The government should say which capital projects are a priority

With the proposal of the fiscal strategy (FS), the government planned to invest 900 million euros in the capital budget, but it is necessary to clearly define the strategic priorities and sectors that will be financed with that money, while private-public partnership is not recognized as one of the ways of financing those projects and by which the missing money in state and municipal coffers can be replaced.

This was assessed by the Central Bank (CBCG) in its opinion on the proposal of this document, which refers to the period from this year to 2024 and which entered the parliamentary procedure. The Government's legal obligation is to submit the opinion of the CBCG to the Parliament along with the FS proposal. This document should be considered by the deputies before the proposal of the law on the budget for 2022.

"For the capital budget, an allocation of EUR 900 million is planned for four years, which is positive. But, as the planned investment amount is large, the selection of new projects and their profitability is very important. FS does not specify investment levels by sector, that is, which projects are defined as strategic priorities and according to which criteria, bearing in mind that the first section of the highway is being completed. This information would help to see and evaluate the justification and effectiveness of public investments. Therefore, it is necessary to clearly define the strategic priorities, dynamics and planned projects (cost-benefit analysis) in the FS, as well as the sectors, which will be financed with a capital budget of 900 million euros in the next three years (transportation, health, environmental protection and others). ”

A clear salary plan is missing

The CBCG pointed out that the private-public partnership institute is not recognized in the strategy as one of the ways of financing projects in the field of traffic and transport (highway, modernization of railway infrastructure), so they suggest that this institute would provide an opportunity to finance large capital projects for which there is a lack of money for the state and local levels.

The opinion states that emphasizing the capital budget and rationalizing non-productive spending in the FS is in line with the recommendations given by the CBCG to the Government in recent years for conducting economic policy, but the supreme monetary institution believes that a clear plan for regulating and harmonizing wages in the public sector with the minimum earnings, as well as the quantification of the extent to which all this will affect the total item on the expenditure side of the budget.

"Expenditures in the medium term will depend on the efficiency of the adoption and implementation of the Public Administration Reform Strategy for the period from next year to 2026. The increase of the minimum salary to 450 euros, as well as the additional salary increase for healthcare workers, will affect the item of gross salary. Bearing in mind that the increase of this item in the budget is very significant, the rationalization of the number of employees in the public administration is important in order to preserve the stability of public finances", the opinion pointed out.

The CBCG proposes to include in the public administration reform strategy a plan to create a central register of employees in the public sector (general and local level of the state), including employees in majority state-owned enterprises, in order to have the exact number of employees in the public sector.

When it comes to the revenue side of the budget, where a new tax reform is planned, the CBCG indicates that any increase in tax burdens has a negative impact on the business environment, especially if one takes into account that the economy is recovering from the pandemic, and the warning is that there may be price growth and inflation costs, while on the other hand, the planned effect of increasing income, which happened in the recent past, may be absent.

"Additionally, the introduction of progressive taxation can reduce the competitiveness of the economy and negatively affect the investment environment, especially when it comes to large companies", assessed the CBCG.

CBCG believes that one should be careful when intending to increase excise taxes, because this carries with it the risk of increasing the shadow economy.

"The planned rapid increase in excise duties in the short term in order to comply with the EU directive may have negative effects that are reflected in the increase of the gray market, especially in the market of tobacco products, while not achieving the planned positive effects on budget revenues.

On the other hand, the increase of excise duties on certain products, as well as the introduction of new excise duties (on sugar, cocoa and ice cream products) will affect the price increase of these products.

Risks due to termination of contributions

The CBCG indicates that the abolition of health care contributions may lead to a reduction in the number of employees or further tax evasion, contrary to the predicted reduction of the gray economy in the labor market, and even the appearance of rights violations and deterioration of the position of employees (by signing part-time work contracts). By canceling these contributions, which make up 60-75 percent of the total receipts of the Health Insurance Fund, the CBCG believes, the risk of financial unsustainability of the health system increases.

"Therefore, before this adoption, the income side of the budget should be analyzed in detail and see if progressive taxation of wages, introduction of additional excise taxes and suppression of the informal economy will replace the planned costs, that is, the loss of income from health care contributions. The planned progressive taxation of profits of legal entities may affect the competitiveness and investment attractiveness of the state.

This measure may disincentivize large companies to invest in Montenegro and to open branches due to the high tax rate, which is why the expected effect of increasing income on this basis may be missing," CBCG assessed.

Since the clear goal is to reduce the deficit and the level of public debt in the medium term, this direction of the FS has the support of the monetary authority. The FS plans to increase the deficit to 2022 percent of GDP in 3,9 due to the negative impact of planned fiscal measures on the revenue and expenditure side, primarily the abolition of health insurance contributions at the expense of employers and employees and an increase in the minimum wage.

Insert the pension reform plan into the fiscal strategy proposal

The CBCG believes that it is necessary to supplement the FS proposal with a concrete pension system reform plan with clear guidelines and information on what the reform would include and how it would affect the budget.

"We note that the growth of average wages will also condition the growth of pensions until 2023, which can further increase the budget deficit. In addition, the adjustment of pensions in 2022 due to the expected inflation in 2021, in addition to the application of the Law on Internal Affairs, which is expected to increase the number of pensioners, will affect the increase in budget expenditures on this basis", is the assessment of the CBCG.

Numerous risks for further inflation growth

CBCG suggests additional caution when estimating inflation rates, especially in 2022, bearing in mind all the foreseen measures that may affect the growth of aggregate demand, as well as movements on the market of oil derivatives, metals and food.

"It is necessary to consider the possibility that the stagnation in the supply chains with the consequent further increase in energy prices and their further pressure on other prices of goods and services will additionally contribute to the growth of inflationary expectations. We should also not ignore multi-year expansionary monetary policies that can affect the long-term growth of inflation," the CBCG points out.

In the supreme monetary institution, they believe that there is still a potential risk and uncertainty brought by the pandemic and its prolonged effects, which may affect the planned growth rates not being achieved, as well as the potential need for additional support packages for the economy.

"That would further reflect on expenditures, and therefore on the level of public debt as a percentage of GDP. In addition, untimely adoption and inefficient application of legislation, the effect of which depends on the revenue side of the budget, may create the need for additional indebtedness and an increase in public debt", the CBCG assesses.

The CBCG proposes to include in the public administration reform strategy a plan to create a Central Register of Public Sector Employees (general and local level of the state), including employees in majority state-owned enterprises, in order to have the exact number of employees in the public sector.