Fiscal Policy in 2008 Belgrade, November 12, 2007

Contents Results achieved in 2007 Macroeconomic framework and economic policy objectives for 2008 Main parameters of the fiscal policy for 2008 Republic of Serbia’s 2008 budget Closing considerations

Consolidated balance of the government sector in 2007 In the first three quarters of 2007, the surplus in consolidated government sector amounted to 50.6 bln RSD (2.1% of GDP); The surplus was created at the level of Republic, local governments and Pension Fund of Small Businesses, while other fiscal institutions were balanced; If license fee is excluded from the revenues, while repayment of debt to pensioners and net loans are included in the expenditure, the surplus amounts to 11.1 bln RSD, or 0.5% of GDP; Therefore, fiscal policy in 2007 has not been responsible for accelerated inflation and growing foreign deficit.

Consolidated 9m 2007 state balance

Republic of Serbia budget for 2007 The results achieved in the first nine months were somewhat better than planned; Revenues were at the planned level, while expenditure was a little below the projected sum; RSD 39 bln surplus was created in the Serbian budget in the first ten months; If the license fee is excluded from the revenues, and repayment of debt to pensioners and net loans are included in the expenditure, the surplus amounted to 0.5 bln RSD; Arrears toward budget users were reduced by around 2 bln RSD; Therefore, Republic of Serbia budget in the first ten months did not create additional liquidity, and consequently did not influence widening foreign deficit and growing inflation through demand.

Execution of the Republic of Serbia budget in the first 10 months of 2007

Republic of Serbia public debt In the first 9 months of 2007, Serbia’s public debt was reduced by some 300 mln EUR; Share of public debt in GDP was reduced to below 30%.

Macroeconomic policy objectives for 2008 Macroeconomic stability –Reducing inflation and foreign deficit; Dynamic economic growth; Raising employment and standard of living; Accelerating EU stabilization and association processes; Accelerating economic reforms; A more balanced regional development.

Macroeconomic framework for 2008

Main parameters of fiscal policy in 2008 Share of public expenditure in GDP is planned to be reduced by 0.8 percentage points, while share of Republic budget expenditure will be lowered by 0.7 percentage points; Consolidated fiscal deficit will amount to 0.6% of GDP, and Republic budget deficit to 0.5% of GDP; Share of public debt relative to BDP will be reduced by 3.4 percentage points; Maintaining salaries at the same level in real terms in 2008 is the key measure to reduce public expenditure in GDP in medium-term period; Tax system reform will be continued, with the objective of simplifying the system and creating a favorable climate for savings and investments.

Proposed 2008 budget for the Republic of Serbia Planned revenues and expenditure are 9.9% higher than in 2007; Despite the relatively modest increase in expenditure, it includes: additional 30 bln RSD for transfers; servicing budget debts in the amount of 3 bln RSD (war invalids, diaspora, railways, judiciary etc.); additional projects amounting to 14 bln RSD (embassies, Eurovision, University Olympics, army, police, science, judiciary and national pensions); Implementation of projects from the National Investment Plan in the amount of 46 bln RSD (budget funds and loans). Planned budget deficit will remain at the 2007 level, though revenues in 2007 included also the license fee for mobile telephony (1% of GDP).

Proposed Republic of Serbia budget for 2008

REPUBLIC OF SERBIA’S REPAYMENT OF DEBT AND ACQUISITON OF FINANCIAL ASSETS

Closing considerations Planned fiscal policy for 2008 is a step in the direction of: reducing the share of public expenditure in GDP, reducing state liquidity effect on aggregate demand, improving the structure of public expenditure; User’s expectations concerning further growth of certain categories of public spending in 2006 and 2007 (salaries, subsidies, etc.) were interrupted; The proposed budget is not economically optimal, but is the maximum in the given political and social circumstances; It is necessary to continue fiscal adjustments in order to reduce the share of public spending in BDP, with the objective of creating a fiscal surplus in the coming years.

Creating a fiscal surplus in the coming years is vital for reducing foreign deficit; Creating a fiscal surplus requires implementation of a medium-term policy of rationalization of public expenditure, whose key elements should include : –Slower growth of average salaries relative to the growth of nominal GDP, –Reducing number of employees in the government sector, –Reducing subsidies, –Rationalizing the network of state-owned institutions; It is also necessary to review effectiveness of state loans; It is necessary to reduce public expenditure and deficit relative to GDP, in order to reduce macroeconomic disequilibria, regardless of the fact that the state holds high privatization deposits; There is no space for reducing major tax rates in the next 2-3 years.