calmer waters. Also, having in mind the most important macroeconomic challenges Serbia is currently facing, i.e. high inflation and low economic growth, we assess that new policy proposals are economically unsound and questionable.
28 June 2023
Notes to the Opinion on the Draft Fiscal Strategy for 2024 with the Forecasts for 2025 and 2026
The Draft Fiscal Strategy for 2024 with Forecasts for 2025 and 2026 was submitted to the Fiscal Council for opinion on 19 May 2023. The Fiscal Council, acting in accordance with its statutory obligations and time limits, prepared and submitted the said Opinion to the Government and the National Assembly on 31 May 2023, as required by the regular budget procedure. After that, the Fiscal Council has a statutory obligation to make the Opinion on the Draft Fiscal Strategy publicly available. However, prior to the publication of this document by the Fiscal Council, public officials announced new, large-scale and unplanned changes in fiscal policy. For this reason, the Fiscal Council, deviating from the standard practice, has supplemented the Opinion on the Fiscal Strategy with notes related to these latest changes.
28 June 2023
Opinion on the Draft Fiscal strategy for 2024 with forecasts for 2025 and 2026
The Draft 2024 Fiscal Strategy with Forecasts for 2025 and 2026 confirms the intention of the Government to gradually progress towards balancing public finances over the medium term. Pursuant to the Strategy targets, the fiscal deficit should decline from 3% of GDP in 2023 to 2.2% of GDP in 2024, and then to 1.5% of GDP in 2025. Thereafter, the identical deficit level of 1.5% of GDP would be kept in 2026. The Strategy also envisages a decline in the public debt-to-GDP ratio from 55.6% (at end-2022) to 51.9% at end-2026. This course in fiscal policy is undeniably good; however, the Fiscal Council assesses that the Strategy could and should have foreseen a more ambitious balancing of public finances. The reform-related section of the Strategy does not adequately recognize all important policies that would improve public finances, as well as the quality of life for a large number of Serbian citizens. Thus, the Strategy does not recognize that a more generous and efficient social policy is needed, in particular because the surge in food and energy prices strongly undermines the living standards of the poorest segments of Serbia’s population (instead, the plan is to reduce expenditures for social benefits as a share in GDP). No appropriate solution is offered to regulate the inadequate system of wages and employment in the public sector, which threatens to obstruct the performance of important functions of the state (in this Opinion, we have devoted special attention to the Tax Administration). The necessary reforms are also lacking – of the taxation, health care and education systems, selection and management of public investments, etc. Regarding public utility companies in the energy sector (EPS and Srbijagas), the Strategy is making a step forward, because the responsibility for their problems is no longer only attributed to the global energy crisis; instead, more serious reforms and investments in these companies are announced. Nonetheless, more concrete plans for that are still under construction.
19 December 2022
Assessment of the Proposed Budget Law of the Republic of Serbia for 2023
The proposed fiscal deficit in the 2023 Budget Bill is relatively high, amounting to RSD 264 billion (3.3% of GDP). When this deficit is compared to the one of 3.9% of GDP planned in the recently adopted supplementary budget for 2022, it is possible to say that the budget for 2023 is gradually taking public finances in the right direction. The main reason why the fiscal improvements could not have been stronger lies in the persisting hefty losses of public enterprises in the energy sector (EPS and Srbijagas) resulting in a huge fiscal expenditure in 2023 as well. About EUR 1.2 billion (1.7-1.8% of GDP) has been directly appropriated in the budget for this purpose - which means that more than half of the 2023 fiscal deficit is a direct consequence of the unsuccessful business operations of EPS and Srbijagas. However, even this amount does not include all the costs that taxpayers have to bear because of these companies. The budget has also given the possibility to the government to issue up to EUR 1 billion in new guarantees for their borrowing, formally not included in the deficit for 2023. Excluding the huge expenditures for EPS and Srbijagas, the budget is generally adequate. Public revenue and public expenditure (excluding the energy sector) are balanced for the most part, public investment spending has been kept at a high level, and the gradual reduction in the tax wedge has continued. Another important positive novelty in the 2023 budget is that after three years, the cash payments of non-targeted support for households, which were misguided from both an economic and a social policy perspective, are finally eliminated.
19 December 2022
Assessment of the Proposed Supplementary Budget of the Republic of Serbia for 2022
Compared to the initial budget for 2022, the proposed supplementary budget introduces unusually large-scale changes on both the revenue and the expenditure side. Budget revenue has gone up by as much as RSD 193 billion (EUR 1.6 billion), and expenditure has risen even more sharply - by RSD 272 billion (EUR 2.3 billion). As a consequence, instead of the planned budget gap amounting to RSD 200.2 billion (EUR 1.7 billion), the deficit has surged to RSD 279.1 billion (EUR 2.4 billion). There are three main reasons why the proposed supplementary budget differs so significantly from the initial budget. The first is related to the strong acceleration of inflation, which for the most part has driven the increase in public revenue. The budget was drafted based on the assumption that the average inflation rate will be 3.7% in 2022, but instead it will reach almost 12%. The second reason has to do with the introduction of a large number of expenditure policies into the budget that were not initially planned. However, for the bulk of these expenditures, this is just a formality now since they have already been implemented or are in the process of implementation (EUR 100 for the youth paid out two times, an increase in assistance for the first, second and third child, tourist vouchers, etc.). The third and single largest change in the supplementary budget is the financing of the huge losses incurred by public enterprises in the energy sector (Srbijagas and EPS). Direct appropriations amounting to about EUR 1.3 billion have been made in the budget for these purposes, while the total costs imposed on the government are even higher because they are also incurred by issuing guarantees for their borrowing. In the spring of this year, Srbijagas borrowed USD 200 million with a government guarantee, and the supplementary budget has opened up the possibility to issue another EUR 650 million of similar guarantees by the end of the year.
30 September 2022
Proposed social and tax policy measures for reducing inequality and poverty in the Republic of Serbia
The crisis caused by the COVID-19 pandemic has shed further light on the problems of inequality in a multitude of countries, including Serbia, where inequality and at-risk-of-poverty rate have stood above the European average for years. In this analysis, the Fiscal Council points out the possibility and necessity for systemic improvements in social and tax policy that would provide additional support to impoverished households, particularly having in mind the recent food and energy price hikes
22 July 2022
Structural problems of the Serbian energy sector in the light of the global crisis: root causes, costs and potential solutions
The global energy crisis was the trigger that has exposed the local crisis of state-owned energy enterprises, which has been smoldering for quite some time now. As a result of these two crises (the global, and especially the local one), since the autumn of 2021 the question of how to finance and secure the uninterrupted supply of electricity and gas in the country has become Serbia’s main problem. EPS can no longer produce enough electricity to meet domestic needs because it did not invest in its coal mines when it was time to do that - so now it has to import the lacking quantities of both coal and electricity, at record high prices. In contrast to EPS, which should be the backbone of the domestic economy and whose own production should cover not only local consumption but also exports, Srbijagas depends on imports at a systemic level. It is true that import prices are beyond the control of the domestic economic policy, but a major failure of Srbijagas is that it has not yet built a gas storage facility of sufficient capacity (which was scheduled to be completed a long time ago). This storage facility would secure stable supply of the country in the wintertime when consumption is the highest because of heating. Due to the lack of storage capacity, and partly due to the mismanagement of the existing storage facility in Banatski Dvor, during the last winter a good portion of gas for heating had to be imported on the market at extremely high prices. Since the problems of EPS and Srbijagas are of a structural (more permanent) nature, they will persist during the coming heating season as well, which is why the domestic energy sector will continue to face huge challenges. In this report, the Fiscal Council
13 Jun 2022
Opinion on Draft Fiscal Strategy for 2023 with Forecasts for 2024 and 2025
Draft Fiscal Strategy brings an important anchor for fiscal policy at a time of increased global uncertainty. However, the Draft Fiscal Strategy for 2023 with forecasts for 2024 and 2025 has been prepared in specific circumstances, due to which it has certain objective limitations. First of all, it is still impossible to have a precise overview of how Serbian economy and fiscal policy will be affected by the growing global instability caused by the war in Ukraine, together with the energy crisis and soaring food prices. Also, this document has been prepared before the formation of a new Serbian Government, which has yet to be given the mandate to conduct the country’s economic policy in the upcoming four years. Although all of these factors limit the Strategy’s capacity to define the medium-term fiscal policy in precise detail, it is very important that the preparation of this document has not been postponed (which was frequently the case in previous crises). The most important message of the new Fiscal Strategy is that, despite the growing uncertainty, the Government will not give up budget stabilization and public debt reduction in the medium term. The major shortcoming of this strategic document is its failure to properly analyze the fiscal risks and problems of SOEs in the energy sector, particularly in Srbijagas and EPS.
13 May 2022
Anti-crisis Budgetary Measures During the COVID-19 Pandemic: Costs, Results and Lessons Learned
As the world is facing yet another period of economic uncertainty, lessons learned from the previous years could help Serbia cope with the looming crisis. Therefore, this paper is relevant not only for expert-level comprehension of policy measures implemented during 2020 and 2021, but also as a guide in designing new policy measures in the wake of rising economic challenges. We analysed fiscal measures undertaken in Central and Eastern European Countries, including the Western Balkans, for the purpose of mitigating the negative effects of the pandemic on the general population and businesses. Our goals were to identify segments of the anti-crisis package where Serbia adhered to international practice, what the total budget cost of implemented measures was, and whether their size and structure diverge from comparable countries. Besides the analysis of fiscal implications of the implemented measures, we also performed preliminary analyses of their effects on basic macroeconomic aggregates.
26 Janaury 2022
15 years of private pension funds in Serbia: Past developments and reform recommendations
During the last 15 years private pension funds realized real returns of 2.2% per annum but have failed to meet reform expectations. Their investment policy, which relies dominantly on government bonds, is unable to provide satisfactory rates of return going forward; in 2020 and 2021, these were negative in real terms (-0.3% and -6.1%). Despite generous and exclusive tax benefits, the pension funds failed to gain traction on the labour market – less than 10% of employees have opened accounts with them, while only 3% are using them to save money with any semblance of regularity. In this public debate material, the Fiscal Council provides recommendations for improvements of the existing system and also outlines possibilities for the complete system overhaul.
15 December 2021
Assessment of the proposed Budget Law of the Republic of Serbia for 2022
The proposed Budget for 2022 continues with a gradual fiscal deficit decrease compared to previous years. The planned fiscal deficit for 2022 amounts to approximately 1.7 bn Euros (3% of GDP), which is lower than the deficit of 2020 (3.8 bn Euros) and planned deficit of 2021 (2.6 bn Euros). At that, the envisaged 2022 fiscal deficit leads to a minor decrease of the excessive public debt to GDP ratio (planned to decrease from 58.2% at the end of 2021 to 56.5% at the end of 2022). the Fiscal Council already sees as highly likely that public revenues in 2022 could be significantly higher than planned (especially taking into consideration the recent inflation surge), while public expenditures have been planned too wide and the execution could easily be below the planned amount. Such trends would lead to an even more favorable, lower fiscal deficit than the planned 3% of GDP in 2022. The Fiscal Council recommends that these potentially better fiscal trends should be used to reduce the fiscal deficit to about 1 bn Euros already in 2022 (below 2% of GDP) – instead of introducing new, currently unplanned expenditures in the budget (which was a common practice in similar situations in the previous years). The most important individual budget elements have been defined, for the most part, with adequate fiscal responsibility and economic justification. However, the budget also suffers from certain qualitative weaknesses that are mostly repeated from previous years. One recurrent issue is the lack of transparency pertaining, first of all, to the expenditures of the Public Investment Management Office, certain parts of subsidies, net budget loans and the security sector.
November 8, 2021
Opinion on the Revised Fiscal Strategy for 2022 with Forecasts for 2023 and 2024
Revised Fiscal Strategy preserves the generally well-planned fiscal policy objectives – gradual decrease of deficit and general government debt. The main quantitative objectives of the Revised Strategy have remained unchanged compared to its Draft from May 2021. The fiscal deficit should first be decreased to 3% of GDP in 2022, continuing the declining trend to 1% of GDP in 2024. The objective for public debt also remains, calling for its share in GDP to be decreased by about 4.5 p.p. compared to the end of 2021 – from 58.2% of GDP to 53.8% of GDP. In its Opinion on the Draft Strategy from June 2021, Fiscal Council already assessed this plan as acceptable, and we stand by this assessment in our Opinion on the Revised Fiscal Strategy. However, a chance has been missed to put the more favourable fiscal results from 2021 to even better use – which would lead to a decrease of the government debt in the medium term by over a billion Euros. The Fiscal Council’s position is that these unplanned fiscal improvements of 2021 should have been used for a more ambitious deficit decrease in the medium term (specifically, setting the deficit path for the 2022-2024 period to: 2% → 1% → 0.5% of GDP, instead of 3% → 1,5% → 1% of GDP). In its opinion on the Draft Fiscal Strategy for 2022 with forecasts for 2023 and 2024, dated June 2021, the Fiscal Council presented several recommendations aimed at improving the credibility of this document. Some of Fiscal Council’s recommendations, however, have not been included in the revised Fiscal Strategy and some have not been adopted in the appropriate way.
November 3, 2021
Assessment of the Proposed Supplementary Budget for 2021 and basic recommendations for the 2022 Budget
The proposed supplementary budget is aimed at stabilizing public finance, which can be assessed as favourable (with certain objections). Since the public health crisis broke out in 2020, Serbian public finance has been forced to quickly adjust to the situation as it unfolded, resulting in higher one-off expenditures. This resulted in an unusually high number of amendments (supplementary budgets), all of which included a stark increase of the fiscal deficit (April and November 2020, April 2021). The proposed second supplementary budget for 2021, however, differs from the previous crisis-oriented supplementary budgets in the fact that it proposes a significant fiscal deficit decrease of about 900 m Euros (from 6.7% of GDP to 4.9% of GDP). Although a fiscal deficit of 4.9% of GDP is still too high, it represents a good foundation for the much-needed further public finance stabilisation in the upcoming years. The largest share, i.e., almost 3.5% of GDP of the planned 4.9% of GDP is allocated to one-off measures that do not represent a permanent budget expenditure (payment of minimum wages to private companies, non-selective financial assistance for citizens etc). That means that, going into the next year, we would be carrying over a fiscal deficit that is lower than 1.5% of GDP, which serves as a good foundation for the preparation of the 2022 budget. Therefore, in addition to this assessment of the Proposed Supplementary Budget, the Fiscal Council would like to recommend to the Government to use the favourable fiscal trends of 2021 and plan the 2022 government deficit at the level of 2%, instead of 3% of GDP, as was previously envisaged in the Fiscal Strategy. A somewhat steeper decrease of the fiscal deficit in 2022 than originally planned would have multiple benefits.
June 11, 2021
Opinion on the Draft Fiscal Strategy for 2022 with forecasts for 2023 and 2024
In general, the Fiscal Strategy envisages good medium-term fiscal policy objectives. After a fiscal deficit surge during the healthcare crisis of 2020 and 2021, the Fiscal Strategy draft envisages gradual balancing of public finance in the medium term. The fiscal deficit is planned to decrease from about 7% of GDP (the plan for 2021), to 3% of GDP in 2022, continuing the declining trend to 1% of GDP in 2024. Such deficit decrease will reverse the currently upward public debt trend, i.e. the public debt is planned to decrease from 60% of GDP to about 55% of GDP by the end of 2024. The planned fiscal adjustment would be implemented in an economically sound way, with no sudden shocks: by controlling the increase of pensions and salaries in the public sector and decreasing subsidies and other current expenditures, whereas the public investments would be maintained at a very high level of over 6% of GDP. On the public revenue side, no tax increase has been planned – on the contrary, it was announced that, if fiscal trends turn out better than expected, the opportunity would be used to decrease the tax burden on economy. Finally, we see macroeconomic forecasts from the Strategy as appropriate, at this time. Taking all this in consideration, the Government’s medium-term plan is generally acceptable – Fiscal Council’s objections to the objectives in the Strategy and the methods envisaged for their achievement are minimal. However, the main question is whether this plan will be consistently implemented. This is why the main recommendations of the Fiscal Council for the improvement of the Draft Strategy are aimed at improving its credibility.
May 10, 2021
Assessment of the Proposed Supplementary Budget for 2021
The proposed supplementary budget brings a U-turn in fiscal policy – a stark increase of the budget deficit, leading to public debt growth. After the record-breaking general government deficit in the 2020 crisis, amounting to 8.1% of GDP (about 3.7 bn Euros), it was planned that the 2021 budget would lead Serbian finances to a somewhat smoother sailing. Hence, the initial 2021 budget envisaged a decrease in the fiscal deficit down to 3% of GDP, which would then (according to the Government’s forecasts) lead to the stabilization of public debt compared to GDP. However, only a few months into this year, this fiscal plan was completely abandoned. The proposed supplementary budget envisages the general government deficit of 6.9% (about 3.5 bn Euros) instead of 2.9% of GDP (about 1.5 bn Euros). A more than two-fold increase of the fiscal deficit, exceeding the original plan by 2 bn Euros, shall be financed by new loans, which will postpone the stabilization of the public debt trajectory. Namely, with a deficit at the planned level, the ratio of public debt to GDP will continue growing in 2021 – from 58.2% of GDP to 61-62% of GDP at the end of the year – which is an excessive level of debt for a country like Serbia.
December 9, 2020
Assessment of the Draft Budget for 2021
The budget proposal for 2021 envisages a central government deficit of 178.5 bn dinars (3% of GDP) and a slightly higher general government deficit of about 180.3 bn dinars. This plan, however, rests on the optimistic assumption that the GDP growth in 2021 will amount to a high 6%, which could easily not materialize. In case of a lower economic growth, public revenue would not come in at the planned level, so the deficit could be significantly higher than 3% (and close to 4% of GDP), while the public debt share in the GDP would continue to grow (over 60% of GDP) instead of coming to a standstill. If the non-favourable epidemiologic circumstances continue into 2021, perhaps the economy will require a new (certainly smaller) assistance package, which would be an additional burden on public finance. Due to so many uncertainties, we assess that the 2021 budget should have been planned more carefully, with a deficit of 2% of GDP, like the Fiscal Council recommended to the Government in November 2020. This could have been accomplished primarily by freezing the salaries in the public sector (or by their minimal indexation), as well as by delaying or abandoning the projects that are not urgent for 2021 (immense expenditures for the equipment in the security sector, construction of the Trebinje airport, subsidies for digital fiscal registers, subsidies for taxi drivers, increased expenditures for incentives to attract investors etc.)
December 9, 2020
Assessment of the Proposed Supplementary Budget for 2020 and Recommendations for Fiscal Policy in 2021
Supplementary budget envisages a record-breaking national budget deficit of 483 bn dinars (8.8% of GDP), while the general government deficit is planned at 492 bn dinars (8.9% of GDP). This is by far the highest fiscal deficit Serbia has ever recorded, exceeding the previous record-breaking deficits of 2012 and 2014 by about 40%. At that, comparative analysis shows that Serbian 2020 deficit will be among the highest in the CEE (where the average deficit will amount to 7.5% of GDP). All this cannot be explained solely by the effect that the GDP decline has had on public revenue, or by immediate expenditures of the implemented anti-crisis measures. A good share of the 2020 deficit arose exactly because the healthcare crisis has laid bare the problems that had been swept under the carpet for many years. Years of insufficient investments into healthcare in Serbia meant that a significantly higher share of the budget had to be set aside for this purpose in the current crisis, than was the case in comparable countries - for the procurement of necessary equipment and improvement of healthcare infrastructure. Problems of the state-owned and public enterprises (Air Serbia, EPS) are not recent, either. The crisis was merely a trigger for state intervention which covered a part of the expenditures of their failing performance in 2020 - which would probably have happened even if it weren't for the crisis. At that, the year will end with unsustainable expenditures for salaries in the public sector as they have been excessively increased in 2020 (by about 10%), with the GDP suffering a real decline of about 1.5%. For all these reasons, the enormous fiscal deficit planned by the proposed rebalance opens a key additional issue - how will the Government establish control over all these expenditures in the upcoming year, bringing public finance back to order?
October 8, 2020
Effects of the measure “100 Euros for each adult citizen” on inequality and poverty (Comment of the study of the International Labour Organization and the European Bank for Reconstruction and Development)
The study of the International Labour Organization (ILO) and European Bank for Reconstruction and Development (EBRD) arrives at the erroneous conclusion that the program of paying 100 Euros to each adult citizen in Serbia has had “a remarkably strong effect” on reducing inequality and poverty in Serbia. 1 This incorrect conclusion of the ILO/EBRD study is the consequence of fundamental errors and omissions in its analysis. Correct analysis, on the other hand, shows that the payment of 100 euros to all adult citizens is a poor social policy measure which has not provided either a lasting, or a significant inequality and poverty decrease.
July 24, 2020
Effects of the healthcare crisis on fiscal and economic trends in 2020 and recommendations for fiscal policy in 2021
Following the implementation of the economy rescue package, new challenges come in the form of stopping further rise in public debt and correcting the enlarged budget imbalances. The healthcare crisis continues, economy is still in trouble and the government no longer has sufficient resources available for a strong intervention - all the more so since it has already taken on an unreasonable debt and spent over 600 m Euros on the payment of 100 Euros to each citizen of legal age. In these circumstances, we currently expect a GDP drop of about 3% in 2020. Economic consequences of the healthcare crisis are not, however, limited to economic activity only: all of the most important fiscal indicators have been completely thrown off balance. General government deficit in 2020 will be at a record-breaking 7% of GDP, public debt will reach a little over 60% of GDP at the end of the year and internal budget imbalances are also rapidly widening. The latter is the consequence, first and foremost, of the immoderately large increase of salaries in the public sector of about 10% at the beginning of 2020 (this increase of salaries would have been excessive even if the economy had achieved the planned 4% growth). It is therefore necessary to adjust the fiscal policy to the new circumstances and to provide, within this altered framework, the best possible support to the economy. Specifically, this means: 1) reduce deficit in 2021 to about 2% of GDP to prevent the further rise in public debt and to restore fiscal stability; 2) increase in government investments in infrastructure and 3) control of the growth of pensions and salaries in the public sector in 2021 (it would be justified to freeze the salaries entirely). At that, this crisis has given us additional reason to analyse some of the previously observed fiscal policy mistakes - insufficient healthcare investments over a long period of time - that also need to be corrected in the future.
January 4, 2020
Main Findings from Final Statements of Accounts for 2002-2018 and the Assessment of the Final Statement of Accounts of the State Budget for 2018
After three years of failure to publish and seventeen years of failure to adopt the final statements of accounts at the National Parliament, these important laws for the period 2002-2018 have now finally entered the Parliament procedure. This marks an important step towards the improvement of public finance management, as the final statement of accounts is the only document that shows final, detailed and comprehensive data on the execution of the State Budget and thus allows for its most reliable analysis. One of the most important conclusions in our analysis is that budget beneficiaries’ spending far exceeds the budget plan and monthly reports of the Ministry of Finance. Namely, the final statements of accounts show that there is a part of the budget bodies’ expenditure that has not been encompassed by regular reports and that amounts to 570 m Euros per year. In addition, final statements of accounts show that about 850 m Euros per year is spent differently than shown in the budget plan adopted by the Parliament. Even before, we knew (in general) that budget appropriations are changed during the year using budget reserves and other non-transparent sources. Still, only final statements of accounts allow us to see the value and structure of these changes. They are not entirely economically problematic (e.g. about a quarter of the sum pertains to an increase in capital expenditures), but this is still too high an amount to be allocated completely outside of the Parliamentary procedure and without the public scrutiny that the Budget Law has been subjected to. Finally, final statements of accounts fail to show some important information, such as, to whom and why enormous penalties have been paid, which public enterprises paid a part of their profit into the budget and in which amount, which private enterprises used subsidies for foreign investors and other important information that will be discussed below.
January 4, 2020
EPS Performance Analysis and Recommendations for Investments Increase
Until early 1990s, Serbia had a well-established energy system and EPS had, at its disposal, a large excess of production capacities compared to the demand for electrical power in the country at the time. It was this excess that allowed it to meet the needs of the growing domestic consumption over the last 30 years, although it was not investing enough to even maintain the existing production capacities. However, such operations are no longer sustainable - in recent years, the domestic demand for electric power has caught up with the current production capacities of EPS, while in the upcoming 5-10 years, it is expected that it will outgrow them significantly. It is hence necessary for EPS to provide sufficient new capacities, which will be able to satisfy the growing electricity needs of the country, in the medium term. This is the prerequisite for the country's future energy stability, but also a requirement for successful operations of the company itself, as it faces a gradual loss of its market share due to the entry of other producers on the market. At that, in the upcoming period, EPS will have to ensure strict adherence to the environmental legislation in its production. To answer all these challenges, EPS would have to launch a major investment cycle in the shortest possible term and to significantly increase its investment into production capacities and environmental protection. However, the company has not been performing well for a long time and the small profits it has achieved in recent years are not even nearly enough for a sustainable funding of the necessary investments. Hence, this is the critical moment for EPS to undergo a substantial reform and finally remove the key obstacles that prevent it from performing well - excessive wage bill due to a surplus of employees and a generous remuneration system, low electricity tariff, major technical losses and theft within the network, collection issues etc. Otherwise, EPS could easily become a serious risk for Serbia’s public finance in the medium term.
January 4, 2020
Assessment of the Draft Budget for 2020 and Revised Fiscal Strategy for 2020-2022
Given the predefined parameters, the proposed budget for 2020 is relatively well planned. The biggest economic mistake in the planned budget policy in 2020 had already been made prior to the elaboration of the 2020 budget - in the 2019 supplementary budget. This supplementary budget defines an exaggerated increase in salaries in the general government, of an average 9.6% (significantly exceeding economic growth) which exhausted a large portion of the 2020 fiscal space in advance. The majority of the remaining funds have been allocated well, which is why in general the Fiscal Council assesses the proposed 2020 budget as positive. Overall expenditures have been planned mostly on par with the revenues, i.e. an appropriate, low state government deficit of 20 bn dinars has been planned (0.3% of GDP). Revenue and expenditure forecasts are good and conservative, so there is no pronounced risk of the deficit spiralling out of control. Finally, the budget includes a solid increase in public infrastructure investments, while the revenue side incorporates a decrease in the tax burden on salaries - which are good measures that, however, could have been more significant had the general government salary increase been smaller and fiscally responsible, i.e. in line with economic growth.
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October 24, 2019
Strategic recommendations for the budget and fiscal policy in 2020
In the 2020 Budget there will be a fiscal space for new economic policies of almost 400 m Euros – a significant funds, but still insufficient when compared to all objective needs of the country. Analysis of the largest weaknesses of Serbian economy shows that it would be best to use the available funds as an incentive for the lacklustre economic growth, by decreasing taxation for businesses, as well as for the development of basic infrastructure - the poor condition of which has been hindering economic growth, but also negatively affecting the quality of life of the population. The catastrophic state of environmental infrastructure particularly stands out (water supply, sewers, wastewater treatment, landfills etc.) - which not only diminishes the quality of life, but also endangers the health of the Serbian citizens. However, already in the Amending Budget Draft Law for 2019, the Government has prematurely defined one of the most important economic policies in 2020 and thus used up a third of the available fiscal space - by proposing an exaggerated raise in general government salaries of over 9.5% on average (instead of a 5 - 5.5% increase which would be economically justified).
October 24, 2019
Assessment of the Supplementary Budget Law for 2019
Supplementary Budget prescribes the usage of the entire surplus made in 2019 budget (due to a better revenue collection than initially expected) by the end of the year. By increasing the public expenditure for about 50 bn Dinars, instead of a modest surplus the budget will end up with the deficit of about 0,5% of GDP – almost exactly as originally planned for this year. The Fiscal Council’s analyses show that this political decision is acceptbale under certain conditions. Public debt has decreased to just over 50% of GDP and the country is no longer in direct danger of a public debt crisis – but the economic growth is lagging behind in 2019. It would thus be fine if the available budget funds were used primarily on growth enhancing measures. The main issue with the proposed supplementary budget, however, is the fact that only a quarter of the new funds are allocated to such measures, e.g. infrastructure development (and the question is if they will even be used for this purpose), whereas most of the funds are directed to non-productive (in terms of growth) purposes. Excessive growth of salaries in the general government, which will - on average – amount to about 9.5% and far exceed the achieved economic growth, is fiscally and economically the most irresponsible of the proposed measures.
July 4, 2019
Pay grades and employment in the civil sector in Serbia: from an unfinished reform to a sustainable system
An ordered salary and employment system in the public sector is one of the main pillars underpinning a functional Government - and in Serbia, such a system does not exist. Reform of salaries and employment is a massive professional and political challenge, but the majority of European countries have been able to respond to this challenge successfully. Although implementation of the salaries and employment reform has been announced repeatedly since 2014, certain measures that the Government has implemented since then have additionally aggravated the already bad situation. The latest postponement of pay grades introduction will cause additional damage and could be a sign that the Government has given up on salary reform altogether. In this study, the Fiscal Council (once again) provides economic arguments and principles, as well as concrete recommendations, for a successful reform of a salary system and employment in general government.
July 4, 2019
Opinion on Fiscal Strategy Draft for 2020 with projections for 2021 and 2022
The Fiscal Strategy Draft prescribes a suitable and realistic quantitative fiscal objectives. The low medium-term deficit of 0.5% of GDP is adequate for Serbia, as it leads to a further decrease of public debt share in GDP, guaranteeing macroeconomic stability. However, for a complete public finance recovery and sustainable economic growth acceleration, a number of structural reforms missing from the Fiscal Strategy Draft need to be defined and implemented. This is the first time since 2011 that the Fiscal Strategy Draft has been prepared prior to the Budget for following year, which we assess as the good first step toward adherence to the budget procedures which will allow for the annual budgets to be made in line with carefully considered medium-term goals of economic policy. Therefore, the main purpose of objections and recommendations presented in this report is to significantly improve the new, revised version of the Fiscal Strategy and then to prepare the 2020 Budget based thereon.
January 4, 2019
Opinion on Fiscal Strategy for 2019 with projections for 2020 and 2021
The Fiscal Strategy has been missing its main mark for years i.e. to serve as a credible, strategic document for medium-term public finance management. As a fiscal policy framework in the next three years, it should comprise the following elements: 1) objective identification of the country’s most pressing economic issues and needs; 2) clear definition of fiscal policy objectives and strategic guidelines for the best response to these challenges and 3) quantification of all these measures and policies and their inclusion in medium-term forecasts. However, the Fiscal Strategy, yet again, fails to do so. On the good side, the Strategy plans for the low fiscal deficit of 0.5% of GDP which is a suitable MTO for Serbia as it allows for the public debt reduction below 50% of GDP from 2020. On the other hand, the majority of structural economic and fiscal challenges that the Government should respond to by 2021 has not been adequately addressed in the Strategy, while some major issues are not even mentioned at all.
December 12, 2018
Assessment of the Budget Proposal for 2019
The 2019 budget plans for the central government deficit of 23 bn dinars, which, at the same time, is the dominant share in the general government deficit planned at 29 bn dinars (0.5% of GDP). The envisaged low fiscal deficit is suitable for Serbia, since it secures the achieved macroeconomic stability (low inflation, stable dinar exchange rate etc.); it will also lead, in the upcoming year, to a further decrease of the high public debt share in GDP. The second strength of the proposed budget is that it is credible, i.e. in general government revenues and expenditures are planned realistically and there is no prominent risk of the deficit exceeding the plan (which had been a common occurrence up to a few years back). The issue with the proposed 2019 budget is that it lacks important public finance improvements: 1) insufficient investments planed for infrastructure development (roads, railroads, environmental protection); 2) the general government salary and employment system reform has been abandoned, so salary increases in different government sectors have once again been arbitrarily determined; at that, the harmful employment ban has been prolonged; and 3) no improvement in the budget process and violations of the budget calendar during the preparation of the budget.
October 22, 2018
Fiscal and economic trends in 2018 and strategic recommendations for 2019 budget
Budget for 2019 should systematically regulate public finance, improve their structure and support economic growth. Thanks to Government measures and some favourable external circumstances, Serbia implemented a successful fiscal consolidation - from a fiscal deficit amounting to 2.2 bn Euros in 2014, we’ve arrived at a surplus in 2017 and 2018, while the public debt has been decreased from over 70% to under 60% of GDP. Now, with the crisis avoided, the fiscal policy in 2019 and the upcoming years must answer two major and related challenges, remaining after the successful consolidation: 1) improving the structure of public finances and 2) low economic growth. Having this in mind, in this report, the Fiscal Council presents a detailed analysis of the current economic and fiscal trends, as well as the most prominent structural problems of Serbia’s public finance. Based on this analysis, we hereby provide recommendations for the Government, on how to respond to the aforementioned challenges and improve fiscal policy in 2019 and beyond.
July 9, 2018
Investments in enviromental protection: a social and fiscal priority
Serbia is one of the most polluted countries in Europe - which puts the health of the population at risk, shortens life expectancy, decreases the quality of life and leads to uneven regional development. It is the opinion of the Fiscal Council that the public finances would have to face this issue without delay, i.e. that the 2019 budget should already allocate far greater funds for investments into environment protection. The circumstances for this are unusually favourable, as the budget for 2019 will comprise a sufficient fiscal space, provided by economic growth, decrease of public debt and the final payment of the debt of Srbijagas from the budget. However, if the Government uses this fiscal space for populist measures (excessive increase in salaries and pensions, subsidies and other non-productive expenditures) as has happened in the past (e.g. National Investment Plan in 2006) and is now, once again, being announced in public - a unique chance to resolve this dangerous and very expensive problem, while preserving the budget stability, shall be missed. Increase in environmental protection investments would improve budget structures (larger public investments) and have a positive effect on economic growth.
June 13, 2018
Wages in general government: Current state and guideline for reform
Serbia needs a comprehensive reform of the general government wage and employment system, and in this study the Fiscal Council shall provide guidelines and recommendations for its implementation. A regulated wage and employment system and an adequate number of professionals employed are cornerstones of fiscal sustainability and modern and efficient state, which the Government has recognized, ranking this reform high on the list of priorities at the beginning of the fiscal consolidation in the period 2015-2017. However, despite the initial enthusiasm and numerous announcements, concrete steps in this direction were, for the most part, absent. The general government wage system is still overly complicated, non-objective and often unjust, while the employment structure by sector and institution is inadequate. Moreover, some of the measures undertaken by the Government in the recent years have only aggravated the existing problems. Thus, the employment ban that has been in force for several years has led to a non-selective decrease in the number of employees and exacerbated the already unfavourable employment structure; the arbitrary increase of wages in the different parts of the public sector (education, security services, administration) only added to the disorder in the wage system. Since we have already written about the issue of inadequate employment in the general government in several previous studies, in this analysis we will primarily focus on the improvements of the poor wage system in the general government. It is an issue spanning several decades, which the Government has so far failed to resolve appropriately.
December 20, 2017
Opinion on Fiscal Strategy 2018-2020
The Fiscal strategy plans for a low deficit of 0.5% GDP in the medium and long term and consequentially for the gradual decrease of the public debt – which is good. However, Fiscal strategy does not represent a good enough framework for managing public finances in the medium term as: 1) it fails to give a concrete government plan for the repeal of temporary fiscal consolidation “crisis” measures such as the temporary cut in above average pensions; 2) it does not plan for a substantial improvement in the structure of public revenues and expenditure in the medium term; 3) it does not envisage a strong and good enough structural reforms, above all the reforms of SOEs and public utility companies; 4) it does not recognize public finance issues at the local government level.
December 12, 2017
The Assessment of Budget proposal for 2018
The 2018 Budget plans for a 28 bn dinar deficit of the Republic, the largest part of the general government deficit, which is planned at 32 bn dinars. Fiscal Council’s assessment of the general characteristics of the budget is mostly favourable. First, in terms of the size of the deficit a good fiscal objective has been set (size of the deficit). Expressed as a share of GDP, the planned national deficit amounts to about 0.6% of GDP (of consolidated government, 0.7% of GDP), which is a low enough deficit to decrease the share of the still excessive public debt in GDP by about 2 pp - from about 65% of GDP to about 63% of GDP in 2018. Secondly, the proposed budget is credible, i.e. revenue and expenditure forecasts are realistic and it’s possible that the budget deficit may even be lower than planned in 2018. Thirdly, budget structure is changing for the better, in general - there is a relatively strong increase of expenditures for public investments, tax burden on the economy is decreased (income tax), the total pension bill is appropriately reconciled with the growth of national economy and the wage bill for those employed by the government is still under control, although it would have been far better, in economic terms, if the increase of expenditures for this item in 2018 had been planned at a more modest scale. However, the Budget has certain weaknesses, one of the most important being the continuous enforcement of the public employment ban as well as maintaining a temporary cut in above average pensions. Furthermore, we emphasize that the Budget for 2018 may adversely affect local governments, and also indicates the backing out of crucial structural reform implementation.
September 29, 2017
Fiscal trends in 2017 and recommendations for 2018
In 2017, the most important quantitative objectives of fiscal consolidation have been achieved. For the first time since 2005, there will be a fiscal surplus and, after ten years, the public debt shall once again see a significant drop. The balance between fiscal trends has neutralized the immediate danger of a public debt crisis and contributed to macroeconomic stabilization – low inflation and moderate current account deficit. However, the reform objectives of the fiscal consolidation are not even close to be fulfilled. These objectives relate, first of all, to the performance of public and state-owned enterprises, as well as to bringing the system of salaries and employment in the public sector to order, furthermore to a reform of healthcare and education and to the improvement of the business climate (rule of law, efficiency of administration etc). The unreformed public sector still represents an enormous fiscal risk and the most recent warning came in the form of a major budget expenditure for the court cases lost due to irresponsible operation of the state enterprises undergoing restructuring. In addition, the budget structure is still very poor – Serbia holds the negative record in Central and Eastern Europe (CEE) in low expenditures on public investments, so the quality of infrastructure in the country is extremely poor. The unreformed public sector and low public investments are among the most important reasons why Serbia’s economic growth is systematically lagging behind that of other CEE countries. In the last three years alone, the GDP in Serbia has accumulated about a 10 pp gap (cumulatively) behind the other countries in the region. However, favourable fiscal trends in 2017, create the conditions needed to change this, by beginning the work on permanent regulation of public finances in Serbia. This is a rare opportunity that should not be missed.
July 5, 2017
Local Public Finances: Issues, Risks and Recommendations
Fiscal problems of local governments put the national public finances at risk, but they also slow down economic growth and lower the quality of life of Serbian citizens. The budgets of many cities and municipalities are unsustainable, while the majority of public enterprises and other institutions under local governance (e.g. pharmacies) show very poor performance. Together with their enterprises, cities and municipalities owe a debt of almost 1 billion Euros; in addition, they are late with payment of outstanding liabilities to suppliers, in the amount surpassing 300 million Euros. The failure of local governments and their public enterprises to pay their liabilities spreads the problem of the local administration to the rest of the economy, especially to public enterprises (which frequently ends up being covered from the national budget), slowing down the country's economic growth. An additional way in which poor local financial management slow down GDP growth is a systemic lack of investment - the annual gap in public investments of local governments comes to about 250 million Euros. Instead of going towards the necessary investments, these funds are mostly redirected to cover the losses of local public enterprises, which receive enormous subsidies in the total amount of about 200 million Euros per year. Perhaps the most devastating effect of disordered finances of cities and municipalities is the fact that the services that local levels of government offer to citizens are at a disconcertingly low level. In terms of access to clean drinking water, waste treatment, wastewater treatment, percentage of children enrolled into pre-schools and numerous other indicators, Serbia is lagging far behind not only developed EU countries, but also behind comparable countries in Central and Eastern Europe. Due to all of the above, we deem that the Government of Serbia would have to get involved more directly into the resolution of the local governments' largest issues - i.e. to prepare and implement a credible set of measures.
22.12.2016.
Assessment of the Law on Budget of the Republic of Serbia for 2017 and Fiscal Strategy for 2017-2019
The Budget of the Republic of Serbia for 2017 brings some improvements to the public finances of Serbia: a relatively low fiscal deficit of 69 bn dinars (1.6% of GDP) will lead to a slight decrease of public debt in terms of GDP, the budget revenues and expenditures have been credibly planned in general, while the inclusion of large infrastructural projects made the budget of the Republic of Serbia more comprehensive and transparent. Even though all these are undisputed and important improvements that the Fiscal Council supports, they are still not sufficient. The public debt of about 74% of GDP is still very high and dangerous; unsuccessful public and state-owned enterprises represent an enormous expenditure for the budget, but also a future fiscal risk. In addition, there are numerous other structural issues with public finances reflected in excessive current expenditures and low public investments, incomplete budget transparency, frequent takeover of unplanned expenditures, unsustainable position of a large number of local governments and others. The Fiscal Strategy in principal envisages good medium-term objectives for the recovery of public finances (fiscal deficit of about 1% of GDP in 2019), but does not comprise all the measures necessary for their fulfilment. Namely, the Fiscal Strategy, as the most important medium-term fiscal plan of the Government, should comprise strict reform measures to bring the public finances to order, as well as precise deadlines for their implementation. In addition, this document would have to encompass a qualitative and quantitative analysis of the largest fiscal risks, together with measures that would be enforced if any of these risks were to materialise.
14.11.2016.
Evaluation of Fiscal Trends and Structural Reforms in 2016
The budget part of fiscal consolidation is going well so far and results achieved indicate that the realization of quantitative fiscal objectives has been adequate and, in many ways, faster than planned. However, the reform part of initiated fiscal consolidation is running considerably late. Successful reforms should improve the structure of public expenditures, decrease future fiscal risks and provide support for a high and sustainable economic growth in the medium term - in other words, allow for a sustainable recovery of Serbian public finances. It is thus very dangerous that a part of the broader, and even expert public, is forming the opinion that the fiscal consolidation is practically completed, i.e. that the problems of national public finances have been resolved by the significant decrease in the general government deficit. While not diminishing the importance of the budget improvements achieved, the Fiscal Council emphasizes that the achieved fiscal result of 2016 should be observed in the light of the overall status of national public finances, which is not even close to good yet. Proper interpretation of the fiscal consolidation results achieved is all the more important when put into the context of the announced salary and pension increase in 2017, as this growth of expenditures, with all the unresolved structural problems of public finances in Serbia, could very well turn out to be premature.
28.06.2016.
Fiscal Trends in 2016, Consolidation and Reform 2016-2020
The fiscal trends in the previous year and a half, since the fiscal consolidation started, can be rated as satisfactory, as the general government deficit has been permanently decreased by over a billion Euros (over 3 pp of GDP). In addition, 2015 saw the beginning of economic activity recovery, now gradually accelerating in 2016 - additionally improving the fiscal stance. However, Serbian public finances are far from solid and the road to their complete recovery will be a long one. The greatest fiscal problem Serbia faces is the exaggerated public debt, which will amount to about 26 bn Euros at the end of 2016 (almost 78% of GDP). For a permanent recovery of public finances, the public debt would have to drop to well below 60% of GDP. In order to do that, Fiscal Council believes that a good overall goal for the new Government would be to decrease general government deficit to the level of 0.5% of GDP by 2019. Even though this goal may seem to be overly ambitious, it is achievable and can be reached mainly through structural improvements of public finances. The greatest risk to public finances, as well as the country's macroeconomic stability, stems from the three public enterprises with greatest fiscal significance (EPS, Srbijagas and Železnice) and large enterprises undergoing privatisation (RTB Bor, Resavica, petrochemical complex etc.) We thus believe that a decisive resolution of the problems/fates of these enterprises in the following six months to a year is the highest priority task for the new Government, as this could cause the public finances to cave in, undoing all the good results of fiscal consolidation in the previous year and a half.
02.03.2016.
Assessment of the Fiscal Strategy for 2016 and Issues in the Implementation of Structural Reforms
To prevent a public debt crisis outbreak, the Government faced three main tasks: 1) decrease of a vast fiscal deficit, 2) reform of unsuccessful public enterprises and 3) resolution of the fate of enterprises undergoing privatization. In summing up the results achieved so far, we consider the success, at best, as partial. Most progress was made in the fiscal deficit decrease, primarily thanks to a necessary and inevitable pension and salary cut in the public sector. The deficit is no longer enormous, it has been decreased from 6.6% of GDP in 2014 to 3.7% of GDP in 2015, but it remains unsustainable as it does not stop the public debt growth and its further decrease will not be possible without new difficult and unpopular measures. At first glance, the resolving the statuses of enterprises in privatization looks impressive - in terms of the number of companies, the majority have had their status resolved in 2015. However, these were mostly enterprises with few employees, while about two thirds of the employees still remain in enterprises with unresolved status, so in this respect as well, the greatest challenges still lay ahead. Least progress was made in public enterprise reform. Only in the case of Železnice it has been somewhat more significant, but even their reform was slowed down as soon as it hit the first painful measures (redundancy of workers). In the reform of the remaining two enterprises with the largest performance issues, EPS and Srbijagas, there has been no progress and it can rightfully be questioned whether the state has sufficient control over their operations. All things considered, the danger of a public debt crisis outbreak has been temporarily postponed but not avoided, so the fiscal consolidation and further public sector reform will have to remain a priority.
December 16, 2015
Assessment of The Law On Budget of The Republic of Serbia for 2016
The 2016 budget has been developed, in principle, in line with the three-year plan for reigning in the public debt increase, but without measures that would be strict enough to ensure fulfilment of the objectives planned for this year. The original plan for 2016 and 2017 envisaged the necessary savings primarily through two relatively powerful measures: 1) salary and pension freeze and 2) downsizing of the general state workforce. The Government, however, decided to partially suspend the first measure by unfreezing pensions and salaries in the majority of the public sector, while the second measure has been overly ambitious from the start and will not provide all the planned savings. This is why the budget for 2016 opted for some other, ad hoc measures, measures that are not optimal and/or are insufficiently well prepared - such as increase of oil derivatives excise and decrease in agricultural subsidies. In addition, unplanned fiscal expenditures for state- and socially-owned enterprises are still possible, as are expenditures from other, potentially dangerous problems that have not been put under complete control and that the state is not yet tackling head-on. It is the Fiscal Council's assessment, therefore, that the 2016 budget plan formally satisfies the requirements for permanent fiscal adjustments in this year, but that it is quite uncertain whether such a plan will indeed be realized and weather some exceptional expenditure will come up that the budget could have foreseen, if not already prevented, at the present time.
June 17, 2015
Fiscal Consolidation in 2015 and Main Challenges for Reforms
The first step of fiscal consolidation, resting on salary and pension cut, resulted in the planned state deficit decrease in 2015. In addition, tax discipline has strengthened, so the public revenue and deficit in 2015 will be somewhat better than planned. However, the key public finance issues pertaining to public and state-owned enterprises, public administration (healthcare, education, local governments etc) have not been brought under control yet. For this reason, this Fiscal Council report includes an analysis of the implementation of key public sector reforms, in addition to the analysis of current fiscal flows.
February 13, 2015
Opinion on Fiscal Strategy Draft for 2015 with Projections for 2016 and 2017
The programme presented in the Fiscal Strategy could bring a recovery of public finances, however, only if additional conditions are also met. The first one is for the fiscal consolidation to be extended to 2018, i.e. that a four-year programme replaces the three-year one. The second one is that the plan also includes contingency measures in case of a deadlock in the implementation of certain more risky parts of the programme. The third one is that it is necessary to conclude an agreement with the IMF which would monitor such a programme.The fourth one is that a more severe increase in public investments is necessary to prevent the ongoing recession jeopardize the fiscal consolidation.
February 13, 2015
Public Investments In Serbia: Supporting Growth In Fiscal Consolidation
The forthcoming fiscal consolidation shall be carried out in an adverse recessionary environment, whilst the increase in public investments is a rare economic policy which can support growth. Therefore, it must not be permitted that in 2015 Serbia once again underperforms in executing public investments, as was the case in 2013 and 2014.. We suggest increase in investments in 2015 to approximately 3.5% of the GDP, instead of the currently planned 3% of the GDP – even at the cost of slightly higher fiscal deficit. Fiscal Council's analysis shows that the adequate financial resources are in place, as well as unquestionable projects, the implementation of which would significantly improve the quality of infrastructure in the country and prevent Serbia entering a prolonged recession.
January 13, 2015
Assessment of the bill on the 2015 budget of the Republic of Serbia
The 2015 budget has introduced important measures for the permanent reduction of public expenditure by EUR 600-650 million. The most important measures involve public sector salary and pension cuts and suspended issuance of new guarantees for covering the losses of public and state-owned enterprises. However, there are still no precise plans for downsizing employment in the public sector, or for the reform of public enterprises, which may hinder the attainment of planned goals. The preliminary projections of the Fiscal Council indicate that the share of public debt to GDP will not decrease before 2018.
December 31, 2014
Budget process in the Republic of Serbia: Deficiencies and recommendations
This document analyses the most important shortcomings and deficiencies of the expenditure of budget funds in the Republic of Serbia: insufficient transparency and accounting of expenditures “below the line” for certain public enterprises and state banks so that they are not visible in the Budget Law, the omission of a large number of (quasi)fiscal institutions and agencies from the regular budget procedures, lack of a monitoring system for employees in the public sector, arrears and commitments, budget planning, as well as the absence of a credible framework for managing the budget negotiations at the technical level. We conclude that the improvement of budget process demands reforms in accordance with the best international practice that will take into account specific circumstances in Serbia, as well as the political support and development of strong human resources capacities, primarily in the Ministry of Finance.
October 27, 2014
Assessment of the bill amending the Law on the 2014 budget of the Republic of Serbia
The state-owned and public enterprises threaten to sink the public finances of Serbia. Their overall adverse effect on the public finances had been growing over the past five years and, in 2014, has reached 3% of GDP. For some companies problems can be observed even at the level of basic business results (core business is unsustainable). Liquidity of companies has been vulnerable, so the state has intervened at the cost of growth of deficit and public debt. The problems of public and state-owned enterprises are not simple and require comprehensive and long-term changes both in the enterprises and in the economy.
July 31, 2014
Analysis of state-owned enterprises: Fiscal aspect
The state-owned and public enterprises threaten to sink the public finances of Serbia. Their overall adverse effect on the public finances had been growing over the past five years and, in 2014, has reached 3% of GDP. For some companies problems can be observed even at the level of basic business results (core business is unsustainable). Liquidity of companies has been vulnerable, so the state has intervened at the cost of growth of deficit and public debt. The problems of public and state-owned enterprises are not simple and require comprehensive and long-term changes both in the enterprises and in the economy.
July 31, 2014
Fiscal developments in 2014 and basic recommendations for budget revision and medium-term adjustments 2015-2017
The danger of the outbreak of the crisis requires immediate implementation of fiscal consolidation. In 2014, the deficit will be approximately EUR 2.65 billion (8.3% of GDP), and the goal of fiscal consolidation should be reducing the deficit to below 3% of GDP in 2017 and reversing the growth of public debt. Fiscal consolidation is based on three pillars: 1) bringing in order public and state-owned enterprises, 2) reduction of unsustainable spending on pensions and public sector wages, 3) structural reforms.
November 26, 2013
Summary of the report "Evaluation of the fiscal strategy 2014-2016 and draft 2014 budget"
The seriousness of the public finances situation in Serbia demands more decisive measures than those stipulated by the Budget Law and the Fiscal Strategy. The 2014 planned deficit of 7.1% of GDP (€2.4 billion) is too high, there are still no visible developments and a clear plan for solving the problems in the biggest money losers (Srbijagas) and the medium-term adjustment plan is not supported by the measures which could result in desired savings. Although the medium-term plan sets good goals in terms of deficit reduction in general, the measures to achieve this are unbalanced and, therefore, uncredible enough.
July 04, 2013
Assessment of budget rebalance, structural reforms proposal and future fiscal trends
The Fiscal Council strongly supports the announced launch of structural reforms. However, the list of proposed reforms should include the pension reform which was unjustifiably omitted. The rebalance which reduces the budget expenditure was indispensable, but the Fiscal Council is somewhat sceptical about estimating its content. Limitation of pensions and wages indexation by the end of the following year is a fiscally responsible measure, but it will not be sufficient to reach the necessary deficit reduction in 2014.
May 23, 2013
Budget implementation, assessment of Government’s measures and Fiscal council’s proposal for public finances stabilization
Public finances in Serbia are in a very bad position. The fiscal deficit will exceed 5.5% of GDP in 2013 instead of the planned 3.6% of GDP, even with the latest Government measures for deficit reduction. The public debt which has already reached more than 60% of GDP will continue growing in both 2013 and 2014. Strong Government measures should be implemented as early as in 2013 and a credible plan for deficit reduction in the medium run. In order to achieve the first target, it is indispensable to adopt the budget rebalance as soon as possible and the rebalance will also have to include the measures for the control of public sector pensions and wages. So as to meet the second goal, it is necessary to finally start the implementation of the planned structural reforms, but also to make an arrangement with the IMF.
April 01, 2013
Assessment of Local Government Finances in 2013
Current misbalance between the resources and responsibilities at the Republican and local governments’ levels causes a deficit in the Republican budget of 25 billion RSD, i.e. close to 0.7% of the GDP at the annual level. It is necessary to eliminate this misbalance in the shortest possible time, so as to embark on a 2014 budget year with a balanced fiscal position between the Republican and local governments. The optimum approach to resolving the fiscal imbalance implies returning the excessive resources from local to Republican level.
March 11, 2013
Assessment of fiscal trends in 2012 and challenges for 2013 and 2014
Preliminary data for January and February 2013 confirm the assessments of the Fiscal Council from November last year – the 2013 deficit will exceed the planned 3.6% of GDP. We expect certain improvements in the coming months, but these will still not be sufficient to fully reverse the current trends. So as to avoid the public debt crisis, the deficit has to be reduced significantly in 2014 and there is still no plan for this. In this Report, once again, we would like to remind of the reforms which have to be launched in the first half of 2013.
November 13, 2012
Assessment of the Draft 2013 budget law
In 2013, strong state deficit reduction is planned – from 6.7% of GDP in 2012 to 3.6% of GDP (from around RSD 220 billion to RSD 132 billion). Planned expenditure reduction is not prepared well enough and the state deficit in 2013 may exceed the planned one by around RSD 25 billion (0.7% of GDP), with certain risks for further increase. It is necessary to define quarterly expenditure execution targets and adopt conditional measures which would enter into force automatically if these quarterly goals are not achieved.
Opinion on the Government's amendments
November 13, 2012
Opinion on Fiscal Strategy for 2013 with projections for 2014 and 2015
Planned deficit reduction in 2013 provides only for temporary macroeconomic stability, while the public debt crisis has not been avoided yet. Draft Fiscal Strategy envisages fiscal deficit reduction as of 2014 exclusively by public expenditure reduction, but there is no planned additional increase in public revenue. However, the given program on how to achieve the reduction is not good enough. The Fiscal Council proposes a more detailed and longer list of concrete measures to the Government.
September 13, 2012
Assessment of the 2012 supplementary budget and draft laws including fiscal effects
The current alarming state of public finance in Serbia demands decisive fiscal policy measures. Unfortunately, the government’s first response to this alarming situation, the supplementary budget, is ineffective although the structural measures related to tax policy and reduction of pension and wage growth are essentially good. If Serbia is to avert a debt crisis in the next few years, deficit reduction (fiscal consolidation) must be dramatic. Of the three groups of measures that can help avoid a public debt crisis, the Government has launched two.
May 30, 2012
Fiscal Consolidation
Serbia is approaching a crisis of public debt which may even occur by the end of this year. Prevention of the crisis requires immediate measures; first, for it to be halted, and second, for the rehabilitation of public finances. The program of fiscal consolidation as advanced in this document suggests measures for addressing immediate problems in 2012 and 2013 and contains policy reforms which in the mid-term period (2014-2016) enables the consolidation of public finances, yielding significant decrease of public debt and reduction of general government deficit practically to zero.
March 30, 2012
An Assessment of the Program Measures to Maintain the Fiscal Deficit of the Republic of Serbia
Fiscal Council supports any effort by the government of RS to reduce the budget deficit, but we estimate that the planned Program of measures for stabilizing the fiscal deficit will not provide sufficient savings even if fully implemented; probably the effects of these measures will be smaller than anticipated.
February 24, 2012
Proposal for Harmonizing Different Methodologies of Public Debt Coverage and Measurement in Serbia
Fiscal Council holds that it is necessary to harmonize the Public Debt Law and the Budget System Law with respect to different capture and measurement of the public debt, so that such single calculated value of public debt can be in official use by all relevant government institutions. For this reason, we have conducted a research the purpose of which was to offer a proposal for improving Serbia’s public debt capture and measurement methodology. The basic criteria used in forming the proposal were the economic justification and compliance with the current international standards.
February 21, 2012
Assessment of Fiscal Rules Compliance in 2011
The Fiscal Council holds that: 1) the general fiscal rule concerning the public debt level was violated; 2) the general fiscal rule concerning the government deficit level was not fully accomplished; and 3) the special fiscal rule determining the pension and public sector salaries trend was accomplished. Violation of the fiscal rule concerning the public debt poses the greatest threat for Serbia’s public finance since the debt has not only exceeded the legal limit of 45% of GDP but it will continue to grow in the medium term. The 2011 fiscal deficit was by 5 billion dinars in excess of the limit permitted by the fiscal rules. The real problem is not the slight increase of the 2011 deficit level but in establishing unfavorable trends of fiscal revenues. It is for this reason that the Fiscal Council is assessing that further adjustment of 1% of GDP will be necessary.
December 23, 2011
Evaluation of the fiscal strategy report and Draft 2012 budget law
The envisaged fiscal deficit of 4.25% of GDP (153 billion dinars) is in conformance with the fiscal rules; there are, however, pronounced risks of the planned deficit overshooting. The Fiscal Council’s assessment is that at the close of 2011 the public debt will most probably be above the legal limit of 45% of GDP. There are strong prospects for the real growth of GDP to be lower in the next year than the planned 1.5%. In the medium run, lasting sustainability of public finance requires fiscal adjustment by 4.5 to 5 p.p. of GDP.
November 10, 2011
Fiscal Council Press Release on the Establishment of the 2012 Fiscal Framework
Bearing in mind slower pace of economic activity in the Euro zone and current economic trends in Serbia, the Fiscal Council reduced the economic growth projection for 2012 from 3% to 1.5%. In line with the fiscal rule on budget deficit, the given modification would result in the increase of the allowed 2012 deficit from 3.9% of GDP as originally planned to 4.5% of GDP. However, the consequences of the lower economic growth will for sure include the overrun of the public debt limit of 45% of GDP in 2012 which was defined by the law. For this reason, the Fiscal Council believes the 2012 deficit should be below 4.5% of GDP.
September 29, 2011
Assessment of the Proposed Revised Republic of Serbia Budget for 2011
Fiscal Council assesses that the proposed Republic of Serbia budget deficit increase by 22 billion dinars is in accordance with Fiscal Rules and Budget System Law. We positively assess the fact that deficit increase is not driven by the increase in expenditures, but is driven by the drop in revenues due to slowing of economic activity. We negatively assess the change in the composition of expenditures – whereby current expenditures have been increased at the expense of capital expenditures, which had been reduced by 8 billion dinars, from 32 billion to 24 billion dinars. We confirm that expenditures for public sector wages and pension had been budgeted in accordance with the indexation formula prescribed by the Fiscal Rules and the Budget System Law. Fiscal Council has identified risks that revenues might underperform, due to possible additional slowing down of economic activity by the end of the year.
June 8, 2011
Analysis of the Fiscal Effects of the Draft Decentralization Law proposed in the Serbian Parliament by “Ujedinjeni Regioni Srbije”
We assess that the proposed model of fiscal decentralization would annually increase the budget deficit by 1.1% of GDP, or by about 40 billion dinars in 2012. Thus, the proposed model is not fiscally sustainable and its adoption requires considerable fiscal adjustment of 1.1% of GDP at the central government level. Otherwise, adopting the proposed decentralization model would seriously breach the Fiscal Rules, budget deficit in 2012 would be by one third higher than allowed – which would disrupt fiscal sustainability and macroeconomic stability.
