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2008 Budget Revision and Fiscal Policy Guidelines for 2009

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Title: 2008 Budget Revision and Fiscal Policy Guidelines for 2009


1
2008 Budget Revision and Fiscal Policy Guidelines
for 2009
  • Minister
  • Dr Diana Dragutinovic

2
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!

3
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

4
Assumptions for realization of macroeconomic
objectives
  • 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
    investments
  • building a modern transport, energy and
    telecommunications infrastructure

5
Macroeconomic projections
6
Major macroeconomic risks
  • Continued expansion of domestic demand, realized
    through
  • rising current expenditure
  • pension increase
  • subsidies etc. increase
  • rising wages
  • rising credit activity
  • planned high investment growth
  • Continued global market crisis

7
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
    inflation
  • A considerably lower inflow of foreign loans and
    direct investments would result in declining
    investments and decelerated economic growth of
    Serbia
  • Unfavorable situation on the global financial
    market would complicate financing of the fiscal
    deficit and realization of infrastructure
    projects in Serbia

8
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
    employment

9
METHODOLOGICAL NOTES
  • To measure overall fiscal results, we will use
    the standard methodology (comprehensible
    worldwide) that enables comparisons with other
    countries
  • 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
    license)
  • underestimated regular expense (soft loans, debt
    to pensioners, etc.)
  • made the total fiscal result better!

10
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
    GDP
  • 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
    transitions
  • 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

11
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12
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13
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
    developments

14
2008 Budget Revision
15
Financing of the Republic of Serbia budget
deficit and debt repayment in 2008
16
  • 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
    observed!)

17
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

18
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

19
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
    fraud

20
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

21
Conclusions
  • 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
    surplus,
  • 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

22
Conclusions
  • 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

23
Conclusions
  • 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
    liabilities.

24
Conclusions
  • 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
    jurisdiction.
  • Major tax rates cannot be reduced in the coming
    period
  • 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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