Republic of Montenegro: Public Expenditure and ... - Vlada Crne Gore

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12 Chapter 2: Composition of Public Expenditure and Key Sources of Fiscal Pressure Table 2.1. Montenegro: Consolidated Government Fiscal Operations, 2001-05,% GDP 2001 2002 2003 2004 2005 Total revenue 38.0 35.1 35.0 36.4 37.7 Current revenue 38.1 35.2 34.9 36.2 37.6 Tax revenue 33.0 32.9 32.7 34.5 35.8 Personal income tax 5.4 4.4 4.5 4.2 4.0 Social security contributions 10.8 11.5 10.6 11.2 10.5 Corporate income tax 0.6 1.0 0.9 1.1 1.5 Retail sales tax 7.1 8.3 9.7 10.3 11.9 Excises 4.4 4.3 4.1 4.0 3.7 Taxes on international trade 4.3 3.0 2.7 2.4 2.4 Other taxes 0.4 0.4 0.2 1.3 1.8 Non-tax revenue 5.1 2.3 2.2 1.7 2.0 Capital revenue 0 0 0.1 0.2 0.2 Repayment of old fiscal claim Statistical discrepancy -0.1 -0.1 0 0 0 Total expenditure and net lending inc. Union Transfers 42.8 38.9 39.9 39.9 40.4 Total expenditure and net lending 42.4 38.6 37.8 37.6 37.9 Current expenditure 38.7 35.4 34.2 33.9 32.0 Expenditure on goods and services 17.4 14.8 14.7 14.7 14.1 Wages and salaries 11.5 11.1 10.5 11.2 10.6 Other purchases of goods 5.9 3.7 4.2 3.5 3.5 Interest payment 0.1 1.0 1.0 1.6 0.9 Subsidies and other current transfers 20.7 19.0 18.0 16.9 16.7 Subsidies 1.2 1.9 1.0 0.6 0.4 Transfers to households 19.5 17.1 17.0 16.3 16.3 Transfers to local government 0.1 Other current expenditures 0.5 0.6 0.5 0.7 0.2 Capital expenditure 2.0 1.5 1.6 2 3.8 General reserves 0.6 1.0 0.6 0.7 1.1 Domestic Arrears (army) 0.6 Lending minus repayment 1.1 0.7 1.4 1.0 0.5 Transfers to the Union 0 0 2.2 2.3 2.5 Discrepancy 0.4 0.3 -0.1 0 Overall balance -4.3 -3.7 -4.9 -3.5 -2.6 Grants 3.1 2.1 0.9 0.5 0.2 Overall balance after grants -1.2 -1.6 -4.0 -3.0 -2.4 Financed 1.6 1.8 4.0 3.0 2.5 Domestic financing 1.6 -3.7 1.7 0.6 -8.4 Bank financing 0.8 -3.4 1.1 -0.8 -7.8 Non-bank financing 0.8 -0.3 0.6 1.4 -0.5 Foreign financing 0 0.6 1.3 2.0 1.5 Privatization receipts 0 4.9 1.0 0.4 9.4 Memorandum items: GDP, in current EURO, mln. 1049 1301.5 1433 1535 1644 Sources: IMF; Montenegrin Ministry of Finance. 2.5 Government revenue increased from about 35 percent of GDP in 2002 to about 37.7 percent in 2005. By composition, social security contributions and value-added tax (VAT)
Chapter 2: Composition of Public Expenditure and Key Sources of Fiscal Pressure 13 account for about 62 percent of the total tax revenue. Personal income tax revenue and the excise tax each account for an additional 12 percent of total tax revenue. International trade taxes account for 7 percent and corporate income tax accounts for only 3 percent of total revenue. 2.6 The overall government deficit increased from about 1.8 percent of GDP in 2002 to about 2.5 percent in 2005 (as foreign grants declined from 2.1 percent to 0.2 percent of GDP and transfers to the State Union budget increased from zero to 2.5 percent of GDP during the same period). By type of financing, domestic borrowing, including the issuance of short-term securities (Treasury bills), fluctuated, in part depending on the Government’s privatization revenues. 18 Net foreign financing increased from 0.6 percent of GDP in 2002 to about 1.5 percent of GDP in 2005. The recent increases in deficits after grants pose a risk to fiscal sustainability and macroeconomic stability. 2.7 A recent fiscal sustainability analysis shows that Montenegro needs further fiscal consolidation to achieve sustainability. Under the assumptions that the economy grows at a constant real rate of 4 percent per year, and that the real interest rate is constant at 5 percent, 19 a recent analysis by the World Bank finds that a primary budget balance of 0.4 percent is needed for Montenegro to achieve long-run fiscal sustainability. 20 In the past two years, estimates of the primary fiscal balance were close to a deficit of 2 percent of GDP. Preliminary data for 2005 suggest a primary deficit of just over 1 percent of GDP. This is still short of the surplus of 0.4 percent of GDP needed for fiscal sustainability. If one were to assume that real interest rate is 1 percent (closer to what Montenegro pays now rather than the 5 percent assumed above) in the long-run, a primary deficit no greater than 1.3 percent of GDP would be needed to maintain a stable debt-to-GDP ratio. A considerable fiscal tightening—on the order of 1 percent of GDP—is needed to achieve fiscal sustainability. Economic Composition B. COMPOSITION OF PUBLIC EXPENDITURE 2.8 The Government of Montenegro spends about two-thirds of its expenditure on wages and salaries, and various social benefits to households (Figure 2.2). Purchase of goods and services, interest payments, subsidies to enterprises, capital expenditure, transfers to the Union and other non-interest current expenditures, account for only about one-third of total expenditure. 18 The government received a large amount of privatization revenue—about 10 percent of GDP—in 2005. So far, the Government has used the proceeds to clear of government debt and some domestic arrears. Whether the government uses the remaining revenues to reduce deficit spending instead of increasing it will have important implications for fiscal sustainability and macroeconomic stability. 19 At the time this analysis was conducted, SaM had a lower B+ rating, for which spreads were running at around 300 basis points over US bonds. With medium term US T-bond rates running at around 4 percent, this suggested an interest rate of around 7 percent in dollar terms. With US inflation rates expected to be on the order of 2 percent, a real interest rate of r = 0.05 was assumed. 20 This is based on an internal World Bank document: “Debt Sustainability in Serbia and Montenegro”, June 2005.
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Page 3 and 4: CONTENTS ACKNOWLEDGMENTS ..........
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6. BEYOND THE NATIONAL BUDGET: FISC
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94 References Langseth, Peter Jerem
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96 Annex 1 Indicator 2001 2002 2003
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98 Annex 3 ANNEX 3. COSTS OF ALTERN
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102 Annex 4 with EU standards and d
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Republic of Montenegro: Public Expenditure and ... - Vlada Crne Gore

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