MACEDONIA'S 2008 BUDGET: MORE, BUT RESPONSIBLE, SPENDING

UNCLAS SECTION 01 OF 02 SKOPJE 000166 SIPDIS SIPDIS SENSITIVE DEPT FOR EUR/SCE TREASURY FOR W.LINDQUIST AND T.PHILLIPS E.O. 12958: N/A TAGS: EFIN ECON PGOV MK SUBJECT: MACEDONIA'S 2008 BUDGET: MORE, BUT RESPONSIBLE, SPENDING Summary -------------- ¶1. (SBU) The GOM's 2008 budget is significantly larger than last year's budget, allowing the GOM the room to pursue a number of politically popular policies. The GOM has increased government employees' wages by 10 percent and intends to increase spending on infrastructure projects by a whopping 48 percent. The budget also ensures that the GOM will spend more than 2% of GDP on defense, and amply funds implementation of the Ohrid Framework Agreement and the decentralization of responsibilities to local governments. The GOM has also cut profit and personal income taxes to a flat 10 percent rate. Despite increased spending and lower taxes, the government will continue its record of fiscal responsibility, with a projected budget deficit of only 1.5% of GDP, as agreed with the IMF. End Summary. More Money Coming In -------------- ¶2. (U) This year the GOM projects it will collect 11 percent more revenue than in 2007, taking in a total of $3.10 billion. (Note: the exchange rate used for all calculations is 1 US$ = 41.6 denars.) As usual, most of the revenues will come from taxes and employers contributions, which will account for 83 percent of total revenues. Central Government Revenues in US$ millions: 2007 2008 2008 Type of tax estimate projected % of total Personal income tax 200 200 9.0 Profit tax 137 126 5.7 VAT 765 873 39.3 Excise 301 324 14.6 Import duties 136 178 8.0 Non-tax revenues 245 330 14.9 Other revenues 183 189 8.5 Tax Reforms Increase Collection -------------- ¶3. (U) In 2008 the GOM intends to continue its policy of lowering tax rates on personal income and profits, simplifying tax procedures, and aggressively enforcing tax collection. Starting January 1, the rate on profit tax and personal income tax dropped from a flat rate of 12 to 10 percent. During the year, the GOM will simplify the calculation and collection of employers' contributions for employees' health, pension and other mandatory benefits. The GOM expects that tax simplification, coupled with improved enforcement, will lead to higher overall revenue collection. ¶4. (U) The Customs Administration also expects to collect more duties in 2008. Customs has acquired sophisticated X-ray equipment for scanning vehicles and hired the consulting firm Crown Agents to help improve internal control processes. The GOM also projects it will receive $43 million from tolls and vehicle registration. The arrest of numerous toll collectors over the past few months is expected to result in a drop in revenue leakage due to corruption. Finally, the GOM expects that the phone company, Macedonian Telecom, will pay $62.5 million for the 2005 and 2006 dividends on shares owned by the GOM. GOM Expenditures -------------- ¶5. (U) The GOM projects it will spend $3.23 billion in 2008, 12 percent more than in 2007. Most of its spending, 84 percent, is allocated for current expenditures, while 16 percent is for capital spending. Government Expenditures in US$ millions: 2007 2008 2008 Expenditures estimate projected % of total Wages and allowances 569 539 23.3 Goods and services 363 404 17.4 Transfers 718 868 37.4 Interest 60 56 2.5 Capital expenditures 303 448 19.3 Key Spending Items -------------- ¶6. (SBU) A few of the key items the GOM will fund in 2008 include: - Transfers to state funds (the pension, employment, health, and road funds) and municipalities are still the largest budget item. As the central government devolves more responsibilities to the municipalities it is also transfering more funds to them. The central government will transfer $230 million to municipalities in 2008, 2.6 times more than in 2007. SKOPJE 00000166 002 OF 002 - Wages and allowances, the second largest budget item, are projected to total $539 million. This includes a 10 percent wage increase for public employees. The higher wage expenses also reflect continued hiring of ethnic minorities to satisfy the requirement for equitable ethnic minority representation in government, as mandated by the 2001 Ohrid Framework Agreement (FWA). - In 2007 the GOM established a separate secretariat for implementing the FWA. For 2008 it budgeted $5.8 million for the secretariat. SIPDIS - In order to better meet NATO standards, the GOM increased the Ministry of Defense's budget from $161 million in 2007 (2.0 percent of GDP) to $189 million in 2008 (2.2 percent of GDP.) - The GOM allocated funds for continued structural reforms, most notably in the police, customs, and defense, where a majority of the costs will cover unemployment benefits, social contributions, and severance payments for early retirements and redundant employees. - The GOM intends to nearly double capital investments in 2008, spending $448 million, or 48 percent more. Some of the projects include investments in roads, bridges, water supply and sewage systems, railway infrastructure, education and health facilities, infrastructure in the free trade zones, and the purchase of embassy buildings abroad. The GOM has a poor track record of actually spending all the money it allocates for capital investments, but it expects this will improve in 2008 (septel). Rather oddly, the costs associated with promoting Macedonia to potential foreign investors have been included under capital expenditures. Budget Deficit In 2008 - Maybe -------------- ¶7. (U) Over the past few years the GOM's budget has consistently ended the year with an unanticipated surplus. 2007 was no exception, with the GOM enjoying a slight budget surplus rather than the projected one percent budget deficit. In 2008 the GOM will once again try to create a greater fiscal stimulus, with a projected government budget deficit of 1.5 percent of GDP, or $133 million, a level the GOM has agreed with the IMF. ¶8. (U) The projected 2008 budget deficit will be financed by domestic and foreign borrowing, as well as the withdrawal of funds from government deposits at the National Bank. The GOM expects to borrow $96 million domestically and $69 million externally, including $30 million from the World Bank. In addition, the GOM is planning to withdraw about $84 million from its deposits with the National Bank. Regular payments on the GOM's domestic and foreign debt will amount to $149 million in 2008. Continued Responsible Budgeting -------------- ¶9. (SBU). With its 2008 budget, the GOM continues its track record of maintaining a responsible fiscal policy. The GOM has targeted a low budget deficit of 1.5 percent, even with higher wages for public employees and a significant increase in capital spending. The GOM has also put money into top policy priority areas, such as defense, decentralization, and FWA implementation. On the revenue side, the GOM's tax cuts have not led to lower tax collections, despite initial IMF concerns. Now the challenge facing the GOM is to ensure that the quality of the implementation of its spending - on structural reforms, capital projects, and strengthening its administrative capacity - match its stated policy ambitions. End comment. NAVRATIL