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Guidance for the Incoming Administration: Navigating Priorities and Challenges in the Early Days of Governance

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The elections are long over, the Parliament has just been constituted, and the time for voting on the new government is approaching. This government will, in all likelihood, be the same as the old one. Perhaps a few faces will change, just to freshen things up a bit, but the basic political principles will remain the same. Therefore, one should not expect any significant policy changes compared to the previous ones. But hope dies last.

Here is a list of common-sense economic recommendations for the new government, what should be done to improve our situation.

Public Finances – Savings

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Public finances are not in a very bad state, but they are also not as great as the finance minister wants to portray. It is true that the level of public debt relative to GDP has decreased, and it amounted to 53% of GDP at the end of the year, which is roughly the pre-pandemic level.

However, it still amounts to 36.4 billion euros, or about 5,430 euros per capita. With the rising cost of capital over the past two years, interest on our public debt has significantly increased. Borrowing is now much more expensive: while we used to borrow at interest rates below 2% (or even as low as 1% for green bonds issued in 2021), a year ago, we had to accept an interest rate of 6.5%.

Additionally, every year, the principal of previous debts comes due, so to repay them, we take on new debt. This is nothing new or unusual in public debt financial management, but it means that the borrowing needs are much more than just the deficit, which is merely the increase in public debt. This year, bonds worth almost 1.4 billion euros are due for repayment, and this needs to be added to the deficit of 1.7 billion euros.

In this year’s budget, it is planned to allocate just over 2% of GDP, or 1.6 billion euros, for interest payments. This represents a return to the previous levels of these expenses before the flood of cheap money during the pandemic. Therefore, it is necessary to be frugal because every borrowed euro must be repaid with interest. The deficit needs to be reduced, ideally to around 0.5% of GDP, to create fiscal space for challenging times. Unfortunately, the revised Fiscal Strategy predicts that the deficit will remain relatively high in the coming years, around 1.5% of GDP until 2026.

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It is clear that in such a situation, any further programs providing funds to broad groups of citizens (young, old, those with blue eyes, or classical music enthusiasts) without income verification should not continue. These expenditures must be within the framework of existing social policies.

More Attention to Healthcare and Education

During the past two decades, insufficient attention has been given to education and healthcare as vital social systems that also impact economic parameters through the creation of human capital. Expenditures on healthcare are somewhat higher than in neighboring countries (measured as a percentage of GDP), but a more significant issue is the poor quality of public healthcare, as citizens end up paying out of pocket for most costs. This means they cannot access the desired treatment within the public healthcare system, leaving the poorest ultimately without healthcare since they cannot afford private care.

Investments in healthcare facilities and accompanying equipment are commendable, but they make little sense without adequate attention to the development of human resources, especially considering the shortage of various specialists (e.g., anesthesiologists). The departure of experienced medical professionals abroad poses a serious challenge, as it interrupts the transfer of knowledge from older to younger workers. Not enough attention is given to preventive measures, resulting in the treatment of advanced diseases, carrying not only higher financial costs but also uncertain outcomes.

Education has also been neglected for several years. The low level of investment – Serbia allocates about 3.1% of GDP to education, while EU countries spend twice as much, 4.8% – is reflected in low achievements on international exams like the PISA test, where even 40% of our students do not reach the basic level of literacy. Compared to their peers, our 15-year-olds have knowledge as if they attended school 1.5 years less.

Recruiting new teachers and improving the quality of the existing staff is a serious problem, as well as the lack of incentives after entering the education system. Besides the quality of education, low coverage remains an issue: almost 5% of children do not start elementary school at all. Economic growth in a modern knowledge-based economy cannot be imagined without educated people.

Improvement of Public Administration Performance

The state relies on the shoulders of public administration. Without effective public administration, the state is deaf, blind, and mentally lagging behind. Public administration should not only create new laws (through the process of drafting legislative solutions to be adopted by the Parliament) but also implement these laws in practice, identify shortcomings and ambiguities, and rectify them. It should then create, implement, and evaluate public policies.

Achieving all this is an unattainable goal with a public administration that is not professional due to decades of nepotism and party interference in staffing through the hiring and promotion process. Public administration is not motivated due to a flawed incentive system and issues related to staffing levels and wage disparities.

The ban on public sector employment, introduced a decade ago, is still in effect, leading to serious shortages of staff in certain sectors (inspections, tax administration, etc.), while in some job categories, there simply aren’t enough personnel due to significantly lower salaries in the public sector compared to similar positions in the private sector. The employment ban should be lifted, accompanied by a clear job classification and salary policy that will standardize standards across the public administration. Currently, salaries not only depend on competence and job responsibilities but often also on the institution in which someone is employed.

Let’s not forget that the question of the quality of public administration is also connected to other important aspects of state functioning. For example, during the first three quarters of the previous year, we paid around 7.5 million euros in commissions for unused credit funds, with almost half of that amount going to the Chinese EXIM Bank, which finances infrastructure projects.

The delay in withdrawing funds is a consequence of delays in infrastructure works because machines cannot simply be started, and digging cannot begin; it is necessary to complete land expropriation and project documentation beforehand. And this cannot be done within the set frameworks with weak administration.

Similarly, if not worse, is the situation with court costs. Due to the poor performance of public administration, citizens and businesses often resort to protecting their rights before both domestic and international courts. In 2022 alone, around 200 million euros were spent on these purposes, while the figures for the previous year are still being tallied but are unlikely to deviate significantly from that.

Public Investments – Only with a Clear Cost-Benefit Analysis

Public investments in infrastructure are already at an admirable level of almost 7% of GDP. At a time when there are also high private investments in construction, there is no point in boosting economic growth by increasing public investments in physical infrastructure. Instead, more attention should be paid to their quality. Too much focus is given to road infrastructure at the expense of communal infrastructure, even though indicators related to the quality of drinking water, wastewater collection and treatment, and overall waste management are very poor. Air pollution, as a result of an underdeveloped district heating system and gas pipeline network, is also a serious health issue.

In a situation of frequent project deadline overruns and inexplicable cost increases, clear prioritization is necessary. Only infrastructure projects that bring clear economic and social benefits should be undertaken. These studies and analyses should finally be made available to the interested professional public, rather than project selection being approached without a clear strategy and goal.

Reducing Tensions – External and Internal

Finally, there is no economic development in an environment with high political risks. Social tensions, both domestic and external, need to be reduced through dialogue, negotiations, and respect for agreements. On the domestic front, this means overcoming the political crisis by improving electoral conditions, and on the external front, resolving open bilateral issues with other countries in the region, as well as further progress in regional initiatives such as the Open Balkan and Berlin Process.

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