Weekly Briefing, Vol. 38, No. 2 (RS), March 2021
New package of economic assistance
Summary
Serbian economy, shook by the Covid-19 pandemic, went through same turbulences as the most of the countries. Therefore, it was expected that, in the beginning of the year 2021, Serbian Government present the plan aimed to diminish negative consequences of the last year and, at the same time, take an effort to give an impetus to the stalled economic activities. In order to preserve the liquidity of the private sector, the state has decided to extend previous assistance programs in order to include the most vulnerable companies. New package of assistance also is directed towards the citizens that, likewise, the year before, were planned to be provided with 60, i.e. 50 euros. As one might expect, presented plan has provoked different opinions, dividing experts into pro and con lines.
New package of anti-crisis measures: something old, something new
As announced in January, Serbian Government, on February 12th, 2021, has adopted the third package of economic measures in order to provide assistance to citizens and the economy.[1]
Program finally was presented to the public on last day of March by Siniša Mali, Serbian Minister of Finance.[2] The worth of this package, aimed to reduce the negative consequences of the coronavirus epidemic, is 5.1 billion euros. According to the Minister Mali, including previous two packages, the Government provided assistance of 953 billion dinars in total, or approximately eight billion euros.
Minister emphasized that program saves people, jobs, production, liquidity, in other words the backbone of the economy. He also announced that the Government of Serbia within following 10 days will adopt a legal framework for the realization of the program of support to the economy.
The new state aid package has several elements. The first envisages the payment of 60 euros to all adult citizens of Serbia in two installments and an additional 50 euros to all retirees (1.7 million of them). It is estimated that a total of 6,118,911 adult citizens will receive 60 euros and that measure will be implemented through two payments, in May and November. Such a measure would cost the budget around 450m euros (just over 360 million euros for payments of 60 euros and about 85 million euros for pensioners). The second the element is the payment of half of the minimum to entrepreneurs and employees in micro, small and medium-sized companies, which would cost the budget around 450 million euros.
Unlike the first two, the third package of measures includes large companies that are also suffering the consequences of the pandemic. Practically, that means that apart 1,050,000 entrepreneurs and employees in micro, small and medium enterprises, additional 300,000 employees in large companies, will receive direct state support in the amount of one and a half of minimum wage.
Third, an additional one has been announced sectorial assistance to activities such as tourism and passenger transport, which in total could cost the budget another 50 million euros. For city hotels, for instance, is envisaged to receive another type of direct state support in the amount of 350 euros per individual bed and 150 euros per accommodation unit. Same type of assistance, city hotels has received by the end of 2020. Direct support is also provided to sector of passenger, road transport and bus stations. For them the assistance of 600 euros per bus for a period of six months is set.
Reactions to measures
Supporters of the Government welcomed the presented package of economic assistance highlighting the fact that the scope of beneficiaries of this new package is wider than previous two, as well the fact that neither part of private sector is neglected. When comes to the assistance provided to citizens, they claim that such measures are not sign of populism, but pure concern for ordinary citizens and intention to help them to survive in this difficult moment.
Unlike them, opponents of this third package of measures, insist on necessity to have fiscally responsible package of anti-crisis measures in 2021. The most prominent among them, are members of the Fiscal Council of the Republic of Serbia. According to them, new set of assistance package should be targeted only to the companies that were the most affected by the crisis.
The main concern of the Fiscal Council is based on the fact that the budget of Serbia tailored for 2021, already was in deficit even without the newly introduced package of anti-crisis measures.[3] As such, this new payment of state aid (which is not provided for in the current budget) will lead both to the additional increase in the fiscal deficit and to the new state borrowings. It is estimated that it will be over 1.5 billion euros which already has been planned by the recently adopted budget.
Further, it implies that the share of public debt in GDP in 2021, instead of slowing down, will continue to grow (to over 60% of GDP) – and this new tax debt taxpayers will repay with interest in subsequent years. Having that in mind, it is rational to work on limited measures, i.e. to focus anti-crisis measures in 2021 only on companies and the population that are suffering the greatest negative consequences of the economic crisis and which really need the help. Even in case that Serbia hasn’t been burdened with large public debt, it won’t be economically justified to make entire population of Serbia to borrow the money in order to finance either companies that were not stroke by health crises or high-income citizens.
The non-selective payment of aid to companies could be justified directly after the outbreak of the crisis when it was not yet known who was most affected – but not now. Serbia had a drop in economic activity in 2020 of about 1%, within which certain sectors such as tourism, catering, production and sales of motor vehicles had a double-digit drop. These data also suggest that not all parts of the economy are equally affected by health crisis. Certain companies are doing very well in the crisis (pharmacies, production and sale of household chemicals, food delivery, etc.).
Thus, it is inappropriate that all taxpayers in Serbia borrow in order to finance jobs during 2021 in those companies that are currently operating successfully and which are not endangered at all.
Also, it is not justified to finance companies that even before the crisis did not have a sustainable business model. Likewise most CEEC’s, Serbian Government should pay state aid in 2021 only to those companies and entrepreneurs who meet clear and objective criteria of financial vulnerability due to the crisis.
Additional government borrowing during 2021 should be reduced as much as possible by postponing projects that are not a priority in 2021. Namely, the budget for 2021 plans a number of expenditures that are not so significant for economic growth and population health and can be easily postponed for better times (enhanced equipment security sector, financing the construction of the airport in Trebinje, various subsidies and others). The realization of such projects can be postponed until macroeconomic and fiscal projections turn positive.
Responsible fiscal policy could reduce additional government borrowing 2021 at below 300 million euros instead of one billion euros. But, with newly adopted set of measures, new government borrowing is inevitable. However, if a new package anti-crisis measures implement selectively and postpone projects that are not a priority; the need for additional government borrowing would be significantly reduced.
Although it is impossible to give completely a precise assessment of how much this approach can reduce new government borrowing in 2021 – preliminary analyzes indicate that this could be reduced from one billion to below 300 million euros. More specifically, the selective payment of state aid to enterprises and population could limit these expenditures to a maximum of € 500 million (instead of € 900 million) euros – savings of 400 million euros) while postponing projects that are not a priority could save about 300 million euros. This would also mean that the fiscal deficit in 2021 could remain below 4% of GDP despite the payment of a new aid package, and public debt would have a relative moderate growth, slightly above 60% of GDP. What we pay special attention to is that due to the announced new anti-crisis measures, the planned ones should not be abandoned government investment in infrastructure. It is the state’s investments in infrastructure that are the most efficient state policy for stimulating economic growth (unlike non-selective payments of budget funds to citizens, which cannot be effectively encouraged economic activity). Also, there is a great need for these investments, especially in areas that have been neglected for decades, such as environmental protection (waste water treatment plants, sewage, sanitary landfills, quality improvement air and other).
Conclusion
The announcement of new set of measures only two months after the budget has been adopted, compromises budget process and shows that there has been an exorbitant increase in public sector wages error. In February announced and in March presented program of anti-crisis measures was not planned by the budget for 2021 – which is a de facto recognition that the budget for 2021 was tailored badly. At the same time, it is completely unclear how this development did not happen could predict in December 2020 when the budget for 2021 was adopted. It’s already then it was obvious that the epidemic would not end in 2020 and that a budget for 2021 was needed to be planned very carefully.
[1] Uredbao utvrđivanju programa direktnih davanja iz budžeta Republike Srbije privrednim subjektima u privatnom sektoru u cilju ublažavanja ekonomskih posledica prouzrokovanih epidemijom bolesti covid-19 izazvane virusom sars-cov-2, “Sl. glasnik RS”, br. 11/2021 (Decree establishing the program of direct benefits from the budget of the Republic of Serbia to economic entities in the private sector in order to mitigate the economic consequences caused by the epidemic of covid-19 disease caused by the sars-cov-2 virus, Official Gazette of the Republic of Serbia, No. 11/2021, ), https://www.paragraf.rs/propisi/uredba-o-utvrdjivanju-programa-direktnih-davanja-iz-budzeta-republike-srbije-privrednim-subjektima-u-privatnom-sektoru-u-cilju-ublazavanja-ekonomskih-posledica-prouzrokovanih-epidemijom-bolesti-covid-19-izazvane-virusom-sars-cov-2.html, accessed on 02/04/2021.
[2] “Paket pomoći vredan 5,1 milijardi evra”, Privredna komora Srbije, 31/03/2021, https://www.pks.rs/vesti/predstavljanje-ekonomskih-mera-za-ublazavanje-posledica-pandemije-covid-19-2507, accessed on 02/04/2021.
[3]Assessment of the draft budget for 2021, Fiscal Council of the Republic of Serbia, http://www.fiskalnisavet.rs/doc/analize-stavovipredlozi/2020/FC_Summary_Assessment_of_the_draft_budget_2021.pdf, accessed on 02/04/2021.