With a certain amount of delay, the Government of Serbia has presented measures to overcome the problems in the economy that have arisen as a result of the virus corona epidemic. These measures are delayed, not only because their launch was originally announced for Sunday but would still be unveiled on Tuesday, but because other countries (Italy, the United Kingdom, Germany and the US) have already largely introduced their measures to help the economy.
The epidemiological situation in Serbia is certainly late for most of these countries, but there was no need to wait that long since we had already seen what other countries were doing. Additionally, for these measures to have a real impact, they must be sufficiently known in advance for entrepreneurs to incorporate them into their businesses.
Government measures are nothing new – they are very similar to measures already implemented across Europe. This is actually good, because it means that there is less chance of making mistakes by trying to design some measures that are unique and never tried before. To remind you, this set of economic measures includes:
1) Tax benefits: a moratorium on taxes on earnings and employee benefits, and income taxes. These funds will be paid out starting next year, with no interest.
2) Direct transfers to companies for the purpose of preserving jobs, amounting to 3 monthly minimum wages (micro and small) or half of the minimum wage (large enterprises)
3) Loans for liquidity, through commercial banks and the Development Fund
4) Payment of assistance in the amount of 100 euros to all adult citizens.
The good thing is that the measures are aimed at short-term liquidity problems in the economy and maintaining employment, due to a decrease or complete cessation of turnover. In this situation, many businesses are forced to lay off workers or close down. The most important of these are the moratorium on payroll taxes and workers’ contributions during the state of emergency, as well as the payment of aid to enterprises in the amount of minimum wage (entrepreneurs, small and medium-sized enterprises) and half of the minimum wage (large enterprises). Thus, practically companies no longer have the cost of hiring workers, as they are borne by the state, which should prevent layoffs.
The good thing is that the more significant measures affecting the micro, small and medium-sized enterprises sector are that they encounter much greater barriers to access to capital. Because of the high risk of doing business, banks are often reluctant to lend to them, so these companies often have a problem with liquidity. The share of labor costs with them accounts for much of the total cost of doing business, which means that their reserves will quickly deplete due to the current economic situation, so such assistance is more necessary to them than large enterprises.
The help program is too wide. It treats all industries equally – though they are not equally affected by the market situation. Industries such as tourism, hospitality and personal services are fully integrated, as well as part of the food and processing industries. But other branches did not encounter such problems. As aid is not directed but goes to everyone equally, it now ends where it is not needed, and on the other hand is not sufficient in some other places. If the measures were targeted at those industries that were more affected, the program of measures could have more results and lower costs.
Another bad measure is the distribution of money to everyone. Although 100 euros seems small, the total earmarked amount for this measure is almost 600 million euros, which is over 10% of the total value of the package of measures. From an economic point of view, these funds will not have a significant impact on economic developments, since much of this will spill over into imports (and thus economic growth will result from increased consumption to “go” abroad), as was already the case with programs to increase aggregate demand during and after the 2009 crisis through high pensions and public sector wages. From a social point of view, the situation is even worse, given that a significant portion of the funds will go to those who do not need this help. A general social security system should be used to help and support income so that the funds really go where they are needed, otherwise it is a waste of money. If the social system is not good for us, and it will not help people who get into trouble because of the outbreak of this epidemic, then this is a reason to reform the social system, not to divide money and who needs and who does not need it.
The third bad aspect is the late payment of promised funds. According to the Minister of Finance, the payment of funds to companies will begin in May. By then, companies should pay their salaries as early as March and April. This program should therefore start earlier, as early as April. It is also unclear to what period the measures of the moratorium on payment of taxes and employee benefits apply – whether for the whole month of March, from the moment of emergency, or since this decision has been adopted.
This dilemma needs to be eliminated as soon as many entrepreneurs are unsure whether they should pay taxes and contributions: their March payment deadline is April 15, but a large portion of employers pay it along with workers’ net salaries early in the month.
The Development Fund has been a black hole since its inception during the Milosevic regime. Abuses in his business are also evidenced by a special report from the 2014 Anti-Corruption Council dealing with existing abuses and trade in political influence, since the funds went to politically eligible tycoons without adequate collateral, so much of these loans were not repaid.
It is likely that the situation has not changed for the better in the meantime. Therefore, it is good that most of the funds for the corporate lending program are going through commercial banks: knowledge and experience in selecting clients reduces the risk that loans will not be repaid. On the other hand, we do not know in detail what this program should look like: whether the state will give these funds directly to banks or whether it will be part of some guarantee scheme, so we have to see.
The value of the overall proposal for measures has been estimated by the state at 5.1 billion euros, or about 11% of GDP. This is in line with the size of the US or German corporate aid program. But the important question is how we will pay for all this. This is clear – by a large amount of borrowing.
The state will have to somehow find this money by issuing securities and rising public debt: the government deficit this year could be as high as a record 9% of GDP, unprecedented since the country’s collapse in the 1990s. Public debt will rise from the current 50-53% of GDP (public debt amounting to just over 24 billion euros, which gives different levels of public debt given the three existing methodologies of its calculation used in our country) to over 60% (or around 29 billion), and will only come dangerously close to pre-fiscal consolidation in one year. At best, this will only be in the short term, as a substantial portion of the funds earmarked will be repaid: a moratorium on employee tax payments does not mean their forgiveness but late payment in installments over the next year without interest.
It is similar to a bank lending scheme: as businesses repay loans, these funds will be released. This will make long-term public debt growth much smaller than it might seem at first glance. Of course, provided that the economic situation in the country returns to normal. Just a 100 euros program to adult residents and giving employees a paycheck means sustained public debt growth.
