Download PRESENTATION -

Republic of Serbia
Fiscal Council
EVALUATION OF THE DRAFT 2014 BUDGET AND
FISCAL STRATEGY FOR 2014-2016
November 26, 2013
1
Serious situation – demands more decisive
measures than those proposed in the draft budget
and Fiscal Strategy
•
Extremely high deficit in 2014 (7.1% of GDP), it has grown in
comparison to 2013
1.
•
Public enterprises and banks will cost the budget €560 million
2.
•
Bringing order in public enterprises and state-owned banks immediately
Good medium-term goals are not supported by adequate
measures
3.
•
Additional adjustments of 0.8-1% of GDP (€300 million) are necessary
More comprehensive measures are necessary, pension reform needs to be
adopted in the first half of 2014, reforms in subsidies, non-targeted social
contributions…
Recovery of public finances is possible only if all three conditions
are met
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Without solving the problems in public
enterprises and banks - no fiscal consolidation
• Citizens make savings that are used to cover losses of public
enterprises and state-owned banks
– The state assumed the liabilities of Srbijagas, Smederevo Steel Mill (Železara
Smederevo), ЈАТ (Yugoslav Air Transport), Galenika, Serbian Railway
(Železnice Srbije)…
– … and financially intervened in the banking sector: Agrobanka, Development
Bank of Vojvodina (Razvojna banka Vojvodine), PBB (Economic Bank of
Belgrade)
• In 2014 unsuccessful enterprises and banks will cost the budget
around €560 million (1.7% of GDP)
– The sum exceeds the collective effects of increased lower VAT rate (from 8 to
10%) and solidarity tax – total effect of €300 million
• That is the main reason for the increase in 2014 deficit when
compared to 2013 of around 0.5% of GDP with savings included
– They keep producing losses and creating new liabilities for the state even in
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2014 (around €630 million of new liabilities)
Srbijagas – the biggest problem
• Liabilities of over €1 billion
– Bank credits – around €800 million (losses financed via liquidity credits with
state guarantee)
– NIS (Petroleum Industry of Serbia), unsettled liabilities for gas extracted from
local fields – €225 million
• Fiscal Council has indicated problems in the operations of this
enterprise since 2012
– At that moment, the debt amounted to around €400 million, now it is almost
three times higher
• In June 2013, the Government: no new guarantees, Srbijagas to
settle its liabilities independently
• On the contrary:
– Government assumed the debts
– Srbijagas continues making losses – in 2014, new debt of €200 million with
state guarantee approved
4
Urgent restructuring necessary
• Servicing Srbijagas loans will cost the state at least €150 million
in 2014
– It is by far the biggest state aid to a company so far (Serbian Railway €110 million), higher expenditures than those for science
– If the liabilities to NIS are not settled in the future – the expenditures will
be even higher
• In the coming years, servicing Srbijagas liabilities will grow
– Additional credit from 2014 should be also settled (€200 million), variable
interest rate (Euribor will grow), grace period for some credits is close to
an end…
• Restructuring – the state should neither permanently nor in oneoff situations allocate new funds…
– … not organizational and legal issues
5
Banks cost a lot – order must be regained
• State expenditures for banking sector recovery will amount to
around €800 million until and including 2014…
• …Since, in 2014, the Deposit Insurance Agency will also have to
undergo recapitalization/new loans (€360 million)
– DIA spent all their funds for the disbursement of insured (but uninsured
deposits, too) deposits in bankrupt banks
• In the end of 2013, €100 million for PBB (Economic Bank of
Belgrade) allocated
– It went relatively unnoticed as a technical transaction, but…
– … That transaction exhausted all the savings arising from solidarity tax
• Are all the problems solved?
– Operations control and responsibility in the state-owned banks management
are needed
6
Deficit in 2014 – as high as 7.1% of GDP
• Budget Law – republic deficit of RSD 183 billion (4.6% of GDP)
• However, true republic deficit amounts to 5.2% of GDP
− Budget Law does not include project loans (Azerbaijani and Chinese credit)
• Local self-government, Putevi Srbije (Serbian Roads), Funds (PIO
(Pension and Disability Insurance), RFZO (Republic Fund for
Health Insurance), NSZ (National Employment Service)) increase
the deficit to 5.5% of GDP
• Off-budget financial transactions reach 1.7% of GDP (covering
public enterprises’ liabilities, banks)…
• …Total deficit of RSD 285 billion (7.1% of GDP)
• It is growing when compared to 2013 level of 6.6% of GDP
− 5.7% of GDP of consolidated state and 0.9% „below the line“
 2014 deficit will grow due to the settlement of liabilities of public enterprises
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and banks
The span of Government measures for deficit
reduction of only 1-1.2% of GDP
• In October, Government announced
measures of over 2% of GDP
fiscal
consolidation
• However, in Fiscal Strategy, they reduced the objective to 1.65%
of GDP
• True effect of only 1-1.2% of GDP
− The only firm effect – increase in the lower VAT rate from 8 to 10% and
solidarity tax
− Savings from subsidies do not amount to 0.3% of GDP, but only 0.1% of
GDP, since RSD 7.5 billion of savings are used for finansing RTS (Radio
Television of Serbia) and RTV (Radio Television of Vojvodina) (revocation of
subscription)
− There are no planned savings from goods and services – total expenditures for
the procurement of goods and services are growing
− The increase in tax collection via reduction of grey economy is disputable
(planned level of 0.4% of GDP)
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Additional savings of 0.8-1% of GDP need to
be made
• The Government October goal - a good one (adjustment of 2% of
GDP)
− It was supported (conditionally) by the Fiscal Council as well
• However, real effects of measures are of smaller scale: 1-1.2% of
GDP
 New adjustments of 0.8-1% of GDP need to be made
• More importantly – additional savings would decrease 2014 deficit
if compared to 2013
− Positive signal to investors from whom budget financing depends
− Government credibility is already low – in 2013, 3.6% of GDP deficit was
planned, 6.6% of GDP deficit will be realized
− It would bring us closer to the necessary arrangement with the IMF
9
Deficit reduction needs to be prolonged to
the medium term, too
• The seriousness of the problem of public finances in Serbia asks for
longstanding fiscal adjustments
− Some other countries – Greece, Portugal, Croatia… are going through a similar
process
• Fiscal Strategy envisaged planned deficit reduction in the period 20152016 of 3.9 pp of GDP
− The adjustment level in 2015 and 2016 is good
− Such adjustment would stop public debt growth in 2016
(if additional savings are
made in 2014 and budget funds outflow into public enterprises and banks is stopped)
• Measures for medium-term adjustments are partly unbalanced and
almost unfeasible
− About 2/3 of savings in expenditures for wages and for interest rates (replacing an
expensive debt with a cheaper one)
− While, over dimensioned expenditure for pensions, some subsidies, non-targeted
social contributions still remain…
10
Room for fiscal consolidation is getting smaller
• Crisis can be avoided only if all three key conditions of fiscal
consolidation are met
1) Additional deficit reduction in 2014
2) Bringing order in public enterprises and state-owned banks
3) Adoption of a credible plan for medium-term savings and launch of
reforms
Reduction of wages and pensions and tax increase are useless if
those savings are spent a priori for Srbijagas, Železara
Smederevo, bankrupt banks, Galenika…
11
Public debt and financing
• At the end of 2013, public debt of 64% of GDP and still growing
− In the coming years, it will exceed the level of 70% of GDP – very dangerous
• Reduction of the public debt share in GDP is not possible before
2017, but only if
− Substantial adjustments are made and deficit reduced to about 2% of GDP in
2017
− Issuing new guarantees for public enterprises debts is stopped or limited
• The state has to provide €5 billion every year (for financing deficit
and repayment of the public debt principal) until public debt is
reduced substantially
• It will be ever more difficult to manage this and more expensive if
the high fiscal deficit is not reduced promptly
− Conditions available internationally are also prone to change – the time when
countries similar to Serbia had cheap loans is probably over
12
Fiscal consolidation itself is not sufficient for
economic growth
• Fiscal consolidation is essential – otherwise, crisis is inevitable
− However, its objective is not to launch economic growth but to create
conditions under which the growth could be possible at all
• State measures stimulating economic growth
− Amendment to the Labour Law
− Simplification and shortening the period for construction permits
issuance
− Deciding upon the fate of 153 enterprises undergoing restructuring
− Public enterprises reform
• First test – adoption of the new Labour Law by the end of 2013
− If the Government does not realise their intentions, the implementation
of other necessary measures is uncertain, taking into account that they
are more demanding
13
Public expenditure in 2013
• In 2013, public consumption dropped drastically
– General state expenditures were lower than those initially
planned by RSD 70 billion
– Possible reasons: low inflation, new (complex) law on public
procurement, more efficient spending, ad hoc savings measures
• But:
–
–
–
–
Expenditures “below the line” of RSD 33 billion
Capital expenditures lowest ever
Scarce funds (health care system)
Transferring expenditures to 2014
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2014 Republic budget
• There is no further expenditure reduction: planned
savings will be annulled by new expenditure
– Expenditure control: low indexation, decrease in some of
subsidies and budget credits, reduction of transfers to the local
level and PIO Fund
– Expenditure growth: interest rates, social care contributions
(unreformed area); subsidies for the public service, covering
arrears (judiciary, ecological fund), redundancy payments; and
still ungrounded extra allowances in some ministries
• Risks to see expenditures overstep the plan: subsidies
(for investors, Srbijagas, Železara) and redundancy
payments
15
Efficiency in VAT collection
90%
85%
80%
75%
70%
2006
2007
2008
2009
2010
2011
2012
2013
Drop in tax discipline during the 2008-2012 crisis and additional huge
drop in 2013!
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Big drop of tax discipline in 2013
• Tax indiscipline endangers fiscal consolidation
• VAT revenues without collection drop would
have reached the level of RSD 30 billion
higher than those in 2013
• Existing “reprogramming” and “zero
tolerance” measures yield no results
17
Monthly VAT revenue tempo
25.000
20.000
15.000
10.000
5.000
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
“Zero tolerance” to tax evasion is not visible in the data!
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Systemic solutions are necessary
• Unrealistic expectations of the Tax
Administration
– € 1 billion (and a half) from grey economy?
– Electronic tax applications exclusively?
• Ad hoc measures such as online reading of cash
registers are not an adequate response
– Unsuccessful wireless reading
• Fight against grey economy asks for systemic
solutions and responsibility
– Adequate incentives, penalties and responsibility
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