VZCZCXRO7013
RR RUEHPOD
DE RUEHBW #1595/01 3311656
ZNR UUUUU ZZH
R 271656Z NOV 07
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 1817
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0026
RUEHVJ/AMEMBASSY SARAJEVO 0385
RUEHVB/AMEMBASSY ZAGREB 1456
RUEHSF/AMEMBASSY SOFIA 0874
RUEHBM/AMEMBASSY BUCHAREST 0272
RUEHUP/AMEMBASSY BUDAPEST 1134
RUEHSQ/AMEMBASSY SKOPJE 0899
RUEHTI/AMEMBASSY TIRANA 0389
RUEHPOD/AMEMBASSY PODGORICA 0142
RUEHPS/USOFFICE PRISTINA 3723

UNCLAS SECTION 01 OF 02 BELGRADE 001595 
 
SIPDIS 
 
SIPDIS 
DOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV SR
SUBJECT: SERBIA: 2008 BUDGET SENT TO PARLIAMENT 
 
REF: Belgrade 1545 
 
Summary 
------- 
 
¶1.  On November 12, the Serbian Government adopted a 2008 budget 
with a 9.9% increase over 2007, with revenues of $12.02 billion, 
expenditures of $12.3 billion and deficit of $280 million.  The 
consolidated fiscal deficit is projected to improve in 2008 to 0.6% 
of GDP, mostly by keeping increases in public sector wages at the 
rate of inflation.  Economists and IMF complained that the budget is 
expansionary and advised running a surplus.  The IMF also questioned 
the government's projections.  Two thirds of budget expenditures 
will go into public sector wages, pensions, the health and 
unemployment funds, and to local government.  End Summary. 
 
Draft Budget 2008 $12 Billion - Up 9.9% Over 2007 
--------------------------------------------- ---- 
 
¶2.  The Serbian Government adopted a draft 2008 budget on November 
12 and sent it to the Parliament for adoption by December 15.  With 
the approval of the budget by the government, an advisor to the 
speaker of parliament assured econoff that passage in the parliament 
would be forthcoming.  The budget stipulates total revenues of 
$12.02 billion and total expenditures of $12.30 billion resulting in 
a deficit of $280 million.  Both revenues and expenditures are 
projected to be up by 9.9% nominally compared to the 2007 budget 
(2008 inflation is projected at 6%).  The budget deficit as a 
percentage of GDP remains unchanged at 0.5%. 
 
Budget: Not an Economically Optimal Compromise 
--------------------------------------------- - 
 
¶3.  Finance Minister Cvetkovic stated on November 18 that the budget 
provides, "financial support to government policies.  The budget is 
not a result of daily political compromises but political 
compromises necessary for approaching the EU.  A much better budget 
which would be based on economic principles could not be implemented 
in these socio-economic conditions."  Janko Guzjan, State Secretary 
in Finance Ministry in charge of budget drafting told a visiting 
Treasury official on November 15 that fiscal policy was weak, and 
that the political coalition was not strong enough to push ahead 
with significant reforms. 
 
Reactions: Budget Should Be More Restrictive 
-------------------------------------------- 
 
¶4.  Central Bank Governor Jelasic commented publicly on November 16 
that as a result of fiscal policies, monetary policy would continue 
to be restrictive, which could cause further appreciation of the 
dinar against euro.  Belgrade Economic Faculty Professor Jurij Bajec 
told a visiting Treasury official on November 16 that the budget 
would look much different if there were no elections coming.  The 
budget deficit, although small, was a bad signal, indicating that 
the government welcomed spending above earnings - a surplus would be 
better for psychological reasons.  Stojan Stamenkovic of the 
Economic Institute claimed in discussions with the same Treasury 
official that government projections of macroeconomic figures were 
not consistent and if the government continued on the projected 
fiscal policy path for 2008-2010 the level of real investment would 
drop to zero.  Pavle Petrovic, an economist from the USAID sponsored 
FREN think-thank, told econoff on November 15 that there was 
pressure from economists and the IMF to run a surplus to make space 
for private investment, but it was hard to sell the idea of fiscal 
restrictiveness when the government was still receiving 
privatization revenues. 
 
IMF: Government Calculations Too Rosy 
------------------------------------- 
 
¶5.  According to the IMF's calculations the 2008 Serbian budget 
deficit will be around $940 mil. (1.8% of GDP) instead of government 
projected $280 mil. The IMF suggested a restrictive fiscal policy 
with a surplus in the 2008 budget of 1% of GDP, through control of 
public sector wages, cuts in the capital budget, subsidies and other 
current spending.  In November 15 discussions with a visiting 
Treasury official, IMF Resident Representative Hirschhofer 
highlighted the conclusions of the early November IMF consultations 
in Belgrade that the presently unbalanced domestic policy mix of 
loose fiscal, tight monetary, and slow-moving structural reform 
would further raise concerns over external stability and would 
 
BELGRADE 00001595  002 OF 002 
 
 
dampen growth prospects. 
 
Tax Revenues Projected to Grow 12-17% in 2008 
--------------------------------------------- 
 
¶6.  Over 93% of government revenues are projected to come from tax 
revenues, with almost half (48.7%) from the VAT.  The next largest 
sources of revenues are excise taxes (17.4%) followed by the income 
tax (11.3%), customs fees (9.6%) and finally corporate profit tax 
(5.3%).  Tax revenues are projected to increase between 12-17% in 
2008, except for the corporate profit tax, which is projected to 
increase by almost 25%.  Hirschhofer told the Embassy that in his 
discussions with the Finance Ministry the government "found" $200 
mil. of additional revenue in the last week before the budget's 
approval.  The Ministry did not provide Hirschhofer with a basis for 
their revised projections. 
 
Two Thirds For Pensions, Wages and Transfers 
-------------------------------------------- 
 
¶7.  Almost 90% of projected 2008 expenditures are current 
expenditures, while just 10% are for capital investment.  More than 
one third of total budget expenditures (35.6%) are transfers, mostly 
to the pension and health funds (25.3%) and to local government 
(10.3%).  The second largest expenditure category is wages for 
public sector employees (27%).  Social allowances for the poor 
(children, veterans, severance for redundant workers) are projected 
to reach 10.2% of expenditures, while subsidies to companies (mostly 
agriculture and railroad) should reach 6% of expenditures. 
Procurement of goods and services should reach 7% of total 
expenditures. 
 
¶8.  The 2008 increase in expenditures of 9.9% over 2007 comes mostly 
from an increase in the public wage bill of 15.6% and an increase in 
transfers to the pension and health funds and to other levels of 
government of 14.8%.  Despite the fact that Finance Minister 
promised in June, after the adoption of 2007 budget, that the public 
wage bill would be frozen as of November 2007, this was later 
changed to a policy of "keeping wages unchanged in real terms in 
2008" i.e. an increase in wages in line with inflation. 
 
Comment 
------- 
 
¶9.  The Serbian Government faces a difficult situation - on one hand 
being accused by economic experts of a loose fiscal policy and 
generous wage policy.  On the other hand the government faces 
strikes by public sector workers demanding higher wages (court 
staff, teachers, and the announcement of a state administrators 
strike).  The government is soft enough in the current political 
atmosphere to resort to further wage increases to maintain political 
support, and just rich enough to do so.    However, the problem for 
Serbia is that almost every year is a (pre)election year and the 
growing budgets pile on top of each other.  Thus, the 2007 budget 
was (nominally) 33% higher than the originally planned 2006 budget, 
while 2008 budget adds an additional 10% increase to this already 
high spending.  It is likely that this pattern will continue since 
the current government/Ministry of Finance has demonstrated an 
unwillingness to be tough in facing wage demands.  Thus the issue is 
how long this can last without triggering balance of payments 
problems, as we have reported reftel.  End Comment. 
 
BRUSH