Serbia: Two years of fiscal consolidation: Results and medium-term sustainability issues

Abstract

Fiscal consolidation in Serbia was based on a comprehensive, multiyear program built on broad-based expenditure cuts, better revenue performance, and related structural reforms and pro-growth policies. During the first two year of implementation the actual fiscal performance substantially exceeded the original and revised deficit targets set in the IMF supported three-year precautionary program. In 2015, the actual deficit (3.7 percent of GDP) exceeded program target by 2.2 percentage points. In 2016 the implementation performance further improved as the actual deficit (1.36 percent of GDP) was 2.6 percentage points better than the plan. The result implies a 4.4 percentage point structural deficit adjustment which exceeds the program target one year ahead of schedule. In this, revenues contribute 3.5 percentage points, public wages 1.0, pensions 0.6 and reversals of structural expenditure savings take away -0.7. The program had a beneficial impact on economic growth. The economy bottomed-out in the third quarter and started recovering in late 2014-early 2015 leading to a positive 0.8 percent growth for the entire year. The growth further recovered in 2016 (+2.8 percent) and is expected to reach 3 percent in 2017 and stabilize at 3.5 percent annually thereafter. With this performance Serbia may become a case of 'expansionary austerity' which demonstrates that fiscal consolidation programs designed in line with sound principles and synchronized with key structural reforms and pro-growth policies can generate growth. Carefully selected expenditure cuts combined with pro-growth revenue collection efforts can have expansionary effect on growth even under most difficult circumstances The political economy issues of fiscal consolidation and structural reforms gain increasing importance in the last year of the program, two months ahead of presidential elections. Fresh thinking is needed to demonstrate that the completion of difficult reforms is a win-win for all, and most everybody loses if reforms are stalled or abandoned.