VZCZCXRO1208
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSQ #0166/01 0601218
ZNR UUUUU ZZH
R 291218Z FEB 08
FM AMEMBASSY SKOPJE
TO RUEHC/SECSTATE WASHDC 7128
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE 0225
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RUESEN/SKOPJE BETA

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