A few days ago, the Fiscal Council issued a new report on the effect of the health crisis on economic and fiscal developments, with recommendations for future fiscal policy. What are the expectations of the Fiscal Council on the consequences of the crisis for the Serbian economy and what are the future steps that the Fiscal Council recommends?
The Fiscal Council estimates that the COVID-19 pandemic will affect the reduction of economic activity this year by about 3%. However, they also clearly say that the situation is still difficult to see, so these projections should not be taken as something written in stone, but as the most probable outcome of the situation at the moment. As we will be able to better understand the situation over time, revisions of these projections are possible.
After a 5% growth in the first quarter of this year, the Fiscal Council expects economic activity to fall by 5% for the rest of the year, which would be equivalent to the already mentioned 3% annual decline. Compared to other European economies, this is a significantly smaller decline in economic activity, and the Fiscal Council sees the cause for this primarily in the structure of the economy, and not in good economic policy. Our economy has a significantly higher share of agriculture and food industry in total production, for whose products the demand did not fall during the crisis. On the other hand, in developed European countries, the share of services and goods with a higher rate of added value is much higher where demand has fallen (for example, the automotive industry, machinery and equipment, tourism), so production will decrease significantly.
The Fiscal Council estimates that this extent of the crisis will result in a drop in employment from 1% to 1.5%, which would mean a loss of between 30,000 and 50,000 jobs. For now, these data on unemployment are not visible, as the state has activated a program to help the economy, which postponed the reduction of the number of employees until the fall (otherwise employers would have to return the received funds for salary support), but also because data on informal unemployment are published with delay. It is expected that workers in the informal economy will be the first to be affected.
The Fiscal Council estimates that the budget deficit in 2020 will amount to 7% of GDP, although other state aid programs to the economy are not included in public expenditures, because they were not publicly announced at the time of publishing this report. Therefore, the deficit is very likely to be higher than this amount, and public debt will certainly exceed the threshold of 60% of GDP (it was 53% at the beginning of the year).
Regarding some other program of state support to the economy, the Fiscal Council is very cautious and points out that there are important things that need to be thought through beforehand. First, while the first program was prepared as an emergency, so there was not much time or opportunity for some more detailed analyzes, so the program was intended for everyone, now the situation is different. It was time to look at the situation in more detail, and therefore the new program should be focused only on those who need that help, and not on everyone.
The main recommendation of the Fiscal Council is the continuation of responsible fiscal policy, which would mean a rapid reduction of the deficit in the next year to 2% of GDP, in order to stop the growth of public debt. High public debt also means high interest expenses, and interest rates on Serbian bonds are significantly higher than in other European countries. The Fiscal Council states that Germany has the same level of public debt as Serbia (around 60% of GDP), but that it pays only 0.8% of GDP per year for its servicing, and Serbia 2%. This level of deficit of 2% of GDP would stop the growth of public debt and thus bring public finances into balance, and in the medium term it should strive to reduce it to -0.5%.
How to reduce this deficit? A significant part of the costs incurred this year is of a temporary nature (state aid to the economy), so they will not be there next year. Therefore, it is necessary to bring the deficit under control not by increasing taxes (since we are already in a bad economic situation), but by reducing government expenditures. On the other hand, the Fiscal Council clearly states that the control of costs must not go through public investments (we need them to support economic growth), but through the control of expenditures for pensions and salaries in the public sector. Also, these costs grew significantly more than was economically justified – wage growth of 10% was too high even if the economic growth was 4%, let alone now when there will be no economic growth. Salaries in the public sector should not be reduced for now, but they should not be increased during the next year. Not only have public sector wages been increased recently, but these employees do not face the problems of private sector workers awaiting wage declines and layoffs, who pay their taxes to the public sector.
Pension growth control should be implemented by modifying the “Swiss formula” currently in force. The current solution says that pensions are adjusted to 50% of the value of price growth and 50% of average wage growth, and the Fiscal Council recommends that this ratio be changed to 75% of price growth and 25% of average wage growth. As for where to find funds for infrastructure investments, the recommendation is to save on security sector expenditures. These funds are not economically productive and have been high over the past few years, as much as 3 times higher than other Central and Eastern European (CEE) countries. Not only the overall level of investments is important, but also where they will be placed – increased investments should be directed to health, communal infrastructure, education and environmental protection.
A special part of the report is dedicated to the state of health, as a priority for public investments. The report details various metrics by which Serbian healthcare lags behind systems in CEE countries, such as the number of scanners, magnetic resonance imaging and other important equipment. The situation is not better in human resources either: we have fewer doctors (by about 20%), and among them we have significantly fewer specialists compared to the countries of Central and Eastern Europe. That is why we should not be surprised by the long waiting lists for a large number of diagnostic examinations and surgical interventions, and it is especially worrying that in previous years these waiting lists have been extended, instead of shortened. All this is a consequence of two decades of low investments in health care – sometimes due to lack of money, but sometimes without clear reasons, as was the case with the reconstruction and construction of clinical centers, when loan funds stood unused for years, Talas reports.
