The ES2 program has not been elaborated either in the strategic or operational documents. Namely, the Program of Economic Reforms (PER), which Montenegro has been preparing since 2015 on an annual basis, is an instrument for planning the country's economic policy and managing reforms. PER is the most important document in meeting the economic criteria in the negotiations for EU membership.
In other words, the extensive reform of the labor market (promised full employment in 12 months) and salary increase through the abolition of pension contributions (also in 12 months), had to be elaborated in detail in a document that represents the mirror of the economic policy plan.
Nevertheless, in the draft PER for 2024-2026, it is meticulously stated that wages will grow by only 2024% in 5, while in 2025 and 2026 they will grow by a modest 4% each, which clearly indicates that of the promised increase that 01.11.2024. .1.000. the average salary is 25 euros with an increase of XNUMX% - there is nothing. When we subtract inflation from the above salary increase, it is clear that the salary increase in the next three years will be symbolic.
Also, in the draft PER, it is precisely stated that the unemployment rate at the end of 2026 will be 11,6%, while through the ES2 program it is promised that full employment (unemployment rate 4%) will be reached two years earlier or on November 01.11.2024, XNUMX. So, nothing from the other key promise - full employment.
It is already known that the ES2 program is not provided for in the Draft Law on the Budget of Montenegro for 2024, which contains budget projections for 2025 and 2026. Additionally, in the recently adopted Draft Program for Suppression of the Informal Economy in Montenegro 2024-2026. modest growth in wages and employed persons is also reported.
Issues of fiscal strategy
The fiscal strategy is a document that relies on the exposé of the Prime Minister of Montenegro, the EU Accession Program, the Economic Reforms Program, the Government's annual work program, as well as sector strategies and programs that define the strategic framework in certain political areas in more detail.
Based on the documents published so far, no wage increase by 25% is foreseen, while pensions of more than 450 euros will be adjusted in the usual way, and increased minimum wages will not be adjusted in 2024 and 2025.
The previous practice of preparing and implementing the fiscal strategy indicates that it cannot adequately address significant reforms that are not foreseen in the budget or in the Program of Economic Reforms.
Comparison of ES1 vs. ES2
The public hears the argument that the Europe Now 2 (ES2) program will succeed because the Europe Now 1 (ES1) program succeeded. However, ES2 is qualitatively and quantitatively different from ES1.
1. ES2 is several times more financially extensive than ES1, which suggests that from the point of view of the sustainability of public finances in the context of the need to refinance a high amount of debt, the budget deficit in interest in the next 4 years, it will be impossible for quick implementation;
2. ES1 treated only employees, while ES2, in addition to employees, treats pensioners and unemployed persons through promises of a higher average salary and pension as well as full employment;
3. Despite the statements that the ES2 program will cost 100 million euros or even be fiscally neutral, only the increase of the minimum pension to 450 euros will cost about 120 million euros annually, while the entire ES1 program was "heavy" about 140 million euros;
4. ES1 increased all salaries at the same time, while ES2 only increases minimum pensions to 450 euros but not other pensions, which represents discrimination against pensioners who receive more than 450 euros;
5. ES1 introduced a progressive tax on wages (those who earn more have a higher tax), while the tax according to the ES2 program is linear (the same increase of 25% for everyone), which will ultimately increase inequality in society;
6. ES1 treated the problem of already existing pairs of so-called cash on hand, while ES2 pumps new money into the system from contributions to the PIO Fund;
7. ES1 did not create new expenditures for the economy, and ES2 creates new expenditures for companies that pay salaries up to 700 euros;
8. ES1 had a limited impact on inflation, while ES2 will have a huge impact on inflation because it is many times more extensive;
9. For ES1, the analysis was presented about 20 days after publication. Seven months after the first mention of the ES2 program, not a single analysis has been published.
10. Most important of all: according to the Prime Minister's announcements, the ES2 program abolishes paid personal contributions for pensions and intergenerational solidarity. This means that the ES2 program brutally robs all citizens of Montenegro who are employed of the time they invested in order to provide themselves with a decent pension, while around 5,5 billion euros (rough estimate) of the contributions paid so far for PIO will be stolen from citizens.
In the end, if the ES2 program will cost only 100 million euros, as the Prime Minister stated, why is it being implemented in phases, considering that just for increasing pensions, about 110 million euros are needed on an annual basis?
Full employment mission impossible
First, it is necessary to demystify what full employment means: full employment does not mean that every person is employed, but usually refers to an unemployment rate below 4%, which allows for normal turnover of jobs and changes in the labor market.
Achieving full employment in just one year is a challenging goal for any country, and it is especially difficult for countries such as Montenegro that are facing structural economic challenges. The unemployment rate in Montenegro was significantly higher than the level of "full employment" and since the data have been available (1985) it has never fallen below 10%.
Achieving full employment requires substantial economic growth that is not foreseen in the next three years, significant job creation in the private sector, as well as potentially major structural changes in the economy, such as labor market reforms, improvements in education and training skills as well as measures to promote entrepreneurship and business development.
Preliminary calculation of the net fiscal effect of a 25% salary increase
The calculator, which was published in September, predicted an increase of all salaries by about 25%, which is only possible by canceling contributions for pensioners, which are the second largest source of budget income after VAT.
If the contributions planned for 2025 in the amount of 585 million euros were to be abolished, a maximum of 25% of that amount or about 150 million euros would be returned to the budget through VAT and other tax revenues. This implies that the difference of 435 million euros should be compensated through new budget revenues, which is impossible to achieve with the existing economic activity and tax rates.
One of the ways to try to "fix the hole" of 435 million euros is to increase the VAT rate to at least 25%, which can bring the budget a maximum of additional 200 million euros annually. However, the increase in VAT is still not enough to "patch" the hole in public finances, which implies that other levies (profit tax, excise and similar taxes) will also have to be increased.
Tomorrow: Illusion of optimization of public administration, international financial institutions and pension system reform, making policies based on evidence.
The author is the CEO of Fidelity consulting
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