The leading figures in Serbia’s coalition government – PM Ivica Dacic, deputy PM Aleksandar Vucic and finance minister Mladjan Dinkic, have reached a preliminary agreement on freezing public sector salaries and pensions in an attempt to reign in rising state spending, daily Blic reported in the weekend, quoting unnamed sources from the cabinet.

Dacic - the head of the Socialist SPS, Vucic – the leader of the country’s biggest party SNS, and Dinkic - the founder of newly established United Regions of Serbia, carried out several telephone conversations over the past several days, determined to undertake measures to improve the state finances. They have allegedly agreed to adopt a decision on freezing salaries and pensions if this would help. For the time being, the idea is to freeze these expenditures only this year, thus annulling the 2% hike scheduled for October.

A final decision will be taken in the coming days, the source said. The government will also consider the proposal of the fiscal council, which says that the state salaries and pensions should rise only 2% next year.

In addition, the government will in the coming days review a savings plan for all state bodies. The target is to reduce the costs of all ministries by an overall RSD 20bn (EUR 180mn). According to Blic’s source, the list of savings includes the bonuses of the police and the army, among others.

The revision of this year’s budget could be submitted to parliament already in the beginning of July, containing some measures considered to be unacceptable so far, the source said. They include the cancellation of many state subsidies – above all to state-controlled companies and firms under restructuring, which operations at present are financed by the budget.

Furthermore, it is believed that the government will decide by end-May which of the companies in state ownership, apart from Telekom Srbije, will be offered for sale. The plan for the state companies includes not only privatisation but also restructuring and will be discussed by the leaders in the government coalition. A possible date for launching a new sale of Telekom Srbije could be made public in the coming month, according to the report.

IntelliNews Comment: The Serb government is under pressure to consolidate its public spending after the IMF warned earlier in May that this year’s budget deficit, including costs to save troubled banks and payments on state guarantees and arrears, could reach beyond 8% of GDP, up from 7.8% of GDP in 2012 and considerably higher than the government’s initial 3.6%/GDP target. The Fund pointed out as vital the focus on strict expenditures control and on adjusting wage and pension bills.

Decision-makers in Serbia are aware of the national discontent they will face if they decide to freeze incomes especially after annual consumer price inflation has been in the two-digit area since September 2012. Therefore such an unpopular decision would need the support of all parties in the coalition – and it looks like their leaders are ready to provide it.

Furthermore, the Jan-Apr data showed the consolidated fiscal gap already reached 45% of the full-year plan, ringing the bell the authorities should act fast and adopt quickly a budget revision to alight their economic policies to the current state of the real economy. Finance minister Dinkic predicted in early May that the 2013 budget gap will likely reach 4.5% of GDP due to lower than planned VAT and excise revenue. 

If they manage to embark on fiscal consolidation and ease the upward pressure on the public debt, seen at 65%/GDP at end-2013 by the IMF, the Serbian authorities hope to get a new funding deal with the Fund in the autumn. They say they do not need the money and would treat such a deal as precautionary. Still, the government acknowledges that the IMF presence in the country would signal that the public finances are under control and help Serbia lure more foreign investment – a key driver for economic growth and prosperity.