Download PRESENTATION -

Republic of Serbia
Fiscal Council
ASSESSMENT OF THE 2012 SUPPLEMENTARY
BUDGET AND DRAFT LAWS INCLUDING FISCAL
EFFECTS
September 13, 2012
Basic assessments
• The first step towards fiscal consolidation has been made
in the wrong direction
– 2012 supplementary budget increases the deficit instead of
decreasing it
• Two of three pillars of strong fiscal consolidation have
been set (taxes and wage and pension control)…
– … the third one is also indispensable (public expenditure reform)
• Proposed amendments to a great number of laws (tax
reform, public finance regulation) are mostly in line with good
fiscal practice
2
Public debt crisis poses threat
• “Serbia is threatened by debt crisis and debt bondage, inability to
pay wages and pensions and function normally as a state!... The
fire should be put out”
– Statements of the Prime Minister Ivica Dačić
• Facts – public debt reached 56% of GDP…
•
•
•
… by the end 2012, it will reach 60% of GDP (it will continue to grow
in 2013 as well)
So as to finance the deficit and repay public debt principal, €1.7 billion
should be provided by the end of 2012 and additional €4-5 billion in
2013
The source and the price are unknown
• Fiscal Council assessment: without considerable deficit decrease, it
is not possible to avert public debt crisis
3
Supplementary budget does not “put out
the fire”
• The first step – supplementary budget
– Without the supplementary budget, the whole republican deficit would amount
to around RSD 216 billion (6.5% of GDP)
– With the supplementary budget, it is increased to RSD 222 billion (6.7% of
GDP) – wrong direction
– There is mitigation to a certain degree since the increase is not huge, while
important structural measures are adopted for permanent deficit decrease
• However, the credibility of the whole fiscal consolidation
programme could be endangered since its first step is deficit
increase instead of decrease
• Therefore, the Fiscal Council considers the supplementary budget
inadequate, since deficit should be reduced, as proposed by the
Council
4
Two of three pillars of fiscal consolidation are
set
• In order to avert the crisis, three groups of structural measures
are necessary:
1.
Tax reform (revenue-positive)
2.
Restriction of public sector pension and wage growth (lower than inflation)
3.
Overall public expenditure reform
(comрanies under the competence of the Privatisation Agency, subsidies, abundant
personnel, pension system, disbursing state guarantees, fiscal decentralisation, etc.)
• The first two pillars are set, but fiscal consolidation requires all
three of them
5
Positive changes in legislation
• Amendments to tax laws (VAT, excise duties, personal income
tax)…
• …bring necessary revenue increase and contribute to public
finance regulation
– Except for paying VAT liabilities upon collection rather than upon invoicing
for small and medium-sized companies, which should be abandoned – bad
tax practice
• System of budget beneficiaries with own-source revenues is
regulated (funds, agencies)
– Good measure – it increases transparency and brings budget savings
• Other new laws (on maximum wage, public enterprises and others)
– in good direction
6
Republican supplementary budget
• State budget deficit without the supplementary budget in 2012 would
amount to around RSD 197 billion (Fiscal Council’s assessment)
• In early 2012, RSD 140 billion was planned (agreed with the IMF), but
it will exceed this amount:
– Due to deteriorating macroeconomic environment (by around RSD 25 billion)
– Due to expansionary fiscal policy in the first half of the year (by around RSD 30
billion)
• However, instead of implying deficit decrease, the supplementary
budget implies additional deficit increase – from RSD 197 to 203 billion
– With tax increase and some savings, other expenditure will “go sky-high”
7
Republican supplementary budget – new
measures
• Tax increase and savings in 2012 – deficit decrease by around
RSD 20 billion
–
–
–
–
–
General VAT rate from 18 to 20% (RSD 7 billion)
Excise duties increase (RSD 7 billion)
Personal income tax (RSD 2 billion)
Lower wage and pension indexation (RSD 4 billion)
Savings in own-source revenue (RSD 1-2 billion)
• However, other expenditures will increase by around RSD 25
billion
–
–
–
–
13th pension (RSD 4 billion)
Agricultural subsidies (RSD 9.5 billion)
Budget subsidies and credits for economy (over RSD 10 billion)
Personnel expenditure (some ministries – additional RSD 3-4 billion)
8
Republican supplementary budget assessments
• Expenditure growth is bad and unsustainable since it further
increases high fiscal deficit and public debt
• Bad message is sent to investors, IMF, EU, etc.
• Funds for new measures and policies could have been provided by
prioritising and redistributing, rather than increasing the deficit
– Local self-government, expenditures rising in real terms by over 20%
• Bad assessment is to a certain degree mitigated by the fact that
important structural measures were adopted so as to reduce the
deficit (taxes, wages and pensions) ...
• ... While the growth of some expenditures will be one-off and
temporary
9
Fiscal consolidation: as of 2013
• Public debt growth should be stopped and “the Greek scenario”
avoided – statements of Government officials
– Basically, in line with assessments given in Fiscal Council’s May report
• Public debt growth could be reversed in 2014 at the earliest
• Fiscal deficit forecast enabling this is as follows:
Public debt
Fiscal deficit
2013
62.6
3.5
2014
62.5
1.9
2015
60.5
1.0
2016
57.2
*Fiscal Council’s assessments
0.0
• One can conclude that deficit reduction needs to be dramatic
10
Less strong adjustment will not do
•
The Government announced deficit reduction in 2013 to the
amount of € 1 billion (to 4% of GDP), but:
1.
This will not be sufficient – public debt will also rise in 2014
2.
Planned deficit reduction in 2013 is actually lower (between €650
and 700 million)
–
Adjustment included one-off revenue (bankrupt companies)
–
Overestimated savings with budget beneficiaries with own-source revenue
–
In 2012, the deficit was increased in the first place, then it is decreased from
that level…
… adjustment seems to be larger

It is necessary to have bigger public expenditure reduction in 2013
11
Necessary fiscal consolidation must have
three pillars
• In May report, the Fiscal Council defined three indispensable group
of measures:
1.
Revenue-positive tax reform
2.
Freezing of wage and pension growth, those are the largest public
expenditure items
3.
Reduction of public expenditure, via reform and improvement of
efficiency in the public sector
• Fiscal Council’s assessment – the first two pillars are properly set by
the Government
• ...But, a true fiscal consolidation requires all three of them
12
I pillar: tax laws amendments (tax reform)
• Proposal made by the Fiscal Council in May
– Increase in general VAT rate from 18% to 22%, while applying higher tax rate
for some of non-existential products, excise duty increase
– Reduction of fiscal burden on labour from 64% to 54%
– Fiscal effect – increase in public revenue by around 1% of GDP
• Government measures
– Increase in general VAT rate from 18% to 20%, increase in excise duties,
corporate income tax, personal income tax
– Without decrease in fiscal burden on labour, but with abolition of quasi-fiscal
levies
– Fiscal effect in 2013 – around RSD 40 billion (1.1% of GDP)
• Slightly different measures, but with almost identical effect on
public revenue – generally speaking, adequate measures
13
II pillar: wage and pension growth
• Proposal made by the Fiscal Council in May
– Pension and wage freeze in October 2012 and in 2013
– Supposing the inflation will amount to around 6% during the whole period of
limiting indexation
• Government measures
– Indexation in October - 2% and additional 2% in April 2013
– But expected inflation during this indexation will be around 10%
• Due to inflation growth, Government measures are practically
identical to the Fiscal Council’s proposal
• Fiscal deficit reduction by around 1.2% of GDP – adequate
– However, wage growth beyond the statutory indexation raises concerns (local
self-government, some ministries)
– Thirteenth pension
14
III pillar: public expenditure reforms
• Proposal made by the Fiscal Council in May
– To reform wasteful and unselective system of state subsidies
– Shape the destiny of the companies under the competence of the
Privatisation Agency (97,000 employees)
– Public sector staff streamline (layoffs)
– Pension reform – penalties for early retirement
– Restriction of purpose and amount of state guarantees (public enterprises
debt)
– Establishment of a sustainable ratio between central and local finances
– Reform of agencies, funds, directorates – with own-source revenue
• Government measures
– Reforms in budget beneficiaries with own-source revenue (agencies, funds)
– it is good and in line with the recommendation
– But these go along with increased subsidies instead of the decreased ones,
thirteenth pension, etc.
15
Success in fiscal consolidation is based on
expenditure reduction
• Short-term deficit reduction (2013): around € 1 billion
– 1/3 should origin from revenue growth and 2/3 from expenditure reduction
…we still cannot see €300 million from expenditure reduction
• However, the deficit needs to be reduced as of 2014 as well
– If no savings are made in the expenditure area…
– …we have bad alternatives: new tax increase or wage and pension freeze
– For this reason, for medium-term effects, expenditure reform is the most
important
• Most of expenditure reforms proposed by the Fiscal Council have
full effects on the budget only in several years
• Therefore, it is necessary to start serious structural reforms in
public expenditure immediately in the following six months (the
third pillar of fiscal consolidation )
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Assessment of the tax package
• It provides adequate increase in public revenue under given
socioeconomic circumstances
– VAT had to be increased from 18 to 20%
• Expenditure of average household is thereby increased by 0.9%
• Paying VAT liabilities upon collection is not an example of good
practice
– Increase in corporate income tax from 10 to 12% and abolition
of exemptions are justified and will not decrease
competitiveness
– Increase in excise duty on tobacco is justified
– Abolition of quasi-fiscal costs is justified
• System efforts need to be made in future so as to improve business
Assessment of „13th pension“ programme
• We evaluate the program negatively because it is arbitrary
and poorly targeted
– Around 100,000 elderly people who do not receive pensions
at all are disqualified
– Financial status or income of other household members are
not taken into account
• A pensioner receiving RSD 16,000 whose wife has no pension
• A pensioner lady receiving RSD 14,000 whose husband receives a
high pension
– Pensioner receiving RSD 15,000 will get additional RSD
16,000, while the one receiving RSD 15,001 will get nothing
• Minimum pension rule prevents such abrupt cuts by adding the
missing amount of RSD 12,700 to everyone
Assessment of laws
• On budget system:
– Positive change in approach to own-resource revenues and
their inclusion in the budget
• There is still a possibility that part of the funds of public fund
beneficiaries will be kept outside the single Treasury account
• It is important to make an unbiased assessment of budget savings
based on this change
– Positive change in legislation on fees and charges
• They can be introduced by law only and the amount is stipulated by
the law or the entity is allowed to set the fee amount (with prior
approval)
• On maximum public sector wage:
– Maximum public sector wage and maximum wage for
ancillary and supporting technical jobs
• However, not all jobs are included
• Exemptions are not fully transparent
• On public enterprises:
– Public enterprises are a part of public sector and they
have great influence on public finance
– Public advertisement for electing managers is defined
in a satisfactory manner
• A possibility to appoint supervisory board members based on
public advertisement should be also considered