Would Economic Recovery Imply Fiscal Stabilization In Serbia?

For many years Serbia has been running fiscal deficit, which has considerably increased since 2008, leading to rise in public debt from 29.2% of GDP in 2008 to 60.3% of GDP in the end of 2012. This paper is aimed at resolving the dilemma if the economic recovery would be sufficient to reduce large fiscal deficit in Serbia or additional fiscal consolidation me asures have to be implemented. Since the actual fiscal deficit is the re sult of macroeconomic trends and policies, in order to answer this que stion it is necessary to exclude the effects of cyclical trends in macroe conomic aggregates on fiscal deficit. Although new EU fiscal rules im pose limit to cyclicallyadjusted deficit (at 0.5% of GDP), in the countri es facing high foreign trade imbalance not only cyclical trends in out put, but also the impact of absorption gap has to be accounted. ln this paper we provide econometric estimate of the size and the dynamics of structural fiscal deficit (cyclically and absorption adjusted deficit) in Ser bia, in the period 20012012, based on quarterly macroeconomic data. The results suggest that most of the fiscal deficit in Serbia is structural in its nature. After the initial consolidation in 2002 and 2003, structural fiscal deficit in Serbia was relatively low (below 2% of GDP) in the peri od 20042006, and rose sharply starting from 2007, so to achieve 6% of GDP in 2012. We also quantify the impact of particular tax/expenditure measures which contributed to creation of structural fiscal deficit in Ser bia. Based on the results, economic recovery will not lead to substanti al decline in fiscal deficit in Serbia, which is why it will be necessary to perform fiscal consolidation through significant cut in public expenditures and slight increase in taxes.