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
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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
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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
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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
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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
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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.

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- 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
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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
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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