The good things about the budget are the relief of the economy due to the reduction of tax obligations for wages, as well as the retention of high capital expenditures for infrastructure, and the introduction of new fiscal rules. The bad features are the growth of subsidies for state enterprises, high expenditures for the security sector, as well as perennial problems with the non-transparency of individual appropriations.
There are major fiscal risks stemming from the work of state-owned enterprises in the energy sector, and an increase in expenditures for their functioning is possible, which will depend on the energy situation during the heating season.
Energy as the biggest challenge for the budget – macroeconomic projections and risks
The budget is based on projected economic growth of 2.5%, which will primarily be based on the growth of domestic private consumption, as well as on annual inflation of 11.1%. The growth rate is in line with the projections of international institutions, while the inflation rate is slightly higher but in line with the projections of the National Bank. If these higher inflation rates do not materialize ie. if inflation slows more quickly, there may be lower public revenue from consumption taxes.
However, the main fiscal risks are not on the revenue side, but on the expenditure side of the budget, primarily in companies from the energy sector. Whether these risks will come to pass remains to be seen, and a lot will depend even on the meteorological situation, as well as on the energy situation on our continent. We will have to import a significant amount of electricity from Europe during the upcoming heating season, since we will not be able to produce sufficient quantities from our own capacities due to the poor condition of EPS, which has not yet recovered from last year’s accidents.
This entails an increase in the consumption of gas for the production of electricity from gas power plants, and those larger quantities of gas than those that were purchased and stored will be paid for at higher stock prices because they are outside the gas arrangement. Those quantities of electricity and gas will be paid at high stock exchange prices, while domestic consumers will be sold at lower prices, and that difference must be transferred to the budget.
For now, at least 300 million euros in energy subsidies are foreseen, but this amount can easily be even higher, provided that there are no new surprises in this area. In addition, there is one billion euros for the import of energy products, but they do not go as subsidies through the accounts of public companies, but directly from the state budget.
Increase in salaries and pensions
Salaries in the public sector will increase by 12.5%, except in the security sector where the increase will amount to 25%. This increase in wages means that they will barely keep pace with the official inflation rate, except in the security sector. It is not known why that particular sector has been singled out as one that needs special attention.
Pensions will be increased in January by 12.2%, which will also preserve real purchasing power at an approximate rate of inflation, but probably nothing more. The new rules on increasing pensions will replace the current Swiss formula (half of the pension is adjusted to inflation, the other half to economic growth) so that the total sum of paid pensions is tied to the share in GDP of around 10%. If the current share of pensions is lower, they can be increased a little more (by adjusting to wage growth) and vice versa (by adjusting to price growth), so that this ratio is maintained.
Increase in subsidies – expenditure side of the budget
The budget remains non-transparent and unclear – there is no visible connection between the estimated costs and what the institutions actually do. We have no information about the number of employees in them, nor the structure of employees, nor the average salary. All expenditure items are given collectively, so it is impossible to have an overview of whether some of the planned programs are really necessary or not.
The best example for that is certainly the budget of the Security and Information Agency, where the total sum of 7.9 billion dinars is just stated, without any other explanation. Considering the sensitive issues that this institution deals with, it is understandable that not too much information about its work will be given to the public, but this is an overgeneralization without any clarity.
It is possible to notice the growth of certain problematic expenditures. The first thing that catches the eye is the expenses for penalties and fines according to court decisions and compensation for damage caused by the work of state bodies: for these purposes, over 150 million euros have been allocated in the budget for the next year. This is a clear and direct price for the bad work of the state administration. Expenditures for subsidies are also high – they exceeded 1.6 billion euros in the new budget. Of that, 300 million is intended for energy companies (EPS and Srbijagas, as well as for energy protected customers), but there is also 200 million for attracting foreign investments. The rest are intended for road and railway companies, as well as agricultural producers.
In principle, the good side of the budget is the retention of relatively high expenditures for investments. But there are also problems from previous years: these projects are not transparent, there are no publicly published feasibility studies and the prices are often high compared to similar projects from abroad.
The budget envisages around 3.6 billion euros in capital investment expenditure, which is a fairly high 6% of GDP (to which should also be added the expenditure of the local level of government, such as cities and municipalities) so that the total public investment exceeds 7% of GDP – a. However, a significant amount of that money is related to the procurement of military equipment, in the amount of over 500 million euros or almost 1% of GDP.
New and simpler fiscal rules that require accountability
Along with the new budget, new fiscal rules were adopted as part of the Law on the Budget System. They replace the existing ones that defined the maximum amount of deficit and public debt: the new maximum amount of public debt will now be 60% of GDP, while the maximum allowed amount of deficit will depend on the public debt – when the debt is low, the deficit will be able to be tall and vice versa. If the debt is above 60% of GDP, the budget must be balanced without a deficit), it will be 0.5% of GDP with a debt of 55%-60%, a maximum of 1.5% with a debt of 45%-55% and a maximum of 3% if public debt is below 45% of GDP.
These fiscal rules are much simpler than the previous ones that were based on a formula, so it can be assumed that the public will be more involved in monitoring whether these rules will be respected. But the previous weaknesses still exist, which is the practical absence of any repercussions if these rules are broken, because they stop at the Government presenting to the Parliament why the maximum amounts have been exceeded and what it plans to do about it. Also, they are established by law, and only a simple majority in the Assembly is sufficient to change this law and those rules. These rules will be put to the test already next year, since the level of public debt will allow a deficit of a maximum of 1.5% of GDP, which is a relatively low amount, so we will see how much the Government is ready to respect its own rules.
A little relief from the economy                 Â
But there is also some good news for the economy – it is about the reduction of labor levies. The non-taxable part of the salary is increased, from the current 19,300 RSD to 21,712 RSD, while the contributions for PIO at the expense of the employer are reduced from 11% to 10%. This means a reduction in public revenues of 245 million euros, but per individual employee it means only a modest reduction in duties of only 1,500 dinars per month, which cannot really change the picture and have a significant impact on making decisions about new employment or salary growth. Bearing in mind that on the other hand the burdens on the economy have also been increased through the increase in the minimum wage, this only acts as a partial compensation for such a move, although the tax wedge (the difference between how much of the total cost of hiring workers is taken by the state) will now be reduced from 38 % to 37% of the average salary, Talas writes.
