SERBIA: 2008 BUDGET REBALANCE ADOPTED

UNCLAS SECTION 01 OF 02 BELGRADE 001158

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

E.O. 12958: N/A
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA: 2008 BUDGET REBALANCE ADOPTED

SUMMARY
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1. The Serbian Parliament adopted a rebalanced 2008 budget on
November 4, with 127 to 17, with 9 abstentions. The rebalance
adjusted for higher than projected 2008 revenues and expenditures,
and changed government priorities from the government formed in
July. Revenues and expenditures are up by 0.4% and 0.6% of GDP
respectively over the original 2008 budget, thus increasing deficit
by 0.2% of GDP. The Finance Minister assessed the rebalance as a
reasonable compromise between development and social goals given the
political circumstances. The opposition rejected the rebalance as
"wasteful and harmful" to the state. The rebalance includes money
for damages to our Embassy during the February 21 riots and MFA
sources told us that we should receive payment very soon. END
SUMMARY.

Expenditures/Revenues above Projections
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2. The Serbian Parliament adopted a rebalanced 2008 budget on
November 4, 2008 by a narrow majority of 127 to 17, with 9
abstentions (the budget needed support from half of the 250
parliamentarians to pass). Many opposition members did not
participate in the session leaving a skewed result that only crossed
the threshold needed for adoption by one vote. The budget
rebalancing measure increased spending based on higher than
projected revenues and changed the expenditure structure to reflect
the new government's priorities (such as infrastructure improvement,
financial incentives for strategic investments, increasing pensions,
etc.)

Revenues, Expenditures Up By 0.4% and 0.6% of GDP
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3. The rebalanced budget, compared to the original 2008 budget,
increased total revenues from $9.92 billion to $10.08 billion or
0.4% of GDP, mostly due to higher than expected revenues from income
tax, corporate profit tax, and customs. Total expenditures
increased from $10.56 billion to $10.80 billon or 0.6% of GDP mostly
due to increased subsidies, and pensions. The total budget deficit
increased from $635 million to $711 million or 0.2% of GDP. Finance
Minister Dragutinovic characterized the deficit as "not a
statistically significant increase." The government will finance
the deficit through new borrowing. Key expenditure increases
included: transfers to the pension fund increased to fund the
extraordinary 10% pension increase, subsidies to agriculture,
investments for joint venture with Fiat, and increased spending for
construction of beltway around Belgrade and Corridor 10 highway.

Finance Minister: Reasonable Compromise
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4. Dragutinovic said at an October 24 press conference that the
budget was a "reasonable compromise given the political
circumstances." She added that the "rebalance harmonized revenues
and expenditures with development and social priorities of the new
government and has not additionally endangered macroeconomic
stability." She added that the rebalance respected basic fiscal
rules - deficit below 3% of GDP, state borrowing only for
investment, and public debt below 40% of GDP.

Money for Embassy Damage Included
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5. The budget rebalance included additional funds for the Ministry
of Foreign Affairs to settle bills for embassy damages during the
February 21 riots. Our MFA contacts told us on November 6 that they
were awaiting the official gazette with the budget rebalance law.
The published law would give them authority to move ahead with
payment either immediately, or in seven days. The Ministry did not
expect further delay in processing the payment beyond a few days to
complete the funds transfer.

COMMENT
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6. The 2008 rebalance follows the trend of expansive fiscal
policies of the last several years. The government faces a
difficult challenge to adjust economic policies to reflect the
realities following the global economic crisis in the upcoming 2009
budget. Many economists, including National Bank of Serbia Governor
Jelasic, say that the state has to restrict growth of expenditures.
Prime Minister Cvetkovic told us on October 14 that the government
would severely cut consumption in 2009. The IMF hopes to sign an
agreement on a stand-by arrangement as soon as November 10. The IMF
delegation told us on November 6 that they were demanding Serbian
government agreement to either freeze in government expenditures, or
roll-back of the 10% pension increase. This will be a bitter pill
for the new Serbian government, eager to deliver on election

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promises, but government officials tell us they hope to use the IMF
as a scapegoat for the tough measures. While the pensioners party
publicly admitted their demand for pension increases to 70% of
averages wages would have to be put off until 2010, they did not
give up on their long-term goals. The IMF and every economist we
have spoken with agree that growth in pensions in Europe's oldest
population would not be sustainable and could crush the state. The
government's ability to find the political will to restrict spending
will be critical to demonstrating credibility to financial markets
in the coming months. End Summary.

MUNTER