Montenegro’s budget deficit widened by 4.6% y/y to EUR 138mn in the first nine months of 2013, equalling to 3.9% of the full-year GDP target, as rising revenue could not offset higher-than-planned expenditures, data from the finance ministry showed. The nine-month budget gap already exceeds the full-year target of EUR 95mn (2.7% of the GDP) due to the repayment in August of EUR 103mn of state guarantees on bankrupt aluminum producer KAP’s loans. In response, the government has said the full-year gap might reach EUR 186.9mn, or 5.3% of the GDP.

Higher tax collection boosted total budget revenue by 8.6% on the year in January-September to EUR 879.5mn, or by 4.9% higher than the target for the period. In February, Montenegro raised the income tax rate from 9% to 15% on earnings above the average while in July it also increased the VAT rate from 17% to 19% in an attempt to boost budget income. In addition, the country intensified the fight against the grey economy and started publishing a list of the biggest tax debtors. Revenue from VAT thus climbed 19.5% y/y to EUR 318mn in January-September, whereas personal income tax proceeds increased 10.7% to EUR 56.5mn over the period. Social contributions also went up by 6.0% y/y to EUR 246.3mn.

The nine-month budget expenditures grew by 8.1% y/y both on an annual basis and compared to the plan for the period, totalling EUR 1.02bn, mainly lifted by KAP-related spending. Current expenses shrank 8.3% y/y to EUR 446mn in January-September dragged down by falling goods and services, employment and subsidies expenditures. On the other hand, public sector transfers and interest expenditures increased in annual terms in January-September.

In its 2013 autumn forecast issued earlier in November, the European Commission (EC) estimated the country’s budget deficit at around 5% of GDP for this year, mainly reflecting unbudgeted spending related to KAP. Nonetheless, the EC noted that the country's budget performance has been improving markedly in 2013 and the budget gap is projected to decline to 3.6% in 2014 and fall further to 2.8% in 2015.