Proposed draft of the Fiscal Strategy of Montenegro 2024-2027. represents a significant qualitative and quantitative deviation from the pre-election promises and the post-election calculator (which was used to develop the "program" Europe now 2): no minimum wage of 700 euros, no average pension of 600 euros, no increase of 25 percent for all employees who receive a salary over 565 euros, no working hours of 7 hours, no full employment.
In addition, in May of last year no increase in taxes and excises was promised, as is the case now. As expected, there is no fulfillment of the promise that should have been fulfilled by November 1, 11, which means that the expectations of around 2024 citizens of Montenegro have been disappointed, to put it mildly.
Therefore, I would like to take this opportunity to congratulate the Government of Montenegro and the Ministry of Finance for officially abandoning the "programme" Europe Now 2, which it was known from the start that it could not be implemented. There remains the question of the personal responsibility of those who knowingly deceived the citizens, yet promised the impossible and made the implementation conditional on their resignations.
It should be noted that the executive power managed to make the public debate about this document pointless, because before the opinion of the Central Bank of Montenegro and before the report on the conducted public debate, it proposed to the Parliament of Montenegro for adoption a set of laws related to the implementation of the proposed "reforms". With this act, the Government showed that it is not even formally transparent, while there really is no need to waste words on essential transparency.
However, the fiscal strategy presented in this way also has several structural deficiencies that I would like to point out.
The first structural shortcoming: prematurity in relation to the previously necessary development of a sectoral policy dealing with the reform of the pension system
Pension reform is a major undertaking that can have a significant impact on people's lives, so it is of crucial importance that the process is conducted carefully and thoughtfully in order to ensure a fair and efficient system for our oldest fellow citizens.
Such a reform represents an ambitious undertaking, the planning and implementation of which represents an extremely complex task. Therefore, the fiscal strategy is not a document that can deal with such a radical reform of the pension system without the necessary details and complex analyzes through sectoral policies, because it is adopted for a period of three years, while the reform of the pension system is being prepared for the next decades, which is why it must be a product consensus after an extensive discussion of all social actors.
Also, the pension system reform strategy must be a precursor to the Fiscal Strategy and not its consequence, as is the case now.
I will remind you that in 2023 the PIO Fund had the lowest deficit in its history of only 35 million euros, which achieved its financial balance. With the proposed fiscal strategy, the deficit of the PIO fund in 2025 will be 11 times larger and will amount to 383 million euros, or about 5 percent of GDP, with a similar trend in the following years.
The fiscal strategy conceived in this way will create a huge transitional cost of financing pensions, which in the long run will fall on the burden of all citizens, and will especially affect the poorest sections of the population. The value of the annual personal point will decrease, which is why future retirees will receive lower pensions compared to the current situation.
No country in the world has so radically and quickly switched from one system (Bismarck's) to another (Beveridge), where 70 percent of pensioners receive an identical minimum pension, and the proposed fiscal strategy clearly paves the way for all pensioners to receive a minimum wage in the future.
In the context of the reform of the pension system, the fiscal strategy does not elaborate on the situation that indicates that we are facing a serious demographic crisis.
Another structural shortcoming: the contradictory effects of the proposed reduction in the tax burden on the labor market
The government defends the adoption of a "heavy" 3,5 percent of GDP per year fiscal strategy conceived in this way, because it "creates the most favorable tax framework for employers in order to encourage employment.". However, the fiscal strategy itself clearly states that the unemployment rate at the end of 2027 will remain at a high level of 9,8%. You will admit that such a high unemployment rate is contradictory to the basic premise that the fiscal strategy is adopted in order to create new jobs, for which as much as 3,5% of GDP is spent annually.
In addition, the mentioned theory about the need to introduce low taxes on labor is not relevant for a reform of this scope, which is also indicated by the fact that Montenegro is one of the countries with one of the lowest rates of profit tax, and that in return we did not have significant positive effects.
The wage tax wedge is said to be among the lowest in Europe. However, the authors "failed" to state that only Colombia and Chile have a lower tax wedge than Montenegro, thus starting to compare the Eurized Montenegrin economy with Latin American economies, which still bear the characteristics of dictator-narco economies.
One of the main pitfalls of the fiscal strategy is the assumption that cash on hand continues to be paid out to the extent of the implementation of the Europe Now 1 program. As this is not the case, a large amount of new money is pumped into the system in this way, which will greatly stimulate inflation. because wages will increase without increasing labor productivity, which represents a classic fiscal expansion resulting in an increase in prices. Of course, this situation cannot last forever.
It is also paradoxical that employees with higher salaries, in addition to higher earnings in euros, also receive a higher percentage salary increase, which is a unique example in the world.
It is clear that the state inefficiently "spends" 240 million euros of fiscal "munitions", which means that in the future it will be left without significant fiscal policy tools. I will remind you that Montenegro does not even lead an independent monetary policy, so we will be left without any tools in case of unforeseen external shocks, which are also possible.
The third structural deficiency: lack of response to entrenched inflation
The fiscal strategy does not treat the basic problem due to which inflation in Montenegro is significantly higher compared to the EU: the chain construction of margins that occurs by importers, distributors and finally retailers. In addition, the fiscal strategy does not contain any measures related to the management of the rapid increase in housing prices and rents, which creates pressure on domiciled residents who are unable to buy an apartment or rent at acceptable prices.
These two phenomena should have been treated most strongly in the fiscal strategy. However, this is not surprising, considering that high inflation favors the budget, because the original revenues could not be replenished with the planned dynamics in the event of a drop in inflation.
In addition to the absence of measures to fight inflation, from which large capital from certain industries benefits the most, it is additionally rewarded by the abolition of contributions. This will lead to an increase in profits, which will be stimulated by higher inflation and new high-interest credit debts of citizens, which is foreseen by the fiscal strategy.
The "honoring" of employers at the expense of existing workers' pensions represents an unfair model of redistribution of future money of currently employed citizens. Exemption from the mentioned contributions makes a classic transfer of money from the future accounts of citizens to the current accounts of employers, after the year in which record profits of the economy were achieved (the same is expected in 2024).
I will remind you that the micro-enterprise sector, which has 34.000 companies and employs 68.000 people, has operated with a net loss for the last five years. Those companies mostly employ people with minimum wages and any additional tax burden will cause a certain number of these companies to drop their working hours to four hours (workers will still work 8 hours) or simply shut down, which will lead to an increase in unemployment.
Of course, the biggest winner of this redistribution is big capital from certain branches that already pay a minimum wage of 600 euros, and which, based on increased inflation and additional consumption, will have higher profits, on which they will not calculate higher profit tax rates.
Through this redistribution, we will get a mutated type of turbo-consumer-capitalism, in which instead of increasing the standards of citizens, the earnings of certain branches of big capital have increased precisely on the account of currently employed people, who have been given crumbs from their future pension.
Large capital was rewarded three times: 1. through the release of the 5,5% cost that it now pays through contributions, 2. through inevitable inflation as earnings increase, which will bring them additional profits, and 3. through expectations of strong growth in newly approved loans. This "cocktail of consumption" will overall lead to additional erosion of citizens' living standards in the medium and long term, and big capitalists to new extra profits at the expense of citizens' standards.
The fourth structural deficiency: an overly ambitious and unreliable plan for the collection of original budget revenues, primarily VAT
The fiscal strategy is obscured by data on inflation and a significant influx of foreign citizens (Russia, Ukraine and Turkey) from 2023, whose arrival had a positive impact on budget revenues, and which significantly increased economic activity.
The share of VAT in the original budget revenues increases to as much as 48% in 2025, which represents too much reliance on one source of budget revenues due to the very nature of VAT, its regressivity, which can lead to the creation of a fiscal illusion, tax evasion and similar effects .
The fifth structural deficiency: macroeconomic data that indicate a gradual cooling of the economy
The current state of the economy is reminiscent of the state of 2006 and 2007, when we had solid macroeconomic results (state budget surplus, low public debt, increased wages and pensions), which were more the result of a spontaneous investment "boom" than a well-thought-out economic policies. Viewed in this way, there was an appearance that the country of 620.000 inhabitants could progress rapidly and reach the level of the EU average.
The deterioration of the macroeconomic situation in the country after the economic crisis of 2008 is actually the result of a wrong development policy that placed a completely open market at the center of economic logic, which resulted in an enormous expansion of import consumption in the country in all categories, even those products that products in Montenegro.
I won't waste words on the 2020 COVID crisis, we all know what happened and I hope it won't happen again.
In addition, the fiscal strategy predicts that household consumption will "increase" more than twice, from 3,5% to 7,2%, which means that we will have inflation, much higher than that predicted, which will hit hard the poorest citizens, but also the middle class.
We have a modest drop in arrivals, which is accompanied by a sharp drop in the number of overnight stays in individual accommodation, which clearly indicates that Montenegro is becoming a destination for shorter stays. Not only that - Montenegro is becoming a transit destination because we have a greater number of passengers at airports, the highway, the Sozina tunnel, the number of entries into Montenegro than last year, and we have fewer tourists staying in Montenegro.
On top of all that, the VAT rate that treats hoteliers, whose VAT rate has been almost doubled, is being increased, while the gray economy in tourism has not even been touched.
The sixth structural deficiency: there are no measures for the necessary diversification of the economy
In the fiscal strategy, there is a noticeable contradiction between the low accumulative capacity of the Montenegrin economy, which almost does not produce final products (in fact, it is mostly based on imports) on the one hand, and the orientation towards financing consumption through the injection of hundreds of millions of euros through the redistribution of contributions to PIO and new credit debts of citizens that will nominally, but not realistically, increase salaries, on the other hand.
Additional consumption will cement the existing economic relations in Montenegro, which means that there is no more room for diversification of the economy. The adoption of a fiscal strategy conceived in this way irreversibly loses the chance for the Montenegrin economy to begin a arduous long-term but necessary process of diversification that will reduce the state's dependence on one economic branch (tourism).
The seventh structural deficiency: it does not treat the neuralgic points of the Montenegrin economy
It does not treat the increase in productivity, but directs all the money into consumption.
It does not deal with the problem of the deficit of the goods balance or the current account deficit that exploded in 2023 and 2024.
Ne adresira regionale dispartitete s spečnim aksentom na stukturne probleme svornog regiona.
It does not contain measures such as progressive taxation of profits or other similar fiscal policy tools.
There is no optimization of public administration.
There is no reduction in non-productive spending by the promised 150-200 million euros; on the contrary, we have its increase.
There are no new funds for active employment policy measures.
There is no additional tax on cryptocurrency trading.
There is no increase in funds to support the economy, but it remains at a modest level.
The linear increase of all wages by 5% is contrary to the ES1 reform, when progressive taxation of higher wages was introduced.
As earnings in the public sector are higher than those in the private sector, a linear increase will lead to an even more uncompetitive private sector because public sector employees will have even higher wages, so the gap will be larger.
Despite the slight increase, the allocation for healthcare remains at a low level of around 800 euros per capita. For the sake of comparison, Switzerland allocates about 10.000 euros for health care per capita, and Singapore about 4.000 euros.
The introduction of excise taxes for still wines will create strong pressure on family businesses, which will not be able to be competitive due to the small volume of production and insufficient capacities for export or positioning for import substitution.
In 2025, subsidies are a decrease compared to 2024.
Interest costs are increasing and will amount to 2027 million euros in 220, which puts pressure on other expenses.
No scenarios were made for the possible case of external shocks.
The fiscal strategy should not be adopted
The fiscal strategy violates the Maastricht criteria and the law on budget and fiscal responsibility through the planned deficit of 3,4% at the end of 2027, while the public debt will reach 2027% of GDP in 65. With local government debt, the budget deficit exceeds 5%. Additionally, our public debt increased from 4,5 billion euros to 5,6 billion euros or 25% in just three years without significant investments in infrastructure.
The fiscal strategy is scarce with data: the tables with the projected number of employees, pensioners, as well as the "mathematics" of how certain numbers were arrived at in the projections are missing, which is why it is not credible. In addition, there is a lack of detailed data on planned infrastructure projects with clear amounts and deadlines for their implementation so that they can be monitored.
Adopting an expansive fiscal strategy weighing around 240 million euros or 3,5% of GDP per year, 100% of which goes to consumption, in a period of unstable global situation, in which Montenegro faces the challenge of refinancing 2 billion euros (about 30% of GDP) at high interest rates with an increase in public debt of 1,1 billion euros or 25%, represents a significant risk for the public finances of Montenegro.
If this Fiscal Strategy is adopted, it becomes clear that the economic development policy of Montenegro will be based on quantitative short-term growth caused by imported consumption with the accompanying effect of unproductive and accelerated borrowing by the state, economy and citizens, primarily to finance that consumption.
As expected, this type of development model will lead to an increase in GDP and citizens' salaries in the very short term, but in the medium and long term it will adversely affect the already expressed vulnerabilities related to the uncompetitiveness of the economy, the weakening of exports, the increase of import dependence, the increase of inequality in society, increase in poverty and regional disparities, while the promised multiplier effects will be absent.
Therefore, the fiscal strategy needs to be returned and a new document prepared that will take some good solutions from the fiscal strategy, abandon the planned redistribution of contributions to the PIO fund, and create a document that will contain measures for the start of the diversification of the Montenegrin economy, which will be followed by many more detail, much more data and analytics.
The author is the director of Fideliti consulting
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