Serbia: Fiscal consolidation: Program design and political economy issues

Abstract

Fiscal consolidation in Serbia was built on broad-based expenditure cuts, better revenue performance, and related structural reforms and pro-growth policies. In 2015 the actual fiscal performance exceeded the original and revised deficit targets set in the IMF program. The final outcome was a deficit of 3.7 percent of GDP, a huge 2.9 percent improvement over 2014. The result contains a 2.5 percentage points of structural fiscal adjustment with 1.5 percentage points in permanent expenditure cuts and 1.0 percentage point in structural revenue improvements. This increases front loading and allows more fiscal space for the implementation of pending structural reforms. The program had a beneficial impact on economic growth which turned out positive at 0.8 percent, 1.3 percentage points above IMF and IFI projections. 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 the most difficult circumstances. The political economy issues of fiscal consolidation and structural reforms gain increasing importance in the second year of the program, two months before the early parliamentary elections. Fresh thinking is needed to demonstrate that the completion of difficult reforms is a win-win for all, and almost everybody loses if reforms are stalled or abandoned.