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2008 Budget Revision and Fiscal Policy Guidelines for 2009


... of branches has average and above average growth) ... which is far above the average of countries in transitions. and meets the Maastricht requirement ... – PowerPoint PPT presentation

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Title: 2008 Budget Revision and Fiscal Policy Guidelines for 2009

2008 Budget Revision and Fiscal Policy Guidelines
for 2009
  • Minister
  • Dr Diana Dragutinovic

Assessment of latest macroeconomic trends
  • Fast economic growth
  • Average growth rate over the past three years was
    6.5, expected growth this year is around 7
  • The growth is relatively widely diversified (a
    large number of branches has average and above
    average growth)
  • Export grows at around 25 rate and is also
    highly diversified
  • But with large imbalances
  • current account deficit last year was 14.7 of
    GDP it will reach some 18.4 this year
  • external debt is around 60 of GDP,
  • y-o-y inflation at the moment is 9.5, it will
    probably be slightly lower
  • This growth model is unsustainable in the long!

Macroeconomic outlook for 2009
  • Positive tendencies in Serbian economy are
    expected to continue
  • 6.5 GDP growth
  • inflation rate declining to 6-7
  • cutting unemployment rate by 0.8 percentage
    points of GDP
  • cutting current account deficit by 0.6 percentage
    points of GDP

Assumptions for realization of macroeconomic
  • Accelerating reforms toward building a complete
    market economy
  • Continued European integrations
  • A counter-cyclical combination of monetary and
    fiscal policy that would lead to
  • cutting the inflation to 4 in 2012
  • reducing current account deficit
  • Raising investments rate to 25-27 annually
    (EUR8-10 billion annually)
  • creating a favorable climate for private
  • building a modern transport, energy and
    telecommunications infrastructure

Macroeconomic projections
Major macroeconomic risks
  • Continued expansion of domestic demand, realized
  • rising current expenditure
  • pension increase
  • subsidies etc. increase
  • rising wages
  • rising credit activity
  • planned high investment growth
  • Continued global market crisis

Potential effects of the global financial crisis
on Serbia
  • Dynamic economic growth, with relative
    macroeconomic stability, is sustained due to
    foreign capital inflow in the form of loans and
    foreign investments amounting to at least 18 of
    GDP (EUR 6-7 billion)
  • A considerable and lasting drop in capital inflow
    would cause a crisis on the forex market and in
    the balance of payments
  • Forex market destabilization may accelerate
  • A considerably lower inflow of foreign loans and
    direct investments would result in declining
    investments and decelerated economic growth of
  • Unfavorable situation on the global financial
    market would complicate financing of the fiscal
    deficit and realization of infrastructure
    projects in Serbia

The role of fiscal policy in realization of
macroeconomic objectives and risk minimization
  • Fiscal policy should
  • Contribute to lowering of the aggregate demand,
    which is vital for reducing inflation and foreign
    deficit and maintaining foreign and public
    deficit within sustainable framework
  • Contain the current expenditure, which is of
    vital importance wages, pensions, subsidies,
    soft budget loans etc.
  • Use public investments and tax and other
    incentives to contribute to increase of economic
    activity, higher employment and reduction of
    regional differences
  • Use regulatory reform to create a more favorable
    climate for growth of private investments and

  • To measure overall fiscal results, we will use
    the standard methodology (comprehensible
    worldwide) that enables comparisons with other
  • However, it is wise to be conservative and not
    creative when applying the standard methodology
    on a non-standard case
  • The previous methodology on average
  • overestimated regular revenue (mobile telephony
  • underestimated regular expense (soft loans, debt
    to pensioners, etc.)
  • made the total fiscal result better!

Assessment of Serbias fiscal performances
  • Fiscal burden and government expenditure in
    Serbia are high
  • revenue at 42.7 of GDP, expenditure at 45.4 of
  • Government expenditure and revenue to GDP ratio
    in Serbia are
  • slightly above the level of Central European
    countries, whose level of development is two
    times higher than Serbias
  • considerably higher than in countries that are at
    the same level of development as Serbia
    (Bulgaria, Romania...)
  • Fiscal deficit in Serbia
  • spans between 1.5 and 2.7 of GDP,
  • which is far above the average of countries in
  • and meets the Maastricht requirement
  • ... but is inadequate for Serbian economy
  • because of the high domestic private demand
  • because of the need for large investments, though
    domestic saving is low

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Reasons for 2008 Budget Revision
  • New priorities of the new government
  • accelerated building of infrastructure
  • financial incentives for strategic investments,
  • improving situation of pensioners,
  • financial assistance to talented persons etc.
  • Part of the priorities has already been
    formalized through regulations and agreements
  • Decree on Extraordinary Pension Increase
  • Agreement with FIAT
  • Agreements with infrastructure contractors
  • Decree on Talented Persons
  • Aligning the budget with macroeconomic

2008 Budget Revision
Financing of the Republic of Serbia budget
deficit and debt repayment in 2008
  • The political agreements left little room for
    managing a sustainable fiscal policy
  • However, proposed Revision is a reasonable
    compromise in the given political circumstances
    (reasonable, because fiscal rules have been

Macroeconomic consequences of the budget revision
  • Revenue/GDP ratio increased by 0.4, expense/GDP
    ratio rose by 0.6, while deficit/GDP ratio grew
    by 0.2
  • The Revision has not increased considerably the
    expansiveness of the fiscal policy, but it was
    realized in an atmosphere of high demand and
    overheated economy
  • It is necessary to take the turn toward cutting
    the share of government expenditure and fiscal
    deficit in GDP as of 2009 already

Macroeconomic frameworks for a sustainable fiscal
policy in 2009
  • Cutting consolidated government expenditure from
    45.4 of GDP in 2008 to 44.3 of GDP in 2009
  • Reducing the fiscal deficit from 2.7 of GDP in
    2008 to below 2 of GDP in 2009
  • Considerable change in the structure of
    government expenditure toward increasing the
    share of public investments (Corridor 10 etc.)
  • Enhancing government spending management
  • Continued tax system reforms

Fiscal policy measures government revenue
  • Objectives to continue tax reforms and tackle
    tax evasion
  • Aggregate result of changes to tax legislation
    every year should be revenue-neutral or positive
  • Tackling the grey economy
  • Nonselective combating of classic forms of
    evasion (smuggling, black labor market),
  • Streamlining regulations in order to tackle new
    forms of fraud,
  • Enhancing the coordination between the Ministry
    of Finance, Ministry of Internal Affairs and the
    Prosecutors Office in exposing and sanctioning

Fiscal policy measures government expenditure
  • Real wage bill growth around 2 in 2009
  • Cutting the expenditure on goods and services
    from 7.2 of GDP in 2008 to 6.7 in 2009
  • Cutting the share of subsidies in GDP from 2.8
    in 2008 to 2.6 in 2009
  • Reducing budget borrowing and recapitalization
    from 0.9 of GDP in 2008 to 0.7 in 2010
  • Redirecting savings made on subsidies, lending
    and recapitalization to public investments,
    primarily to Corridor 10.
  • Directing at least 50 of the NIP towards
    financing of Corridor 10

  • Continued fast economic growth calls for reducing
    internal and external imbalances to a sustainable
    level, meaning
  • gradual reduction of government expenditure
    relative to GDP,
  • moving from a fiscal deficit into a fiscal
  • restrictive monetary policy...
  • It is macroeconomically unsustainable to increase
    synchronously expenditure for
  • pensions,
  • investments into infrastructure,
  • incentives for strategic investments,
  • start-up loans,
  • farm subsidies,
  • population policy,
  • science,
  • environmental protection etc.
  • Therefore, we need to establish priorities within
    a macroeconomically sustainable fiscal policy

  • In the area of fiscal policy, it is vital to
    define priorities on the expenditure side
  • Establishment of priorities entails that
  • some projects are realized entirely,
  • while others are realized only partly,
  • realization of some projects is postponed for a
    particular period of time,
  • some projects are abandoned.
  • The criteria for project selection should be
    their potential contribution to economic and
    social objectives defined in the Memorandum, the
    Prime Ministers exposé and coalition agreements
  • The result of projects/plans selection should be
    a lower share of government expenditure and
    fiscal deficit relative to GDP

  • Any attempt to realize all election campaign
    promises and all demands of budget beneficiaries
    and interest groups would result in a higher
    fiscal deficit.
  • It is very unlikely that the deficit could be
    financed because
  • expected privatization receipts are modest,
  • domestic financial market is underdeveloped,
  • the end to the global financial crisis is nowhere
    in sight,
  • Serbias credit rating is low and would be even
    lower with such a policy.
  • Due to inability to provide funds to finance the
    deficit, there would be delays in settling the

  • For a successful realization of the Governments
    economic objectives, all coalition members need
    to assume responsibility for the governments
    overall results, and not only for results in
    their line ministries.
  • Teamwork would entail relinquishing the previous
    practice of various ministries autonomously
    undertaking obligations, without consulting the
    Ministry of Finance and the government.
  • It is necessary that all ministries introduce
    rigorous savings measures and to make a
    rationalization plan of revenues within their
  • Major tax rates cannot be reduced in the coming
  • Within the EU accession process, Serbia will lose
    around 1 of GDP in customs duty revenues over
    the next 2-3 years.
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