Vladimir Vučković, member of the Fiscal Council of Serbia: Reforming Public Enterprises is a Challenge

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When we sum up our experience with the last seven years, which is how long the Fiscal Council has been existing, it is a common practice for the government to implement measures suggested by the Council a year or two earlier

The Serbian Parliament adopted the Fiscal Council’s reports for 2018. At a public hearing, it was said that this year’s state budget would be balanced or could even record a small surplus and that the public debt would decrease in relation to the country’s domestic product and in relation to the country’s income. We have talked about the budget redistribution and the fiscal consolidation with Vladimir Vučković, a member of the Fiscal Council of Serbia.

 

Is the government more open to the Fiscal Council’s recommendations and what can we expect to see in the upcoming period? In which way can Serbia’s economy grow?

— The temporary reduction of pensions was abolished and this was one of the recommendations of the Fiscal Council for 2018. Now, a new investment plan is announced for next year, with utility infrastructure in focus, which should already have been a priority for this year as we wrote about it earlier. When we sum up our experience with the last seven years, which is how long the Fiscal Council has been existing, it is a common practice for the government to implement measures suggested by the Council a year or two earlier. For instance, we proposed freezing civil servant salaries and pensions as early as 2012, the government refused it at the time, and in late 2014, it found itself in a situation where it had to reduce them. This is the price one pays when implementing decisions is postponed. The announced investment programme could be extremely important for Serbia’s economic growth. Public investments increase economic activity in the short term because construction operatives are hired. In the long run, such investments create conditions for the development of the private sector, because entrepreneurs need basic infrastructure to be able to do their business. Fixing the business environment is also equally important for economic growth, as is solving a huge number of problems that bother business people such as various bureaucratic obstacles, unreasonable demands from ministries, customs, inspections, corruption, slow administration; namely, everything that stops people from doing business and investing, and makes them regret that they launched a business in the first place. These stories are not interesting in terms of macro-economy, but they are the bottom line of the Serbian economy’s slow growth. Furthermore, the issue of the judiciary is just as important. Can people count on the protection of their rights and contracts and how quickly will the injustice that they suffer be corrected?
What hinders the process of fiscal consolidation?

— Fiscal consolidation has been successfully implemented and Serbia and for two-three years now, the country has had public finances. We are now in the situation when we are changing the structure of public revenues and expenditures and we are no longer talking about savings. The future growth of current expenditures in the structure of current expenditure, i.e. civil servant salaries and pensions, should be limited and the state should boost the significance of budgetary investments. In the past, this process was slow and difficult – the disbursed salaries and pensions are immediately visible and are politically attractive, while investment works, by definition, are demanding and take a longer period. We need more efficiency and commitment in all stages of investments, from designing investment projects to implementing them. This requires political support, but also greater expertise.

 

What do you think of the redistribution of Serbia’s budget? Is the money being spent on the right things?

The total budget expenditures, amounting to around 40% of GDP, are at the appropriate level. Looking overall how is this budget being spent, we can see that changes are needed. Fewer subsidies, moderate growth of wages in the public sector and pensions, and a more pronounced increase in investments are the key components of a more prudent budget spending. In order to achieve this, it is necessary to reform state enterprises and to support all types of public investments, which we have already talked about. Another area that the Fiscal Council regularly focuses on is salary tax and contributions.

 Two options are outlined in the 2018 Report: an increase in the non-taxable part of the earnings and a linear reduction of taxes and contributions at the expense of employers. Is there a fiscal space for further relief for businesses?

— On the public revenue side, there is no room for great relaxation, i.e. reduction of taxes and contributions. As for expenditures, we can talk about a change in the structure. This means that if we want a greater reduction in salary tax and contributions, we need to think about increasing the VAT. When we compare the tax rates in Serbia and the corresponding countries, we can see that we are  Reforming Public Enterprises is a Challenge When we sum up our experience with the last seven years, which is how long the Fiscal Council has been existing, it is a common practice for the government to implement measures suggested by the Council a year or two earlier around average. In other words, our salary tax and contributions are not too big as it can often be heard publicly. What could be done is reducing the salary impost a bit more than in 2019. The extent of this reduction will depend on other decisions, and also on how much the next year’s expenditures will increase. This is like the principle of communicating vessels – you cannot substantially reduce taxes if you don’t increase expenditure that the money generated from taxes covers.

The Fiscal Council has recommended on several occasions that the state should not spend money on a substantial increase in civil servant salaries and pensions, but rather that the budget funds should be spent partly on investments and partly on lowering the tax burden on salaries. In light of this, what do you think of the announced increase in salaries and pensions, and the government not introducing pay grades?

— The growth of civil servant salaries and pensions should be concomitant to economic growth. That is the only healthy principle which entails a 6% to 7% growth per annum because this is the projected growth of the so-called nominal GDP that is actually a benchmark for the mentioned dynamics. While pensions should be increased equally for everyone, in terms of salaries there are several strong reasons not to carry out the increase ad hoc. All civil servants should be given a coefficient that would be used to objectively assess their job and that can be used as a guideline when it comes to increasing their salaries. This is what pay grades are all about and their implementation has been delayed for years. This is not good since we still have a system that is rife with huge illogicalities and disparities. Nobody even knows how much civil servants actually earn. All we have are certain averages that give a very vague picture. Pay grades are the only segment that we are not happy with. There are coefficients determined for some civil servants but not for all. The employees of the Interior Ministry were a separate category. There is no reason for employees who both work in administration and are doing the same job but in different ministries to have different salaries. And that is the case in Serbia today.

The Fiscal Council says that the state budget weathered the storm. What challenges lie ahead?

— Reforming public enterprises is a challenge. They need to be more successful and more professional in order to invest more funds and spend less on the wrong things. Public enterprises should be part of a successful development story, not a constant threat to the budget. It is, therefore, necessary to reduce the number of employees in them, control salaries, expel political influence, and reduce corruption. Another important area is the construction of communal infrastructure and advances in the field of environmental protection since we live in a country that is extremely polluted and where people do not have the basic prerequisites for a normal life. I am talking about water supply grids, sewer, landfills, wastewater treatment and the like. As much as people and business community are damaged by a low living standard, they are perhaps even more damaged by the living conditions that are unworthy of the 21st century Europe. The third thing is to keep controlling salaries in the public sector and pensions – this was most often the reason for the destruction of public finances in the past.

 


FINANCIAL SITUATION IN LOCAL SELF-GOVERNMENTS

The Fiscal Council has repeatedly warned about a poor financial situation in certain cities and municipalities. What’s the situation like today?

— The situation is better because some local authorities have begun to collect more responsibly their respective public revenues and behave more prudently towards costs. Local public enterprises now operate better, and they are less dependent on local budgets. However, this is, for a good part, a result of favourable circumstances like, for instance, a good ratio between a favourable price of gas and payment of heating bills. These and similar circumstances could change, which shows that local public finances are not permanently well-regulated and that there is still much work to be done. Local public investments are lacking and the state is expected to help with that. This fact shows that future public investments will be demanding and that strong coordination between all levels of government will be required.


 

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