Fiscal Policy in 2008

Fiscal Policy in 2008

Belgrade, November 12, 2007

www.mfin.sr.gov.yu 2

Contents• Results achieved in 2007

• Macroeconomic framework and economic policy objectives for 2008

• Main parameters of the fiscal policy for 2008

• Republic of Serbia’s 2008 budget

• Closing considerations


Consolidated balance of the government sector in 2007• In the first three quarters of 2007, the surplus in consolidated

government sector amounted to 50.6 bln RSD (2.1% of GDP);

• The surplus was created at the level of Republic, local governments and Pension Fund of Small Businesses, while other fiscal institutions were balanced;

• If license fee is excluded from the revenues, while repayment of debt to pensioners and net loans are included in the expenditure, the surplus amounts to 11.1 bln RSD, or 0.5% of GDP;

• Therefore, fiscal policy in 2007 has not been responsible for accelerated inflation and growing foreign deficit.


Consolidated 9m 2007 state balancemln RSD Index

2006 2007 I - IX 2007I - IX I - IX I - IX 2006

PUBLIC REVENUES 614,952 711,220 115.7Current revenues 607,959 702,857 115.6 Tax revenues 536,475 622,793 116.1 Personal income tax 84,322 82,159 97.4 Corporate profit tax 14,318 21,881 152.8 Value Added Tax 161,149 192,311 119.3 Excise duties 60,806 70,223 115.5 Customs duties 32,202 40,513 125.8 Other tax revenues 21,654 24,111 111.3 Contributions 162,025 191,596 118.3 Non-tax revenues 71,484 80,064 112.0Capital revenues 6,993 8,363 119.6PUBLIC EXPENDITURE 557,779 660,639 118.4Current expenditure 526,457 607,358 115.4 Payroll expenditure 138,936 166,449 119.8

Acquisition of goods and services 76,653 93,773 122.3 Repayment of interests 19,499 13,055 67.0Subsidies 36,389 37,445 102.9Social aid and transfers 242,777 284,631 117.2 of which pensions 166,949 190,172 113.9Other current expenditure 12,204 12,006 98.4Capital expenditure 31,322 53,281 170.1 of which for the National Investment Plan 58 22,058 38,362.3Consolidated deficit/surplus 57,172 50,581 88.5


Republic of Serbia budget for 2007• The results achieved in the first nine months were somewhat better than

planned;

• Revenues were at the planned level, while expenditure was a little below the projected sum;

• RSD 39 bln surplus was created in the Serbian budget in the first ten months;

• If the license fee is excluded from the revenues, and repayment of debt to pensioners and net loans are included in the expenditure, the surplus amounted to 0.5 bln RSD;

• Arrears toward budget users were reduced by around 2 bln RSD;

• Therefore, Republic of Serbia budget in the first ten months did not create additional liquidity, and consequently did not influence widening foreign deficit and growing inflation through demand.


Execution of the Republic of Serbia budget in the first 10 months of 2007

mln RSD Index2006 2007 I - X 2007I - X I - X I - X 2006

TOTAL REVENUES 409,986 477,468 116.5Tax revenues 355,690 419,585 118.0Personal income tax 50,718 49,953 98.5Corporate profit tax 14,296 22,473 157.2Value added tax 184,803 220,313 119.2Excise duties 66,083 76,402 115.6Customs duties 36,320 46,349 127.6Other tax revenues 3,469 4,096 118.1Non-tax revenues 54,296 57,883 106.6TOTAL EXPENDITURE 373,650 438,316 117.3Curent expenditure 359,263 402,393 112.0Payroll expenditure 91,171 120,283 131.9Acquistion of goods and services 21,885 27,218 124.4Repayment of interests 17,008 13,838 81.4Subsidies 24,325 25,759 105.9Transfers to other levels of government 158,961 159,594 100.4Social aid from the budget 41,137 49,562 120.5Other current expenditure 4,775 6,138 128.6Capital expenditure 14,387 35,923 249.7of which for the National Investment Plan 58 26,710 46451.5Budget deficit/surplus 36,336 39,152 107.7


Republic of Serbia public debt

• In the first 9 months of 2007, Serbia’s public debt was reduced by some 300 mln EUR;

• Share of public debt in GDP was reduced to below 30%.

Share of Serbia's public debt in GDP

50.2

34.9

29.6

0

10

20

30

40

50

60

2005 2006 IX 2007

У %

БД

П


Macroeconomic policy objectives for 2008

• Macroeconomic stability– Reducing inflation and foreign deficit;

• Dynamic economic growth;

• Raising employment and standard of living;

• Accelerating EU stabilization and association processes;

• Accelerating economic reforms;

• A more balanced regional development.


Macroeconomic framework for 2008Execution

2006 2007 2008

GDP, bln RSD (current prices) 2,125.80 2,454.30 2,779.00

GDP per capita, in EUR 3,354 4,058 4,573

GDP (%), annual change 5.7 7.0 6.0

Real growth of some GDP components, in %

Personal consumption 5.4 9.5 4.9

Government spending 8.3 16.1 5.7

Investments 15.2 28.6 20.2

Export of goods and services 28.2 32.6 25.8

Import of goods and services 22.2 36.5 20.5

Foreign trade balance, %of GDP -19.9 -20.2 -18.9

Current account of the balance of payments, % ofGDP

-12.3 -14.7 -14.1

Inflation, end of period, in % 6.6 6.5 6.0

Foreign debt, % of GDP (in EUR) 58.9 55.5 56.8

Number of employees, annual average 2,026 2,000 2,014

PROJECTION


Main parameters of fiscal policy in 2008

• Share of public expenditure in GDP is planned to be reduced by 0.8 percentage points, while share of Republic budget expenditure will be lowered by 0.7 percentage points;

• Consolidated fiscal deficit will amount to 0.6% of GDP, and Republic budget deficit to 0.5% of GDP;

• Share of public debt relative to BDP will be reduced by 3.4 percentage points;

• Maintaining salaries at the same level in real terms in 2008 is the key measure to reduce public expenditure in GDP in medium-term period;

• Tax system reform will be continued, with the objective of simplifying the system and creating a favorable climate for savings and investments.


Proposed 2008 budget for the Republic of Serbia

• Planned revenues and expenditure are 9.9% higher than in 2007;

• Despite the relatively modest increase in expenditure, it includes:• additional 30 bln RSD for transfers;

• servicing budget debts in the amount of 3 bln RSD (war invalids, diaspora, railways, judiciary etc.);

• additional projects amounting to 14 bln RSD (embassies, Eurovision, University Olympics, army, police, science, judiciary and national pensions);

• Implementation of projects from the National Investment Plan in the amount of 46 bln RSD (budget funds and loans).

• Planned budget deficit will remain at the 2007 level, though revenues in 2007 included also the license fee for mobile telephony (1% of GDP).


Proposed Republic of Serbia budget for 2008mln RSD Index

Budget 2007 Proposed

2008 budget

Structure of the

proposed 2008

budget, in % 2008/2007

TOTAL REVENUES 581,842 639,600 100.0 109.9Tax revenues 517,298 596,179 93.2 115.2Personal income tax 61,409 72,000 11.3 117.2Corporate profit tax 27,297 34,024 5.3 124.6Value Added Tax 270,359 311,493 48.7 115.2Excise duties 98,849 111,275 17.4 112.6Customs duties 54,264 61,585 9.6 113.5Other tax revenues 5,119 5,802 0.9 113.3Non-tax revenues 64,543 43,421 6.8 67.3TOTAL EXPENDITURE 595,518 654,429 100.0 109.9Current expenditure 524,835 588,551 89.9 112.1Payroll expenditure 152,911 176,712 27.0 115.6Acquisition of goods and services 42,925 45,827 7.0 106.8Repayment of interests 17,411 16,957 2.6 97.4Subisidies 35,509 39,572 6.0 111.4Donations and transfers 203,184 233,200 35.6 114.8Social aid from the budget 61,632 66,703 10.2 108.2Other current expenditure 11,262 9,581 1.5 85.1Capital expenditure 70,683 65,878 10.1 93.2 of which for the NIP 44,391 34,550 5.3 77.8Budget deficit/surplus -13,676 -14,829 - 108.4


REPUBLIC OF SERBIA’S REPAYMENT OF DEBT AND ACQUISITON OF FINANCIAL ASSETS

in mln dinarsTotal 74,477

1. Repayment of debt 48,358

1.1 Repayment of debt to national creditors 39,160

1.2 Repayment of debt to foreign creditors 6,361

1.3 Repayment of debt in line with activated guarantees 2,837Acquisition of financial assets 26,120


Closing considerations• Planned fiscal policy for 2008 is a step in the direction of: reducing

the share of public expenditure in GDP, reducing state liquidity effect on aggregate demand, improving the structure of public expenditure;

• User’s expectations concerning further growth of certain categories of public spending in 2006 and 2007 (salaries, subsidies, etc.) were interrupted;

• The proposed budget is not economically optimal, but is the maximum in the given political and social circumstances;

• It is necessary to continue fiscal adjustments in order to reduce the share of public spending in BDP, with the objective of creating a fiscal surplus in the coming years.


• Creating a fiscal surplus in the coming years is vital for reducing foreign deficit;

• Creating a fiscal surplus requires implementation of a medium-term policy of rationalization of public expenditure, whose key elements should include :– Slower growth of average salaries relative to the growth of nominal

GDP,– Reducing number of employees in the government sector,– Reducing subsidies,– Rationalizing the network of state-owned institutions;

• It is also necessary to review effectiveness of state loans;• It is necessary to reduce public expenditure and deficit relative to GDP,

in order to reduce macroeconomic disequilibria, regardless of the fact that the state holds high privatization deposits;

• There is no space for reducing major tax rates in the next 2-3 years.

Fiscal Policy in 2008

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