Serbia must adapt its policies, primarily fiscal policy, to the new circumstances
In very turbulent economic times, with global conflict emerging on our doorstep, nothing is the same. “What is this crisis that we are in, what caused it, and is there a remedy for getting out of it,” we asked Nikola Altiparmakov, a member of the Fiscal Council of Serbia and one of the most famous domestic financial experts specializing in fiscal policy, pension reforms, and profit distribution.
The inevitable first question is related to the economic crisis we are facing, if we consider the situation in the world and Serbia. Although the crisis has not been officially announced, it seems to be very impactful. How would you characterize what is happening here and in Europe, primarily?
During the previous decade, the most developed countries of the world, in a short-sighted and, I would say, irresponsible way, experimented with zero interest rates, which led to large imbalances that began to manifest, primarily in the form of accelerated inflation. It will take a long time to correct the financial and economic imbalances created during the multi-year period of zero interest rates. So, as you noted, America has not yet technically slipped into recession, but many indicators suggest that it will in the next year or so. Specifically, the yield curve on US bonds is inverted, and every time this has happened in the past 100 years – a recession has followed. On the other hand, the Eurozone has formally entered a minimal recession, but the real challenges for Europe are yet to come. Namely, the fight against inflation will require the European Central Bank to reduce money printing, which will make it difficult to finance the most indebted countries, especially Italy. When you add to that the misfortunes caused by the war in Ukraine, especially for the European economy, you can conclude that the coming years in Europe will be marked by great uncertainty, including modest prospects for economic growth and an increase in living standards. Serbia must adapt its policies, primarily fiscal policy, to these new circumstances.
Prices are skyrocketing, and inflation is registered across the continent. One gets the impression that it is much higher in Serbia than the statistics show. How do you comment?
During the previous year, citizens from America, Europe and Serbia usually have an impression that inflation was higher than official statistics show. This perception, I would say, is the result of two factors. First, the fact that the biggest price increase was recorded in the area of food and energy products, which most directly affects the majority of the population. Second, the fact is that international statistical standards for monitoring inflation, which have not changed substantially for decades, could potentially be improved in certain segments in order to provide a more comprehensive representation of the difficulties that citizens face. Thus, as one American commentator noted, “the fact that the price of a piano did not increase in the inflation index does not affect the lives of citizens that much, but that is why high increases in the price of food and housing really affect the quality of life.”
There are numerous interpretations and different “readings” of economic indicators. While the government mitigates the consequences of the crisis, unofficial sources and citizens sense a different math. What is the problem? Why is two and two not always four?
In this case as well, we can note factors of both economic and political nature. From a political point of view, ruling parties always tend to look at things optimistically, from a “glass half-full instead of half-empty” perspective. Furthermore, from an economic point of view, leading international authorities, such as the World Bank, the IMF or the European Union, are also biased towards optimism in their announcements due to the well-known economic phenomenon of the “self-fulfilling prophecy.” Even if the situation in the economy is satisfactory, the negative projections of respectable institutions could collapse the confidence and expectations of investors and businessmen, which, by itself, could be enough to cause a recession. Thus, these two sources of “bias towards optimism” are unavoidably present in the modern world.
Social peace is bought by increasing pensions and salaries in the public sector. Is it justified, and where is such a policy leading us?
Additional wage increases in the education and health sectors are not disputed, neither from a budgetary nor a social point of view, since these two sectors have been neglected for many years. However, the problem is that one gets the impression that we continue to treat health care and primarily education – which has always been the pillar of every nation, especially in the modern times of the 21st century – in the limited and unsystematic manner. And the problems in the education system in Serbia are visible at every level, and they go far beyond a mere salary issue.
The Eurozone has formally entered a minimal recession, but the real challenges for Europe are yet to come
As for additional increases in pensions, they are unjustified and against fiscal rules. What’s more, in this way, the intergenerational agreement is being changed to the detriment of young workers who will have to repay the debts in the future that Serbia will take on this year to pay an additional, extraordinary increase in pensions. Instead of this measure, the available budget funds should have been used to increase the scope and amount of social protection programs, which are particularly important in the years of high inflation and high price increases of basic groceries and energy.
What is happening with the public debt in Serbia. There are many different interpretations and assessments here as well. How can citizens know what the truth is?
After the successful fiscal consolidation between 2015 and 2019, we can conditionally say that the problem of public debt in Serbia has been brought under control. But in order to remain in calm and safe waters, as far as the public debt is concerned, we must no longer allow ourselves irrational spending from the budget, like the “helicopter money” from the past few years, when unnecessarily and counterproductively, Serbia spent two billion euros more than other comparable countries in Europe and the region, as these irrational spending actually did not accelerate economic growth, but accelerated inflation in our country.
Another negative consequence of the zero interest rates of the last decade is that the capital markets did not properly perform their controlling role and did not limit many countries, such as Italy and Greece, from irresponsibly and unsustainably borrowing beyond their means. Unfortunately, the capital markets still do not function adequately in this segment, so the responsibility now lies with the countries themselves, such as Serbia, to put their public finances in order before the problems get out of control, as was the case during the global financial crisis in 2008.
Recently, the USA was on the verge of bankruptcy due to the extremely high public debt. Isn’t that standard American domestic economic policy, and why has it become a problem now?
The recent episode in America was primarily of a formal nature, that is, as you stated, the internal specificity of the American political system. But there is also a much more serious, deeper economic and social problem in America, which is a large budget deficit that has not reduced for years, nor does it have the prospect of being significantly reduced in the coming years, even though the public debt has already increased to 100% of the gross domestic product (GDP). The problem of public debt in America and in the most indebted European countries like Italy is closely related to the problem of inflation – as precisely because of the lack of fiscal consolidation, these countries resorted to printing money to cover their deficits, which accelerated inflation and will make it even more difficult to reduce it in the coming years. Unlike Europe, although America does not feel the economic consequences of the war in Ukraine to a greater extent, the unsustainable fiscal policy is a source of problems for both America and the rest of the world.
We can conditionally say that the problem of public debt in Serbia has been brought under control
Relations in the world in the economic sense are changing dramatically. How does it affect Serbia, and how dependent is the Serbian economy on various global factors?
Naturally, when you see the gloomy prospects for growth in the most developed countries, above all in Europe, which is our main trade and economic partner on which we are very dependent – it is clear that Serbia will also face vast economic challenges. In particular, a recession in the Eurozone, primarily in Germany, will reduce the demand for our export products and thus negatively affect our gross domestic product. In these new conditions, Serbia will have to maintain stable public finances and a low budget deficit, bearing in mind the high cost of borrowing in international markets and the fact that we pay interest rates of close to 7% per year whenever we need to borrow. Also, it will be an imperative to pay attention to social aspects because the crisis especially affects vulnerable sections of the population. In addition to the previously mentioned improvements to the social protection program, in the segment of social cohesion it is fundamental to enable more progressive taxation that will be able to protect the most vulnerable workers with the lowest incomes and dependent family members.
When I say more progressive taxation, I do not mean a high tax increase for the most productive categories of workers primarily responsible for economic growth and development prospects but, above all, a tax relief for vulnerable workers. In particular, the current tax-free allowance of only 20 thousand dinars per month is unreasonably low and should double to 40,000 dinars per month. Furthermore, following established European practice, it is necessary to introduce similar tax-free allowances for children and other dependent members of the household since statistics show that families with low incomes and a large number of children are among the most vulnerable in Serbia, and it is they who need protection in these turbulent times.