Taxes are stifling the economy

When you hear in the media that the economy is growing by five percent, the following image automatically appears in your head: a new factory has been built on the outskirts of the capital, hotels are packed even in November, businesses are working non-stop. Logically, you conclude that the Montenegrin economy is living its best days. However, when we scratch beneath the surface, the numbers tell a completely different story.

To prove the claim that taxes are stifling the economy, it is necessary to clarify the following: gross domestic product (GDP) consists of two components. The first component is gross value added (GVA): it is the lifeblood of the economy and represents everything that Montenegrin companies, workers, craftsmen, restaurateurs and everyone else together are. produced and earned. The second component is the net taxes that the government collects: the VAT you pay in a pub, the excise tax when you fill up your gas tank, the customs duty on imported goods (all minus subsidies). This is not something the economy produced; it is what the government took from the economy.

And that's exactly where Montenegro has a huge problem.

In 2025, the GVA component, or the real economic activity of the economy, increased by 300 million euros, or 4,7% compared to the previous year. At the same time, taxes collected by the state increased by 226 million, which is 12,4% more than the previous year, meaning that taxes are growing almost three times faster than economic growth. In addition, of the total GDP growth of 526 million euros, about half (43%) does not come from economic activity, but from higher tax collection.

Look at the graph: from 2021 to 2023, the share of economic growth in total GDP growth increased from 72 to 80%, which is positive. Dramatically, in 2024, the share of growth is 67% and in 2025, only 57% of total GDP growth.

This rapid decline in the contribution of the real economy to economic growth means that the increase in Montenegrin GDP is based on a higher tax burden on the economy due to the Europe Now 2 program, which is clearly visible in the time series. Of course, even for laypeople it is clear that such a model is unsustainable in the medium term.

Imagine a restaurant owner in Budva. Last year, he had a turnover of one million euros. This year, he has a turnover of one million and fifty thousand euros, which is a 5% increase. However, the VAT he pays to the state, excise taxes on drinks, various utilities, fees and charges; all of that has increased by 13%. He works a little more, and the state takes drastically more from him.

Or imagine a craftsman in Bijelo Polje who makes custom-made furniture. His orders have increased by 3% and he is now making three more new kitchens. But the price of boards and varnish has gone up due to new taxes, so when he pays all his obligations to the state, he actually has less left than last year. The state is celebrating the “growth” of GDP, and the craftsman from Bijelo Polje is considering whether to close his shop. The economic blindness of decision-makers seems to not see these phenomena, which are quite common.

The worst in Europe!

In Montenegro, GVA accounts for only 78% of GDP, while net taxes amount to 22%. This is twice the EU average. So, out of every 100 euros of Montenegrin GDP, only 78 euros come from real economic activity. The remaining 22 euros are pure fiscal intervention and it is twice the European average. In fact, in Montenegro, the share of GVA in GDP is the lowest in Europe.

For comparison: in Germany, GVA accounts for 90,5% of GDP, in France it is 89%, and even in neighboring Croatia it is 83%. Montenegro is at the bottom of Europe with 78%.

And what is worrying is the fact that this trend is getting worse. In the first quarter of 2025, net taxes reached 23,8% of GDP, an increase of 1,6 percentage points compared to the same quarter of the previous year. Quarter by quarter, the state takes an increasing share of the pie, while the economy is left with less and less.

I will give a concrete example. You fill up 50 liters of diesel at 1,78 euros per liter and pay 89 euros. Of that, the largest part is excise duty, VAT and various fees; the money goes to the state, not to the pump. If the price of diesel increases by 10% and you fill up the same 50 liters, the state automatically gets more because the tax base is higher. You did not buy more fuel, distributors did not sell more fuel. However, GDP “grew” because taxes are higher.

Now imagine a family in Podgorica buying the same refrigerator that cost 500% more last year, and this year it costs 550% more because the prices of raw materials and transportation have increased. The family didn't buy the refrigerator and some other accessory. They bought the same one, only more expensive. But the state collects VAT on that additional 50%, so GDP "grows" nicely. The economy has produced an identical number of refrigerators, but statistics say that we are richer.

Economists measure this phenomenon with tax elasticity: if the economy grows by 1%, how much do taxes increase? In Montenegro in 2025, tax elasticity is 2,09, which means that for every percentage point of economic growth, taxes increase by two percent. In the EU, this ratio is close to 1, which is further evidence that the tax burden on the Montenegrin economy is twice as high as the European average.

Worst of all, this is not a one-time spike. In 2024, taxes grew twice as fast as the economy compared to 2023, and in 2025, almost three times as fast. So the trend is accelerating.

Fiscal bubble mechanism

This mechanism is actually simple, it's just that no one wants to explain it to citizens. The truncated Europe Now 2 program increased wages and the minimum pension by pumping in a few hundred million euros without any basis in economic logic.

When someone gets a higher salary, that money ends up in the store, at the gas station, in the bank, and ultimately leads to inflation because it triggers a chain of consumption without increasing productivity.

Banks play the role of consumption multipliers in this mechanism. The credit portfolio has grown significantly in the last two years, especially in the consumer credit segment, as credit limits have been increased for clients. Every credit that is spent generates VAT. Citizens borrow, buy goods, pay taxes, and GDP “grows”.

The chain that is formed is as follows: higher wages lead to higher consumption. More loans approved lead to higher VAT and excise tax collections. All of this together leads to higher inflation because there is no productivity growth, which means that citizens, although they have nominally higher wages, can buy fewer goods and services than before. Higher inflation has a crucial impact on economic growth.

Imagine a couple in Herceg Novi who received a raise of 150 euros per month thanks to the Europe Now 2 program. The bank approved a consumer loan of 8.000 euros based on that higher salary. They bought new furniture, a television and a laptop. On each of these purchases, the state collected 21% VAT. GDP has grown steadily, but the couple now has a monthly payment of 220 euros for the next five years. When one day the loans come due and there is no new net lending, the mechanism stops. The state is slowing down with VAT refunds, as can be seen from VAT collection in the first months of this year.

And then look at what happens in winter. In the first quarter of 2025, the share of growth in net taxes collected by the state amounts to over half (53%) of the growth in total GDP growth. Every second euro of GDP growth is related to taxes. And this is during a period when there are no tourists, when hotels are closed, when restaurateurs live on savings from last summer.

Imagine a bakery in Ulcinj in February. Turnover is minimal, there are hardly any customers. But the obligations to the state do not stand still: VAT for the previous month must be paid, contributions for workers must be paid to the state, excise taxes on energy products do not wait for spring and new customers. And in the summer, when tourists finally arrive and the city comes alive a little, the tax collection grows faster than turnover and sucks money from the bakery's account for the benefit of the state.

The result of this model is the following: almost no new jobs in the private sector, no new factories, no new export-oriented investments. Close to zero organic economic growth.

Where is all this leading us?

Montenegro is a country with almost the highest tax burden on the economy in all of Europe and at the same time with the lowest share of value added in GDP. It is a fiscal bubble that lives off consumption, credit and VAT: a system in which the more expensive it is for the economy and citizens, the better for the state.

Two-thirds of Montenegrin budget revenues are made up of VAT and excise duties, which are inextricably linked to consumption. In the first major shock, such as the one we are currently witnessing due to rising oil prices, revenues from excise duties and VAT will fall. On the other hand, budget expenditures are fixed and have a growth trend, fueled by unrealistic promises of wage increases and pensions that are being postponed indefinitely.

And the state will have to introduce new and increase existing taxes and excise duties in order to be able to finance budget expenditures at all.

The fiscal bubble will have to burst at some point; the problem is that the citizens and the economy will pay for the bursting, not those who inflated it to such proportions.

The author is the CEO of Fidelity consulting