Report: Local government debt a threat to Serbia’s public finances

Financially sound, for the most part: Serbia's capital city, Belgrade. [Dennis Jarvis/flickr]

If the Serbian government does not take the necessary steps, the debts of local governments, which currently reach 4% of GDP, will sink public finances, the Fiscal Council has warned. EURACTIV.rs reports.

Among the bigger cities, Novi Sad has the most stable finances, whereas Kragujevac is on the brink of bankruptcy.

Cities and local governments in Serbia owe roughly one billion euros and are more than 300 million behind in paying matured obligations.

Presenting the “Local Public Finances: Problems, Risks and Recommendations” report on Tuesday (27 June), Fiscal Council President Pavel Petrović underscored that the fiscal problems of cities and local governments were endangering the public finances of the state and impeding economic growth.

The analysis reports that the structure of local governments’ expenditures is bad because too much is spent on subsidies and too little on capital expenditure.

Serbia’s local governments earmark around 1% of GDP, or €330 million, for investment, as opposed to the average in Central and Eastern European countries with 2% of GDP. In the last few years that comparison has become even more unfavourable – 0.8% of GDP in Serbia relative to 2.5% of GDP in CEE.

The Fiscal Council believes investment at the local level should be raised by at least €250 million, and that more than half of the funds may be secured through reforming local public companies.

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The biggest responsibility for the poor state of public finances lies with local governments themselves, but the central government has also greatly added to the problem with bad policies, warned the independent state body tasked with assessing the credibility of fiscal policy from the aspect of respecting the defined fiscal rules.

According to the Council, after the Law on Financing Local Self-Government passed in 2007, an ad hoc decision the government in 2009 stripped local governments of 15 billion dinars.

Due to political pressure, in 2011 a new law was passed which unjustifiably allocated as much as 40 billion dinars from the republic’s budget to local governments. That resulted in the crumbling of state public finances and was followed by two reviews, in 2013 and 2016, in favor of increasing state and reducing city and municipal revenue.

The republic, in the opinion of the Fiscal Council experts, is also responsible for not having prevented the pileup of local governments’ problems over the last 10 years. Although local governments enjoy constitutionally guaranteed autonomy, there are mechanisms whereby the central government could have prevented the escalation of the problem. There was, however, no reaction.

The Fiscal Council also thoroughly analysed the budgets of the four largest cities in Serbia: Belgrade, Novi Sad, Nis and Kragujevac.

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The capital of Serbia, Belgrade, currently has a balanced budget revenue and expenditures and is not late in paying its obligations, but a prerequisite for the permanent health of the city’s finances is solving the problems plaguing the public transportation system.

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Belgrade spends as much as 15% of annual expenditures or more than €100 million on covering the losses of public transportation, which is why the city is not left with sufficient funds for investment. The Fiscal Council said that over the past three years, just €80 million had been spent on investment, when the amount should have been at least double that.

The capital of the Autonomous Province of Vojvodina, Novi Sad, has more stable finances than Belgrade but lacks the money for investment. The city currently has a credible and fairly balanced budget and is paying its obligations on time.

Nevertheless, Novi Sad has to reform its public finances so as to forestall potential fiscal risks and finance a planned increase in investment in the coming years.

The city of Nis, in southern Serbia, is in serious fiscal trouble, but can still get out of it on its own if it changes its method of managing public finances. The Fiscal Council recommends that the city harmonise budget revenue with expenditures, but also make a surplus of around 15% of the budget to pay old debts, with a gradual increase in investment.

Kragujevac, a city in central Serbia, is by far in the worst fiscal position, with a debt at the end of 2015 that nearly equalled the annual budget.

In order to put its public finances in order, Kragujevac, on the revenue side needs to increase the collection of property taxes, while another important resource should be the contribution for construction land regulation and the collection of old tax debts.

Where expenditures are concerned, the budget sector workforce needs to be downsized, public investment increased, measures introduced to cut expropriation expenditures and problematic public companies restructured.

The Fiscal Council also thinks that a reform of local public companies would reduce the enormous costs of local governments and improve the quality of their services.

The biggest problems local public companies face are excess employees, low debt collection, technical losses and uncompetitive prices.

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