ASPECT OF FISCAL CONSOLIDATION : EVIDENCE FROM SERBIA

In contemporary market conditions facing continuous debt crisis, the notion of fiscal consolidation is one of potential solutions for solving the main economic issues in any country. As regards fiscal consolidation, it necessary to point out to the importance of developing strategies aimed at minimizing deficit and debt level. Serbia is among those countries in which irrational spending is widely present with unfavourable tendency regarding the aspect of production and consumption. Over the past 25 years, Serbia has spent much more than it has produced, which has led to large budget deficits and debt level. The aim is to point out to the concept of fiscal consolidation and its implementation in Serbia, while the subject of this paper is to present the package of measures and strategies defined by the government of the Republic of Serbia and the Fiscal Council Program.


INTRODUCTION
If we observe the transition period of 2001, Serbian economy had a long-run episode of intensive and slow growth.Th e fi rst transition years included post-confl ict reconstruction, structural reforms and foreign direct investments which led to rapid economic growth with an average rate of 5.9% and a better state of public fi nances.Fiscal defi cit and public debt were moderate and lower until 2008, but the global economic and fi nancial crisis led to deterioration of these indicators.Fiscal instruments that were available to the government in 2009 were limited, and thus it was necessary to restrain from consumption to ensure investment.Th e government had a nominal pension freeze in 2009 and 2010 and salaries in the real sector were frozen.In order to achieve infrastructure improvement, capital expenditures were held at the level of previous two years or 4% of GDP (IMF, 2009).In October 2011, Parliament adopted amendments to the Law on Budget systems, introducing a two-tier structure of fi scal rules.Th e fi rst rule is designed to limit future fi scal defi cit and public debt while the second rule should limit the consumption of essential items, particularly public sector wages and pensions (IMF, 2011).Serbia has struggled with weak and slow growth.Th e stagnation of economic activity has resulted in falling revenues and increasing expenditures.Also, structural fi scal problems, such as continued support to state-owned companies and ineffi cient tax administration have been a drag on growth.As a result of these pressures, general government fi scal defi cits averaged 5.6 percent of GDP a year between 2008 and 2014.Th is paper refl ects the main measures of fi scal consolidation program in Serbia with special emphasis on the key macroeconomic and fi scal indicators within a ten-year period.Th e authors will try to present the situation before and aft er taking measures and point out to the relevance of fi scal consolidation.Moreover, the authors wanted to highlight the situation in Serbia from the economic aspect using tables and graphic views which manifest trends in Serbia and provide little contribution to this part of public fi nance.Th is contribution is determining facts in Serbian economy and results of the fi scal consolidation program.

LITERATURE REVIEW
Th e fi nancial crisis has led to an increase in public debt in developed countries where the average rate of gross government debt exceeds 100 percent of GDP for the fi rst time since World War II (IMF, 2011).Also, it has revealed that there is a need for fi scal consolidation that is more likely to improve the global competitiveness and ensure growth (Rodrik, 2012;Spence, 2012).Numerous studies have dealt with the issue of fi scal consolidation (Giavazzi & Pagano, 1990;Alesina & Perotti, 1995;Ardagna, 2004;Hallergerg et al., 2007;Mulas-Granados, 2006;Avellaneda & Hardiman, 2012).Th e economist Mulas-Granados ( 2006) added a political variable as a fact that there is the diff erence as to whether the government is left or right-oriented.Alesina and Perotti (1995) analyzed the role of coalition government and concluded that substantial fi scal adjustments are less likely than other forms of government.
Fiscal consolidation is determined as the specifi c policy that should lead to the reduction of government defi cits and debt accumulation (OECD, 2011).Th e creation and implementation of the consolidation plan vary from country to country due to the specifi c and various circumstances of their economy (Botman & Honjo, 2006;Leigh, 2010;Berkmen, 2011;Clinton et al., 2011;Taylor et al., 2013, Tapsoba, 2013).Berkmen (2011) induced that fi scal consolidation can't give positive results without structural reforms.Furthermore, fi scal consolidation provides the opportunity to rationalize and enhance the tax systems as well as to get rid of distortion damaging the economy (Princen & Moure, 2013).Bakker and Christiansen (2014) emphasize that it's notable that fi scal consolidation leads to the genuine improvement in government solvency, while Kataryniuk and Valles (2015) noticed that signifi cant fi scal consolidation may reduce the need for future fi scal operations, raising the current confi dence of households and enterprises.Samuelson and Nordhaus (2001) defi ne fi scal policy as the use of taxation and government spending to infl uence the economy.Th e core problems arose from declining revenues despite tax rates increase, continued rise of unsustainably high compulsory spending, with public wages and pension bills being the most relevant components.Also, the costs of resolving the status of public banks and guarantees for loss-making public enterprises represent serious state budget expenditures.

MACROECONOMIC STABILITY AND FISCAL POLICY
Figure 1 shows that the country should achieve macroeconomic stability using adequate policies and strategies with an emphasis on the implementation of structural reforms.On the other hand, the economy has to stabilize the fi nancial system so that banks and other fi nancial institutions could operate smoothly.Economic growth, fi nancial sector resilience and fi scal sustainability are the key principles that should be present in any country.Th e strong budget institutional framework is needed to sustain the entire process with the institutional aspects playing a major role in making of fi scal policy (IMF, 2010): ◆ understanding the scale of fi scal challenge to planning necessary adjustments; ◆ creating a respectable consolidation strategy with transparent fi scal rules; ◆ implementing this strategy through budget.
Table 1 shows the basic economic indicators of foreign trade partners of Serbia in 2015 with the projections for 2016 and 2017.As can be seen, macroeconomic indicators will be better in the next two years.Disinfl ationary trend in the EU continues during 2015 due to low energy and food prices and infl ation is expected to grow by 0.1% in 2015.In future, stronger growth in domestic demand and narrowing of the output gap as well as the expected growth in energy prices will contribute to accelerating infl ation to 1.5% in 2016 and 1.6% in 2017.On the other hand, unemployment rates should be lower in 2016 and 2017, but the rates will still double in Eurozone (10.8% and 10.3%).Petrović et al. (2016) emphasize that high unemployment is one of the biggest structural problems in Serbia where the rate within the population aged 15-64 years was 17.3%, which is among the highest unemployment rates in Europe.
Italy has a huge gross government debt exceeding 130%, which is far greater than the defi ned convergence criteria.Furthermore, Germany doesn't have this problem and its debt is around 70% with a decreasing tendency in 2016 and 2017, which is quite encouraging data given the fact that the German economy is the strongest in the Eurozone.Finally, consolidated fi scal balance of GDP records a declining trend in the entire observed group of countries where the level of this indicator will be in plus in Germany (expected surplus of 0.4% of GDP).Th us, it is necessary to precisely defi ne the concept of fi scal balance and consolidation and list their favourable and adverse eff ects.
Labus and Labus (2016) defi ned the standard expectations of the fi scal consolidation program and noticed that it squeezes aggregate demand by depressing public and private consumption.Vujović (2016) determined three related thematic areas of fi scal consolidation in Serbia: a) macromonetary and macro-fi scal public debt block, b) fi nancial sector block and growth enabling micro structural block.Th e fi rst one is focused on price and exchange rate stability, reducing fi scal defi cit and public debt, the second one places special emphasis on providing adequate business and consumer fi nancing at competitive interest rates, whereas the third one is directed towards improving the legal and institutional aspects of business environment climate.In the next chapter, the authors shall analyze in detail the theoretical basis of fi scal consolidation and its practical implementation.Serbia recorded GDP growth rates over 5%, as a result of an intensive foreign capital infl ow and privatization of public enterprises.However, the global crisis and lack of institutional reforms in public administration and enterprises as well as unfavourable business environment lead to lower economic growth in Serbia.During the last two years, there have been negative rates of the observed indicator, i.e. real GDP decrease at the end of 2014 was 1.8% (Kalaš & Milošević, 2015).Th e growth of industrial production is continuous and permanent except in 2009 when there was headlong decline of 12.6%, as a result of the fi nancial crisis.Furthermore, unemployment presents the chronic problem of our economy and the rate has doubled for years and has a growing trend.Th is indicators grew by 10.3% only in the period 2008-2012 due to deterioration of the world economy, but also because of the structural problems and rigid legislation and unreformed labor markets.Gligorov (2015) noticed that Serbia entered the recession process in 2014 because of fi scal consolidation and export stagnation.

FISCAL CONSOLIDATION: THEORY AND INDICATORS
Figure 3 shows the trend of public debt and budget defi cit, as two main fi scal indicators in every economy for the period from 2008 to 2015 in Serbia.As we can see, public debt has recorded a growing tendency, especially in the period from 2009 to 2012, when this parameter increased.
In October 2015, debt reached a record degree of 72.9%, which is 44.9 percent higher compared to the beginning of the period.On the other hand, the budget defi cit is growing from year to year exceeding 6% of GDP in 2012 and 2014.However, the defi cit was reduced as a result of adjustments to public fi nances within the fi scal consolidation package and arrangements with the IMF.where the level of wages increased by 0.4%, i.e. from 23.4% to 23.8%, while the share of pension funds reduced by 0.5%, i.e. from 28.9% to 28.4% although in 2013 this category accounted for one third of the budget, i.e. 30.2%.
Figure 5 shows the structure of budget deficit in terms of monetary expenditures for wages and pensions as the prevalent components in the public fi nance system of Serbia.Th ey make more than 50% of the entire budget, which confi rms the relevance of these expenditures.Th e share of wages and pensions at the end of 2015 was 52.20%, which is by 0.7% higher compared to 2014.
Important fi scal consolidation measures were adopted with the budget rebalances in 2012 and their implementation continued in 2013.Th is policy has primarily been to the revenue side and is related to tax rate changes as well as elimination of signifi cant number of parafi scal levies.On the expenditure side, the most important measure was limiting the growth of public sector wages and pensions where these components are reduced for  employees with earnings exceeding 60.000 RSD and a hiring freeze.Th e measures of fi scal consolidation signifi cantly determine the trend of macroeconomic aggregates in the future, especially the trend of GDP and private consumption.Moreover, measures relating to salaries and pension cuts will have double impact on the overall level of general government revenues (Fiscal Council, 2014): ◆ Nominal decrease of salaries and pensions in the public sector will have adverse eff ects on the real level of personal consumption, which will be partially compensated by the trend of salaries into the private sector; ◆ Projected level of infl ation with the trend of the real level of private consumption leads to stagnation of a nominal level of consumption as a determinant of indirect taxes collection in 2015.
◆ Reduction of salaries in the public sector directly aff ects the trend of the level of direct taxes.Also, decrease of salaries in parts of the public sector that aren't fi nanced directly from the budget of Serbia will aff ect the revenue side, by showing the anticipated savings on the revenue side as part of nontax revenues; ◆ Th e assumption is that the consumption of excise goods is inelastic and that quantitatively expressed trend of consumption is autonomous in relation to the overall level of spending.Th e trend of prices of these products directly and largely aff ects the volume of grey economy; ◆ Effi ciency of parts of the public sector will cause a higher payment received from public companies in the future and together with the introduction of a new category of dedicated revenues in the forms of fees for mandatory strategic oil reserves will aff ect the amount of total tax revenues.
Th e economic restructuring of the Serbian economy will be notably supported by the decline of irrational public expenditures and adequate model of investing funding, which would boost the economic growth.Th erefore, fi scal policy has the key role in defi ning the optimum relationship between expenditures and revenues in the budget and if there is a defi cit, the government should enable long-term fi nancing.Also, public debt management represents one of the primary goals in every country and the economy lacking the appropriate strategy would face serious issues.

CONCLUSION
Th e economic crisis has had a considerable bearing on the Serbian economy through a sudden infl ow of capital due to the global trend of decreased economic activity and aggregate demand.In 2009 and 2010, there was a nominal freeze of pensions and wages in the real sector, given that these two components represent the largest budget expenditures.Furthermore, in the period 2011-2012, the rules were designed to limit fi scal defi cit and debt while still maintaining the wages level in the public sector.With solidarity tax or reduction in net income and temporary suspension of employment until 2015, there was also an increase in VAT rate from 8% to 10% with determination of measures to repression of shadow economy.If we observe the year 2016, the data show halved fi scal defi cit and it's encouraging in terms of public fi nances of Serbia.However, the public debt growth is a serious issue in our economy.Over the last two decades, irrational spending of funds on the basis of borrowing has been the common tendency in terms of dealing with public fi nances.Fiscal consolidation must be set and be even more comprehensive with special emphasis on public enterprises with huge loss.Also, giving guarantees and subsidies for their existence on the market leads to spending large funds in the budget and contributes to the defi cit growth.Finally, fi scal consolidation needs to be underpinned by structural reforms as only in this way it is possible to achieve measures and goals of successful adjustment of public fi nance.

Guichard
et al. (2007)  andBarrios et al. (2010),Hagen et al. (2002),Afonso and Jalles (2011) believe that fi scal consolidation is likely to be launched when the government is weak i.e. when there is huge indebtedness.Lowering of high defi cit and public debt is the main task for the Serbian government(Labus & Labus, 2015).Yartey et al. (2012) have presented several options for debt decrease including the following: growth, fi scal consolidation, infl ation, privatization, debt restructuring and defaults(Yartey et al., 2012).