SERBIA: 2008 BUDGET SENT TO PARLIAMENT

UNCLAS SECTION 01 OF 02 BELGRADE 001595

SIPDIS

SIPDIS
DOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: EFIN ECON EINV SR
SUBJECT: SERBIA: 2008 BUDGET SENT TO PARLIAMENT

REF: Belgrade 1545

Summary
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1. On November 12, the Serbian Government adopted a 2008 budget
with a 9.9% increase over 2007, with revenues of $12.02 billion,
expenditures of $12.3 billion and deficit of $280 million. The
consolidated fiscal deficit is projected to improve in 2008 to 0.6%
of GDP, mostly by keeping increases in public sector wages at the
rate of inflation. Economists and IMF complained that the budget is
expansionary and advised running a surplus. The IMF also questioned
the government's projections. Two thirds of budget expenditures
will go into public sector wages, pensions, the health and
unemployment funds, and to local government. End Summary.

Draft Budget 2008 $12 Billion - Up 9.9% Over 2007
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2. The Serbian Government adopted a draft 2008 budget on November
12 and sent it to the Parliament for adoption by December 15. With
the approval of the budget by the government, an advisor to the
speaker of parliament assured econoff that passage in the parliament
would be forthcoming. The budget stipulates total revenues of
$12.02 billion and total expenditures of $12.30 billion resulting in
a deficit of $280 million. Both revenues and expenditures are
projected to be up by 9.9% nominally compared to the 2007 budget
(2008 inflation is projected at 6%). The budget deficit as a
percentage of GDP remains unchanged at 0.5%.

Budget: Not an Economically Optimal Compromise
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3. Finance Minister Cvetkovic stated on November 18 that the budget
provides, "financial support to government policies. The budget is
not a result of daily political compromises but political
compromises necessary for approaching the EU. A much better budget
which would be based on economic principles could not be implemented
in these socio-economic conditions." Janko Guzjan, State Secretary
in Finance Ministry in charge of budget drafting told a visiting
Treasury official on November 15 that fiscal policy was weak, and
that the political coalition was not strong enough to push ahead
with significant reforms.

Reactions: Budget Should Be More Restrictive
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4. Central Bank Governor Jelasic commented publicly on November 16
that as a result of fiscal policies, monetary policy would continue
to be restrictive, which could cause further appreciation of the
dinar against euro. Belgrade Economic Faculty Professor Jurij Bajec
told a visiting Treasury official on November 16 that the budget
would look much different if there were no elections coming. The
budget deficit, although small, was a bad signal, indicating that
the government welcomed spending above earnings - a surplus would be
better for psychological reasons. Stojan Stamenkovic of the
Economic Institute claimed in discussions with the same Treasury
official that government projections of macroeconomic figures were
not consistent and if the government continued on the projected
fiscal policy path for 2008-2010 the level of real investment would
drop to zero. Pavle Petrovic, an economist from the USAID sponsored
FREN think-thank, told econoff on November 15 that there was
pressure from economists and the IMF to run a surplus to make space
for private investment, but it was hard to sell the idea of fiscal
restrictiveness when the government was still receiving
privatization revenues.

IMF: Government Calculations Too Rosy
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5. According to the IMF's calculations the 2008 Serbian budget
deficit will be around $940 mil. (1.8% of GDP) instead of government
projected $280 mil. The IMF suggested a restrictive fiscal policy
with a surplus in the 2008 budget of 1% of GDP, through control of
public sector wages, cuts in the capital budget, subsidies and other
current spending. In November 15 discussions with a visiting
Treasury official, IMF Resident Representative Hirschhofer
highlighted the conclusions of the early November IMF consultations
in Belgrade that the presently unbalanced domestic policy mix of
loose fiscal, tight monetary, and slow-moving structural reform
would further raise concerns over external stability and would

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dampen growth prospects.

Tax Revenues Projected to Grow 12-17% in 2008
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6. Over 93% of government revenues are projected to come from tax
revenues, with almost half (48.7%) from the VAT. The next largest
sources of revenues are excise taxes (17.4%) followed by the income
tax (11.3%),customs fees (9.6%) and finally corporate profit tax
(5.3%). Tax revenues are projected to increase between 12-17% in
2008, except for the corporate profit tax, which is projected to
increase by almost 25%. Hirschhofer told the Embassy that in his
discussions with the Finance Ministry the government "found" $200
mil. of additional revenue in the last week before the budget's
approval. The Ministry did not provide Hirschhofer with a basis for
their revised projections.

Two Thirds For Pensions, Wages and Transfers
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7. Almost 90% of projected 2008 expenditures are current
expenditures, while just 10% are for capital investment. More than
one third of total budget expenditures (35.6%) are transfers, mostly
to the pension and health funds (25.3%) and to local government
(10.3%). The second largest expenditure category is wages for
public sector employees (27%). Social allowances for the poor
(children, veterans, severance for redundant workers) are projected
to reach 10.2% of expenditures, while subsidies to companies (mostly
agriculture and railroad) should reach 6% of expenditures.
Procurement of goods and services should reach 7% of total
expenditures.


8. The 2008 increase in expenditures of 9.9% over 2007 comes mostly
from an increase in the public wage bill of 15.6% and an increase in
transfers to the pension and health funds and to other levels of
government of 14.8%. Despite the fact that Finance Minister
promised in June, after the adoption of 2007 budget, that the public
wage bill would be frozen as of November 2007, this was later
changed to a policy of "keeping wages unchanged in real terms in
2008" i.e. an increase in wages in line with inflation.

Comment
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9. The Serbian Government faces a difficult situation - on one hand
being accused by economic experts of a loose fiscal policy and
generous wage policy. On the other hand the government faces
strikes by public sector workers demanding higher wages (court
staff, teachers, and the announcement of a state administrators
strike). The government is soft enough in the current political
atmosphere to resort to further wage increases to maintain political
support, and just rich enough to do so. However, the problem for
Serbia is that almost every year is a (pre)election year and the
growing budgets pile on top of each other. Thus, the 2007 budget
was (nominally) 33% higher than the originally planned 2006 budget,
while 2008 budget adds an additional 10% increase to this already
high spending. It is likely that this pattern will continue since
the current government/Ministry of Finance has demonstrated an
unwillingness to be tough in facing wage demands. Thus the issue is
how long this can last without triggering balance of payments
problems, as we have reported reftel. End Comment.

BRUSH