Serbia's consolidated budget deficit shrank 14.2% y/y to RSD 78.3bn (EUR 688mn) in January-May 2013 due to a higher revenue growth which offset a mild spending increase, data from the finance ministry showed. The reading accounted for 2.1% of the full-year GDP forecast.

The five-month budget deficit accounted for roughly 60% of the official full-year target of 3.6% of GDP, or RSD 135bn, which will likely be missed.

The January-May consolidated budget revenue rose 4.5% y/y to RSD 570bn supported by higher VAT and social contributions proceeds. Spending inched up 1.8% y/y to RSD 648bn on the back of rising current expenditures.

Income from VAT increased 11% to RSD 159bn in January-May, reflecting the VAT hike as of October 2012, while social contributions revenue grew 7.3% to RSD 160bn. Income from profit tax, however, remained in the red, shrinking 18.4% y/y to RSD 25bn, reflecting the bad economic environment in 2012.

Spending remained subdued as falling capital, subsidies and goods and services expenses partially offset rising social transfers and employment expenditures.

Current expenses increased 5.2% y/y to RSD 618bn (95% share in total) whereas capital expenditures shrank 37% to RSD 25bn, equalling to just 3.9% of total spending.

Curbing the rising budget deficit is crucial to ease downward pressures on the local dinar currency which has recently been depreciating against the euro. The dinar weakening was triggered by the recent warning by the IMF and the fiscal council that Serbia’s budget gap will significantly exceed the official target of 3.6% of GDP in absence of additional austerity measures.

The Serb government agreed in early June on a basket of additional austerity measures, aiming to prevent the budget deficit from exceeding 4.7% of GDP (RSD 177bn) in 2013. The measures include RSD 40bn worth of expenditures cuts, restructuring of loss making state-owned enterprises and improving the business environment through labour legislation changes. A budget revision is planned for end-June.