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

Chapter 2: Composition of Public Expenditure and
Key Sources of Fiscal Pressure 17
service delivery. Chapter 3 discusses public administration and institutional reforms that can
help improve service delivery and accountability within the civil service.
2.15 Similarly, Montenegro’s
expenditure on public order and
safety, at about 4 percent of GDP, is
about twice the average for new
member countries. These expenditures,
driven primarily by spending on the
police service, are higher than the
average levels in CEE countries.
Reforms are needed to control spending
on this particular component, and
progressively bring spending in line
with the average norms in the region.
Social Welfare and Protection
Sources: Montenegrin Ministry of Finance, IMF.
2.16 Public spending on social
welfare and protection, accounting for about 14 percent of GDP, is high but similar to the
levels in other countries in the region. As elsewhere in the region, within social welfare and
protection, pensions and pension related benefits dominate, accounting for about 80 percent of
this spending. In Montenegro, recent pension reforms 22 have helped ease the fiscal pressure
coming from the Pension Fund (see Box 2.1). Yet, the Pension Fund is still running a deficit. In
view of the fiscal pressure, further reforms may be required in the future to bring the system into
balance and into compliance with international standards.
Health Care
Figure 2.2. Montenegro’s Functional Spending by
Major Components (% share in total), 2005
Housing and
Municipal
Activities (0.3%)
Sports, Culture
and Religion
(1.2%)
Social Welfare
and Protection
(26.7%)
Health Care
(13.3%)
Economic
Services (6.6%)
Education
(10.3%)
General Public
Services
(28.7%)
Public Order and
Security (8.1%)
Defence (5.0%)
2.17 Similarly, Government spending on health care services, accounting for about 6.6
percent of GDP, is much higher than the SEE (5.9 percent) and NMS average (4.7 percent).
Montenegro’s health system faces several key challenges, including financial sustainability,
equity in access and efficient service delivery, and insufficient governance and information on
the financial flow, quality of care and a growing private sector. Most of health care service
22 The Pension Insurance Act of September 2003 tightened the PAYGO parameters (increased the retirement age by
five years over a ten-year period; widened the calculation period from ten best years to full career over a 15 year
period; changed the indexation pattern from wage to a combination of wages and prices; introduced a point formula
and lowered the accrual rates from more than 2 percent to 1 percent per year of service; and tightened disability
conditions and eliminated most social-related benefits from the pension system). In 2004, the Parliament of
Montenegro enacted a law on consolidated reporting and control of social security contributions, personal income
tax and surtax, which centralizes the collection of taxes and social contributions at the Department of Public
Revenue (DPR). The implementation of this law, expected to start in 2006, could further contribute to the effort of
tightly linking benefits to contributions.