The public finances of Serbia are in a decent state; the main budgetary expenses are under control, and taxes are collected regularly. However, in 2023, the state significantly increased its debt at a high interest rate.
The country’s borrowing will cost 1.5 billion euros this year, said Danko Brčerević, the chief economist of the Fiscal Council.
“Unconventional state expenses that should not be part of the regular budget significantly influenced the state’s borrowing. One such expense was the aid to Srbijagas, over 500 million euros, partly directly from the budget and partly through guaranteed loans, which also increased public debt,” Brčerević stated.
Another reason for the state’s borrowing was, as he mentioned, the extraordinary payment of aid to citizens, which is economically and socially questionable – 20,000 dinars to all pensioners, 10,000 dinars for children up to 16 years old, and 10,000 dinars for high school students.
He emphasized that due to these expenditures, which “exploded” before the parliamentary and local elections on December 17, the state significantly increased its debt in 2023 more than necessary.
Brčerević mentioned that around 1.3 billion euros were spent from the budget in 2023 on loan interest, and due to new debt and rising interest rates, in 2024, even more will be paid, around 1.5 billion euros.
“These are enormous, unproductive expenses that clearly show the need for more rational and moderate borrowing by the country in recent years, especially regarding the indiscriminate distribution of money to citizens,” Brčerević said.
Public debt lower than planned
“He added that Fiscal Council analyses confirm that the budget deficit and public debt in 2023 will be somewhat lower than planned. The initial plan was for the budget deficit to be 2.8 percent of the Gross Domestic Product (GDP) or 1.9 billion euros.
“Now, the President (Aleksandar Vučić) says that the budget deficit will be around 2.3-2.4 percent of GDP or 1.6 billion euros. Similarly, instead of the planned public debt of 53.3 percent of GDP or 36.8 billion euros, it is now expected that the debt will be around 52.5 percent of GDP, or 36.3 billion euros. This is positive, but the improvements are still moderate. It wouldn’t surprise me if the year-end results turn out slightly better than the President’s recent expectations,” said Brčerević.
He mentioned that the Fiscal Council maintains the assessment that a lower deficit of 2.2 percent of GDP should have been planned for 2024.
This, according to him, is easily justifiable because around half of the fiscal deficit from 2023 comprises extraordinary expenses such as aid to Srbijagas, Elektrodistribucija Srbije, and support to the population, which should not continue into 2024.”
“During 2023, there was a significant increase in gas and electricity prices,” he said, “so in 2024, budgetary support to energy companies will be eliminated or drastically reduced, and new non-selective cash handouts to the population have not been announced for 2024. This economic policy measure should not continue.”
He added that the economic growth in 2023, according to the latest data, will be around 2.5 percent of GDP, which, given the circumstances of global instability and high interest rates, could be interpreted as a solid result.
Countries in Central and Eastern Europe (CEE) that are comparable to Serbia will have an economic growth of less than one percent in 2023, he said, but attention should also be drawn to the fact that a good part of Serbia’s economic growth in 2023 is due to specific circumstances.
“Agriculture saw a high growth of around 10 percent compared to the drought in 2022, and there is also high growth in electricity production due to very favorable hydrological trends and comparison with the low base of 2022 when EPS (Electric Power Industry of Serbia) had significant problems. Without these extraordinary factors, Serbia’s GDP growth would be similar to that of comparable countries,” said Brčerević.
State funds distributed to the wealthier population
“One of the reasons for high inflation in Serbia, according to Brčerević, is the significant fiscal spending.
“Instead of directing state funds only towards the most vulnerable, they were unjustifiably distributed to wealthier citizens, which fueled inflation. With further reductions in the fiscal deficit, favorable international trends, and appropriate policies by the National Bank of Serbia, a substantial slowdown in inflation in Serbia in 2024 is almost certain,” he said.
He stated that the dinar’s exchange rate is realistic, and there is no fear of a significant drop in its value in the short term.
He assessed that the increase in pensions and public sector salaries planned in the 2024 budget is in line with the law and based on realistic grounds.
“However, the extraordinary increase of 5.5% in pensions in October 2023 was problematic, as it was not grounded in actual economic results and the prevailing legal regulations,” stated Brčerević.”
“He reminded that the same decision was made in 2008 when, due to political pressure from PUPS (Party of United Pensioners of Serbia), pensions were raised exceptionally twice, by 11% and 10%, not due to economic growth. Consequently, the total increase in pensions exceeded 35%, which led to budget collapse, and pensions were subsequently reduced in 2014.
“The extraordinary pension increase from October 2023 is far less than that in 2008 and therefore will not fundamentally jeopardize the budget. However, it is very dangerous that the pension growth in Serbia is again determined arbitrarily, rather than according to the law and objective economic principles,” said Brčerević.”
Construction of stadiums or investment in healthcare and education
“There is room for greater allocations in healthcare and education provided that the budget is managed responsibly”.
“The state should precisely invest in these areas, rather than arbitrarily distributing money to selected groups of citizens or ‘pouring’ it into unsuccessful state-owned enterprises,” said Brčerević.
He mentioned that priorities for selecting state projects should be re-examined and questioned whether Serbia needs the construction of football stadiums rather than investment in healthcare and education.
Regarding environmental protection, as he stated, insufficient investment has been made for decades, and the situation is, without exaggeration, catastrophic.
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