Identifier
Created
Classification
Origin
07BELGRADE895
2007-06-25 06:33:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Belgrade
Cable title:  

REVISED BUDGET SEEN AS EXPANSIONARY

Tags:  ECON EFIN KPRV SR 
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VZCZCXYZ0061
RR RUEHWEB

DE RUEHBW #0895/01 1760633
ZNR UUUUU ZZH
R 250633Z JUN 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1053
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
UNCLAS BELGRADE 000895 

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN KPRV SR
SUBJECT: REVISED BUDGET SEEN AS EXPANSIONARY


SUMMARY
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UNCLAS BELGRADE 000895

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN KPRV SR
SUBJECT: REVISED BUDGET SEEN AS EXPANSIONARY


SUMMARY
--------------

1. (u) Serbia's new government on June 14 presented a 2007
budget proposal that would continue expansionary fiscal
policy with an expenditure increase of 27.4 percent and a
projected deficit of 0.6 percent of GDP. A chorus of
criticism, from economists, the central bank, and the IMF,
greeted the Ministry of Finance proposal, which will
replace the provisional financing utilized by the lame duck
Kostunica government. Economists labeled the budget as
expansive and a threat to macroeconomic stability. Central
Bank Governor Jelasic pledged to maintain a tight monetary
policy or even tighten further if increased demand boosts
inflation. Finance Minister Cvetkovic answered critics by
noting that "previously signed obligations in wage policy
had to be respected." END SUMMARY.


2. (u) The Kostunica government on June 14 sent Parliament
a full budget proposal for 2007 to replace the decree on
temporary financing that had provided funding to the lame
duck government. The budget, if approved by Parliament,
would authorize total expenditures of SRD 595.5 (USD 9.8
billion) or 25 percent of GDP, vs revenues projected at SRD
581.8 billion (USD 9.6 billion) or 24.4 percent of GDP, for
a deficit of SRD 13.7 billion (USD 220 million),or 0.6
percent of GDP. However, National Bank Governor Radovan
Jelasic - who still awaits re-appointment - disputed this
figure, contending that the actual deficit is SRD 50
billion, or 2 percent of GDP, based on exclusion of one-off
revenue of SRD 25 billion from sale of a mobile telephony
license. The basic macroeconomic assumptions for the
budget include GDP of SRD 2,382 billion, real GDP growth of
5.9 percent, and end-year inflation of 6.5 percent.


3. (u) Total revenue is projected to rise by 16.6 percent
in nominal terms, while tax revenue, which provides almost
88 percent of budget income, would rise 18.4 percent,
continuing the rapid increase in collections recorded in
the first half of the year. VAT revenue would provide
about half of tax income; VAT, excise, and customs all are
projected to increase by 20 percent over 2006, while income
and profit tax are projected to rise by 10 percent. The
share of income and profit tax is projected at 15 percent,
and for excise taxes, 17 percent. Customs revenue should

contribute 9 percent of total revenues.


4. (u) The 20.8 percent jump in current budget expenditures
(RSD 524.8 billion, net of capital outlays) is driven by a
22.2 percent increase in salaries for public employees, to
which the previous Kostunica government agreed in the run-
up to January elections; payroll is 29 percent of current
budget expenditure. Transfers to the pension, health and
unemployment funds, which make up another 28 percent of the
current expenditures, will rise by 14.6 percent. Transfers
to other levels of governments, which represent 10.6
percent of expenditures, will rise 54.9 percent, while
social payments, including the transition fund, allowances
for children, the poor, veterans, etc., will increase 16.3
percent. Even subsidies are up 15 percent.


5. (u) New Finance Minister Cvetkovic fulfilled his pledge
to move outlays for the National Investment Plan (NIP) on-
budget; the new spending plan increases NIP outlays by a
factor of five, to SRD 44.3 billion (USD 731 million).
Overall, capital expenditure would more than double, to SRD
70.6 billion, or 11.8 percent of total expenditure.


6. (u) The consolidated budget of the general government
includes not only the central government but also the
budgets of Vojvodina's provincial government, local
government and the Pension, Health and Unemployment Fund.
This budget is projected to reach SRD 995.7 billion (USD
16.3 billion),or 41.8 percent of GDP. Overall government
revenues are projected to reach SRD 986.1 billion (USD 16.2
billion),or 41.4 percent of GDP, leaving a consolidated
budget deficit of SRD 9.3 billion (USD 100 million),or 0.4
percent of GDP.


7. (u) Finance Minister Cvetkovic explained that the budget
was imposed on the Ministry by large salary increases for
the public sector agreed in late 2006 before the election
campaign. Salaries of budgetary users will increase by 22
percent on average through 2007, but salary growth will
slow in the second half of the year, he promised. However,
Cvetkovic expects the 2007 budget deficit to be much lower
in execution than projected because NIP spending requires
detailed plans and time-consuming public procurement
procedures. Since just SRD 9 billion was spent for NIP in
the first half of 2007, it is unlikely that the projected
35 million can be spent in the second half.

8. (u) Serbia will continue to run a primary surplus, with
interest payments budgeted at SRD 17.4 billion, and overall
debt service, at SRD 58.6 billion. The finance minister
contends that Serbia is not a highly indebted country since
public debt in 2006 was USD 12.4 billion, or 32 percent of
GDP, of which domestic debt accounted for USD 5 billion.

Analysts: Expansionary Budget a Threat to Prices
-------------- --------------

9. (u) All observers agree that the budget is too
expansionary, with projected outlays increasing 27 percent
over 2006 in nominal terms, or 21 percent in real terms.
NBS Governor Jelasic said that the budget will not support
price stability and could lead to more restrictive monetary
policy if inflation rises in response to increased demand.
He also observed that the draft 2007 budget will not "open
the IMF door for Serbia" since the Fund's April mission
recommended a healthy surplus to preserve macroeconomic
stability, vice the budget's 2 percent deficit.


10. (sbu) IMF Resident Representative Harald Hirschhofer
publicly warned that the draft budget could deepen
macroeconomic risks by causing even faster growth. Fiscal
stimulus was limited to a degree in the first half of 2007
by the spending limits imposed by the temporary financing
decree, but realization of the proposal 2007 budget would
mean fiscal expansion in the second half of the year, he
points out. He recalled the IMF recommendation for a
fiscal surplus in 2007, increased efficiency in public
spending, fast privatization of public companies and
revision of NIP. Privately, Hirschhofer told a group of
donor country officials that the deficit could be as high
as 3 percent of GDP and would increase the trade and
current account deficits even more.


11. (U) Independent analyst Vladimir Gligorov - who is
close to the opposition Liberal Democratic Party - called
the budget populist and warned that the central bank will
have difficult task to keep inflation in the target range
of 4-8 percent. Stojan Stamenkovic, of the Economics
Institute, agreed that the budget is too high and called
for a cut of SRD 25 billion to harmonize fiscal and
monetary policy. If this budget is not reduced, he warned,
the central bank will be forced to tighten monetary policy
by raising interest rates, leading to appreciation of the
dinar and an increase in imports of some EUR 1.5 billion.

Opposition: A Status Quo Budget
--------------

12. (U) Opposition deputies announced they will not support
the budget. Serbian Radical Party (SRS) deputies claimed
that budget was drafted without clear goals and "is not
based on the current Constitution." Socialist deputies
will vote against it since the budget has "an especially
high deficit in the field of health protection and a large
number of people would remain without appropriate treatment
or certain drugs." The Liberal Democratic Party (LDP)
cannot support the budget due to the way it was proposed in
the Parliament as well as the character of the budget
itself, said LDP leader Jovanovic, calling it a "budget
that sustains status quo in Serbia".

Tax Breaks to Fulfill Pre-election Promises
--------------

13. (U) On June 14, the Ministry of Finance also proposed
amendment of several tax laws, amendments that would
fulfill pre-election promises of the Democratic Party,
which nominated Cvetkovic as minister (although he says he
is not a party member). The Ministry proposed to decrease
the tax rate on real estate transfers from 5 to 2.5
percent, with a full tax holiday for those purchasing their
first apartment; end the VAT on purchases of new apartments
by first-time buyers; decrease VAT for purchase of personal
computers from 18 to 8 percent, and decrease collections
from several other taxes.

POLT