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DE RUEHBW #1566/01 3571428
ZNR UUUUU ZZH
R 231427Z DEC 09
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0512
INFO EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 BELGRADE 001566 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV ETRD EFIN SR
SUBJECT: SERBIA: PARLIAMENT PASSES 2010 BUDGET IN LINE WITH IMF PLAN 
 
SUMMARY 
 
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¶1.  (SBU) The Serbian Parliament on December 21 adopted the 
government's 2010 budget, totaling nearly $11.5 billion in 
spending.  While the 2010 budget is nearly a 7% increase from the 
2009 budget in nominal terms, it is to be the start of a multi year 
budget reform process expected to decrease the public sector's 
overall share of GDP.  The consolidated budget proposes a 4% 
deficit, which will be funded primarily through external borrowing. 
The budget is in line with IMF recommendations, which should permit 
the IMF to soon approve Serbia's second tranche of its Stand By 
Agreement.  While the government heralded the budget passage, the 
opposition said it was devastating for the economy.  Ultimately, 
the budget was adopted with a narrow majority with all opposition 
parties abstaining from voting.  While the budget is a step 
forward, Serbia will need to exercise fiscal discipline and hope 
for an economic recovery in 2010 if it is to stay on target.  End 
Summary. 
 
 
 
2010 Budget: Expenditures and Revenues Up 
 
------------------------------------------ 
 
 
 
¶2.  (U) The Serbian Parliament adopted the 2010 budget and a set of 
accompanying laws on December 21 by a narrow majority of 127 to 4. 
(The budget needed support from 126 of the 250 parliamentarians to 
pass.)  The planned budget projects a modest recovery of GDP of 
+1.5% in 2010 (after a 3% GDP contraction in 2009), inflation at 
6%, and current account deficit of 9% of GDP.  The budget projects 
revenues of $9.8 billion, or 6.6% higher in nominal and 0.6% higher 
in real terms than the government's revenues in 2009.  The budget 
outlines expenditures of $11.4 billion, or 6% higher than 2009 
expenditures, but unchanged in real terms.  The expected 2010 
budget deficit was projected almost equal to the 2009 deficit at 
$1.6 billion or 3.4% of GDP while the consolidated state deficit 
(with local government funding included) would reach 4% of GDP. 
Since the bulk of the deficit will be financed via international 
borrowing, Serbia's total external debt as a percentage of GDP is 
expected to increase from 63.6%  in 2008, through 71.1% in 2009 to 
73.5% in 2011. 
 
 
 
Finance Minister: Public Consumption Restrained 
 
--------------------------------------------- -- 
 
 
 
¶3.  (U) Finance Minister Dijana Dragutinovic called the budget 
socially just, stimulative, much closer to international standards 
and more transparent than previous budgets.  At a December 2 press 
conference Dragutinovic said the government had conservatively 
projected budget revenues while restraining consumption in 2010 
through freezes in public wages and pensions.  As a result, the 
public revenues' share in GDP was projected to decrease from 38.6% 
in 2009 to 38.3% in 2010 while expenditures' share in GDP would 
fall from 43.1% to 42.3%.  In line with the government's efforts to 
stimulate the economy, the budget favors capital expenditures.  The 
budget outlines support for economic activity via subsidized loans, 
direct subsidies, and housing and infrastructure projects, such as 
the Corridor 10 highway construction. 
 
 
 
VAT Major Revenue Source; Pensions, Wages Costly 
 
--------------------------------------------- --- 
 
 
 
¶4.  (U) The structure of the 2010 budget revenues remains dominated 
by VAT (49% of total revenues), excise tax (20%) and personal 
income tax (12%) while the expenditure side is dominated by 
transfers to the Pension, Employment and Health fund (34%), wages 
(24%), social programs (10%), transfers to the other levels of 
government (8%) and subsidies (6%). 
 
BELGRADE 00001566  002 OF 003 
 
 
Budget Maintains Ad Hoc Adjustments and High Subsidies 
 
--------------------------------------------- ----- 
 
 
 
¶5.  (SBU) Despite the government's attempt to reign in expenditures 
in 2010, pensions and subsidies were expected to be a growing 
public burden, Milojko Arsic, member of Prime Minister Cvetkovic's 
economic advisory team, told us on December 15.  Transfers to the 
pension fund were projected to increase 1.4% nominally despite 
frozen pensions due to the increased number of pensioners.  A real 
increase was projected in subsidies totaling $640 million (mostly 
to railways and agriculture), interest rates payments (due to 
increased public debt) and for public procurement.  Arsic said the 
biggest revenue increase was to be an increase on the excise tax 
for cigarettes.  VAT revenues were projected unchanged, while 
income and corporate taxes and customs were projected to drop in 
real terms due to the poor economy and decreased customs rates with 
the EU.  Arsic's major complaint about the budget was that major 
adjustments were done via ad hoc measures (freeze of wages and 
pensions), raising doubts about their long-term sustainability. 
 
 
 
Independent Institutions Receive Requested Amounts 
 
--------------------------------------------- ------ 
 
 
 
¶6.  (U) For the first time the Government fulfilled its obligation 
toward funding independent state institutions - the newly formed 
Anticorruption Agency,  State Auditing Institution, Trustee for 
Information of Public Interest, Ombudsman - and approved in the 
budget the exact amounts they requested.  Some analysts claimed 
this was a result of public pressure and an EU request. 
 
 
 
Opposition: Budget Devastating for the Economy 
 
--------------------------------------------- -- 
 
 
 
¶7.  (U) During the week long budget debate, the opposition parties 
claimed the budget would be disastrous for the economy.  Overall, 
the parliament adopted only 13 of the 240 budget amendments 
submitted by the opposition.  Nenad Popovic from the opposition 
Democratic Party of Serbia (DSS) said that the budget was 
"devastating" due to the $547 million deficit increase over the 
April 2009 budget rebalance, which he said would put a huge 
additional burden on the economy.  Jorgovanka Tabakovic from the 
Serbian Progressive Party (SNS) complained that the budget was a 
government attempt to exert its economic influence and to minimize 
the role of the parliament.  The SNS had submitted amendments 
seeking more money for defense and subsidies in agriculture.  The 
Radical Party (SRS) unsuccessfully sought to decrease funds for 
Serbia's EU integration efforts and to increase funding for 
cooperation with non-aligned countries. 
 
 
 
Budget Passes with Slim Majority 
 
-------------------------------- 
 
 
 
¶8.  (U) The budget was adopted with a narrow majority of 127 out of 
250 MPs. The budget was supported by 124 MPs from the ruling 
coalition, plus two independent MPs and the parliament's sole 
ethnic Albanian MP. Four governing coalition MPs from the Alliance 
of Vojvodina Hungarians (SVM) voted against the budget, claiming 
the budget was not in line with the Serbian Constitution, and that 
Vojvodina was receiving an insufficient share of government 
revenues allocated for capital investments.  Balint Pastor from SVM 
claimed on December 12 that out of $837 million allocated for 
Vojvodina, the effective budget (when public sector wages and old 
debts are excluded) was only $187 million and that Vojvodina would 
go bankrupt.  SVM had also made it difficult for the government to 
adopt the 2009 budget rebalance in April 2009.  Coalition members, 
including both the DS and smaller parties such as League of 
 
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Vojvodina Social Democrats, criticized SVM for not supporting the 
government and hinted that the coalition might be reevaluated. 
There are now rumors that DS could remove SVM from the coalitions 
in the Vojvodina Assembly and the Subotica city assembly, where DS 
has absolute majorities. 
 
 
 
Liberals Request Pensions to be Decreased 
 
----------------------------------------- 
 
 
 
¶9.  (U) The Liberal Democratic Party (LDP) also chose not to 
support the budget due to large transfers to the pension fund.  LDP 
leader Cedomir Jovanovic criticized the $270 million per month 
transfers to the pension fund, noting many pensioners were opposed 
to EU and NATO integration, which LDP supported.  Jovanovic claimed 
the budget was the victim of numerous political deals and said the 
government had not made an inter-generation agreement but instead 
chose to "give welfare to pensioners by taking away the younger 
generation's future."  Jovanovic asked that pensions be reduced for 
pensioners who did not serve until full working age.  LDP had 
submitted amendments to decrease subsidies to railways and to 
allocate more funds for education, science, agriculture and the 
State Auditing Institution. 
 
 
 
Budget Meets IMF Recommendations, But More Reforms Expected 
 
-------------------------------------------- 
 
 
 
¶10. (SBU) The IMF Resident Representative Bogdan Lissovolik told us 
on December 15 that the 2010 budget was in line with IMF 
expectations and agreements (ref A).  The IMF Executive Board 
should now approve the second tranche of Serbia's $4 billion Stand 
By Agreement later this week.  The IMF still expects Serbia to 
adopt a Law on Pension System Reform by the end of February 2010, 
cut state administration by 10% in 2010, work on tax reform, and 
establish better control over public companies, Bogdanovic said. 
 
 
 
Comment 
 
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¶11.  (SBU) Serbia's 2010 budget is a small step in the right 
direction of public sector reform.  While the budget is an 
important piece of the puzzle and meets the IMF conditions, Serbia 
must incorporate greater structural reforms to bring pensions, 
subsidies and state spending under control.  The budget's narrow 
passage in parliament and the opposition's vocal distrust of the 
government's reform efforts proves that this will be a difficult 
task in the months to come.  There could be political fallout from 
SVM's unwillingness to support the budget.  While it is unlikely 
that DS would endanger the national coalition, some response in 
Vojvodina is likely forthcoming.  End Comment. 
BRUSH