Serbia’s fiscal position in the first quarter of 2026 reflects a decisive shift toward expansionary policy, driven by both structural spending commitments and counter-cyclical measures. While revenue performance remains relatively stable, expenditure growth has accelerated significantly, resulting in a widening fiscal deficit and raising questions about medium-term sustainability.
In the first two months of 2026, the budget recorded a deficit of RSD 70.5 billion, representing a year-on-year increase of RSD 44.8 billion. Extrapolating into a 1Q framework, the trajectory points toward a material deterioration in fiscal balance, particularly when compared to the more contained deficits observed in 2025.
Revenue growth remains modest but positive. Total budget revenues increased by 3.5% in real terms, supported primarily by non-tax revenues, corporate income tax, and donations. Corporate tax revenues reflect residual profitability from strong sectors such as automotive and services, while non-tax revenues indicate administrative and institutional inflows rather than underlying economic acceleration.
However, key consumption-linked revenues show signs of weakness. Value-added tax, excise duties, and customs revenues declined, suggesting softening consumption dynamics and reduced import volumes. This aligns with the broader macro picture of import compression and shifting demand patterns.
On the expenditure side, the expansion is far more pronounced. Total expenditures grew by 15.2% in real terms, driven by a combination of capital spending, social transfers, and public sector wages. Capital expenditures alone increased by 41.2%, indicating an acceleration of infrastructure and investment projects.
Transfers to social security organizations rose sharply, reflecting demographic pressures and policy decisions to support household incomes. Public sector wages also increased, contributing to aggregate demand but simultaneously embedding structural rigidity in the expenditure base.
Monthly dynamics reveal additional volatility. January saw a significant spike in expenditures, followed by partial normalization in February. However, the overall pattern suggests front-loaded fiscal expansion, which could persist throughout the year depending on political and economic priorities.
A notable aspect of the fiscal structure is the divergence between revenue and expenditure growth. While revenues are expanding at a moderate pace, expenditures are accelerating rapidly, creating a structural gap that is unlikely to close without policy intervention.
From a financing perspective, this widening deficit coincides with weaker capital inflows, as evidenced in the balance of payments. This raises the likelihood of increased reliance on domestic borrowing and external debt issuance, potentially at higher costs given the global interest rate environment.
The composition of spending also warrants attention. While capital expenditures can support long-term growth, their efficiency and execution remain critical variables. At the same time, rising current expenditures, particularly wages and transfers, reduce fiscal flexibility and increase vulnerability to shocks.
In a 1Q 2026 context, Serbia’s fiscal policy can be described as pro-growth but increasingly constrained. It supports domestic demand and offsets industrial weakness, but at the cost of rising deficits and reduced fiscal space.
The broader implication is a transition toward a demand-supported growth model, where fiscal policy plays a central role in sustaining economic activity. This model is viable in the short term but requires careful calibration to avoid crowding out private investment and undermining macro stability.
