1. GOVERNMENT OF THE REPUBLIC OF SERBIA MINISTRY OF FINANCE www.mfin.sr.gov.yu FISCAL MEASURES AIMED TO INCREASE EMPLOYMENT, SOCIAL SECURITY AND POVERTY REDUCTION May 2005 Jelena Rančić

2. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA Contents: Macroeconomic indicators Fiscal reforms and stable fiscal policy: decrease of fiscal burden (income tax) - change of public expenditure structure - public debt reduction

3. МИНИСТАРСТВО ФИНАНСИЈА IN RESPECT OF POVERTY REDUCTION STRATEGY, THE KEY OBJECTIVES FOR MINISTRY OF FINANCE ARE : Sustainable economic growth Macroeconomic stability Fiscal reforms continuance and stable fiscal policy ACCOMPLISHMENT OF THESE OBJECTIVES IS A PRECONDITION FOR: Unemployment reduction Improving quality and quantity of social protection services Health care special programs (primary and preventive health care) Implementing educational reform in line with the requirements of the market economy and the development of private sector (especially SME) MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

4. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

5. МИНИСТАРСТВО ФИНАНСИЈАMINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

6. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

7. FISCAL REFORMS FROM 2001 TO 2005 Gross wages (net) taxation system was introduced with personal income tax rate of 14% (in 2001) A unique minimal basis for contributions was introduced - 40% of gross wage (previously 7 basis) from previous quarter (in 2004) Payroll tax by employer of 3.5% was abolished (in 2004) Contribution rates were changed (in 2004): Contribution rates by employer and employee to 2004from 2004 Pension fund - employees20,622,0 Health insurance11,9012,30 Unemployment insurance1,101,50 MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

8. FISCAL REFORMS FROM 2001 TO 2005 Employers that employ workers who lost their jobs in restructuring process are granted certain tax relief: - when employer hire elderly worker (from 46 to 50 years of age) it pays only 20% of total contributions for the next two years - when employer hire elderly worker (more than 50 years old), it is not obliged to pay contributions for the next two years The plan is to introduce global income tax MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

9. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

10. Corporate income tax was reduced from 20% to 14% (2003), and then further reduced to 10% (2004) Law on Excises was further harmonized with the EU regulations in terms of scope of taxation and excise amounts Law on customs tariff brought the reduction of average customs rate for about 35%, and 36 custom rates were replaced by 6. The beginning of 2005 saw the introduction of VAT that replaced sales tax (sales tax rate was 20% with a lot of tax exemptions), whereby one-phase taxation of goods and services was replaced by taxing the sales cycles in all phases FISCAL REFORMS FROM 2001 TO 2005 MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

11. All goods and services are taxable by VAT (with no exemptions), and there are two rates: standard (18%) and reduced rate (8%) The plan is to reduce standard rate for some goods and services (food products –frozen fruits, vegetables, meat, fish; new housing; tickets for cultural and sport manifestations) MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA FISCAL REFORMS FROM 2001 TO 2005

12. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

13. FISCAL SUSTAINABILITY OF PUBLIC EXPENDITUIRE Significant reduction of current expenditure (subsidies, transfers, wages and salaries, social grants) and increase in capital investments Pension funds arrears are decreased Public expenditure structure changes MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

14. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

15. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

16. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

17. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

18. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

19. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA

20. The process of switching from line budgeting to program budgeting is underway. Program budgeting will facilitate determining of accurate budget allocations directly used for implementation of poverty reduction strategy. Until the program budget is adopted, it is possible to present the overall effects of introduced poverty reduction reforms only indirectly. The Ministry of Finance is preparing the report on implementation of Poverty Reduction Strategy, with the estimate of realized funds in the period 2004-2005. MINISTRY OF FINANCE GOVERNMENT OF THE REPUBLIC OF SERBIA