Distribution of the tax burden by destination in the Western Balkans 2023

The distribution of budget revenues must take into consideration the demands of individuals, families and their own businesses, who, in the role of direct and indirect taxpayers, claim equal proportional benefit. According to this request, which comes naturally as a recovery of the contribution to the budget and society, all budget objectives must be met to bring in all the programmed revenues. In the meantime, since the government also has programs carried over, that means additional costs for them, debts are usually obtained in the financial markets abroad or within the country.

While each government of the Western Balkans (WB6) increased the level of crediting of budget expenditures with debt from domestic and foreign markets after 2020, it was quickly noticed that this policy had less effectiveness than what should be based on making homework by increasing the tax base by combating informality and creating and strengthening a welcoming environment for business.

To ensure budgetary discipline and financial planning, WB6 finances are based around a specific medium-term program with similar formats to EU countries. However, the rules have not contributed to the stability of the domestic debt.

All WB6 countries have a budget deficit in 2023, which is decreasing (Table). This situation is due to costs that have managed to increase in all countries, which must be faced with social policies, as well as increasing public investments.

The highest levels of public debt in the region are seen in Montenegro (70.5% of GDP) and Albania (70.5% of GDP). While in Serbia and North Macedonia, a debt level lower than 55-56% of GDP is seen[1]. The two countries with the optimal debt level are Bosnia Herzegovina and Kosovo, respectively at the levels of 26.7% and 17.2% of GDP.

For Montenegro and Albania, the budget performance in 2024 still remains a major challenge, where if we have a higher public debt, the demand for borrowing will likely increase, as a larger share of GDP is required to pay this debt and interest rates may be higher and with shorter maturities, as has happened for some countries.

Exceeding these ceilings is costly for countries, as it can affect GDP growth and all the domino effects that come from not meeting the economic growth objectives that are the reference of many fiscal objectives and not only budgetary ones.

If we start from the tax revenues collected in the budgets of the countries of the region, compared to the budget revenues, we notice that they hold up to 90% of the share of the budget revenues.

In Albania, tax revenues account for 93% of budget revenues, and except for North Macedonia with a share of tax revenues equal to 90% of budget revenues, other countries collect tax revenues from 86% to 88% of budget revenues.

Based on this budget logic, it can be seen that the budget program in some countries has less dependence on loans and aid and this independence allows more space to build more consistent programs in function of the sustainability of fiscal discipline, but also the expansion of new programs.

Budget expenditures (Table below) have in each of the countries of the region a larger share in relation to budget revenues, on average 2.3% of GDP in the last three years. According to the indicators of the volume of expenditures by country, it can be seen that the highest level in relation to GDP is seen in Serbia (44.9% of GDP), in Montenegro (42% of GDP) and in BiH (as much as 41.6% of GDP).

These high expenditures in the region are in proportion to the high level of budget revenues.

We see the other three countries of the region with budget expenditures up to 15.7% lower (if we compare Serbia with Albania). North Macedonia has kept the same level of budget spending since 2022, which is 36.4% of GDP. Kosovo in 2023 has increased the level of budget expenditures by 4.2% of GDP more than in 2022. Albania has decreased the level of budget expenditures in 2023 by 1.2% of GDP, mainly due to the non-implementation of capital investments planned for 2023. Even for these countries it can be seen that they have a lower level of budget expenditures as they are dependent on the lower level of budget income.

After reductions in government spending to levels that reach 1/3 of GDP, some possible results are the negative impact on the economy, the fiscal system and social life.

Let us consider Albania.

The first effect is economic. A reduction in aggregate demand[2], with the impact of reducing the country’s growth rates and the secondary effect of higher unemployment, especially if the private sector does not immediately fill the gap left by the reduction in government spending. In the case of unemployment, we see that the effect from 2022 is 0.2% less, which proves the fact that unemployment would be higher, if we also count the emigration of a workforce and exits from the labor market due to aging in 2023 with at least as much as 2.1% of the working-age population.

The second effect is fiscal. The reduction in government spending has led to a reduction in the budget deficit, which can be seen as positive from the perspective of fiscal responsibility. However, this may also lead to reduced public investment in areas such as infrastructure, education and health etc.

The third effect is social. The decline in government budget spending has affected social programs and services, potentially affecting vulnerable populations and leading to debates about the role of government in providing social welfare.

In summary of the analysis related to the discussion of how much a small budget deficit and a declining public debt are worth in conditions where expenditures are not carried out according to needs, they cannot create the conditions for increased productivity and this directly affects the tax base and the tax burden that must be to be distributed on the principles of taxation.

In Montenegro and Serbia, budget revenues are as much as 42.1% of GDP (Table below). This balance between budget revenues and expenditures is indicative of a strong fiscal discipline and has an impact on the reduction of the budget deficit in 2023.

But even BiH has introduced 40.1% of GDP income into the budget.

The other three countries have introduced in their budgets from 27.8% of GDP in Albania, to 29.3% of GDP in Kosovo and as much as 31.7% of GDP in North Macedonia.

The low level of budget revenues compared to the other three regional countries is indicative of a tax burden with a small weight compared to the resources to be taxed, but also a deficient tax policy, as long as it cannot tax more.

On the other hand, poor budget reliability[3] is a problem for all countries in the region. This reality of BP6 country budgets is dependent on uncertainty and budget management in terms of programming and implementation control.

From our ongoing analysis, we notice that the budget problems in the countries of the region are a matter of management and political will to face corruption (greater ability of political and technical management would reduce many problems).

They appear precisely because of the contractual nature of the national budget and the various incentives of the government and political and economic actors.

The problem with the budget is that this instrument serves two clear purposes. When these goals do not match, the budget process loses its importance;

The prime minister of each country seeks to manage domestic resources in a different way than he projects in official budget documents.

It is partly the complexity of the forces acting on the budget that prevents actors from abandoning the process entirely: it is never entirely clear whether deviations from the plan are the result of an external shock and weak capacity, an inability to control subordinates, or conflicting pressures from different interest groups.

In the comparison between budget revenues and expenditures, only Montenegro has spent less than revenues. Meanwhile, all other countries have created budget deficits of different levels, where the highest is in North Macedonia and the lowest in Albania.

In Montenegro and North Macedonia, the budget deficit decreased to 5% and 4.9% of GDP, respectively, and in Serbia, it decreased to 2.2% of GDP.

Albania has reduced the budget deficit to the level of 1.4% of GDP and Kosovo to 0.3% of GDP. BiH has a budget deficit level of 1% of GDP.

From all these countries (Table below), it is seen and argued precisely that a high level of tax revenues also enable their distribution in expenses addressed to different directions of priorities.

This distribution at these budget levels in BP6 countries is also a measure of how each of the countries performs in relation to fiscal discipline, the productivity of government policies, as well as how to adapt to the difficult times that have come. in the same way and unexpectedly in each of the countries.

The way of addressing budget expenditures is further the approach that proves the level of transparency in response to government programs and strategies. In the distribution of the budget, we have divided it into three main directions, according to the structure of the state budget itself, (a) expenses for personnel (without other current expenses, (b) expenses for protection and social policies, (c) capital expenses.

If we analyze the budget on the part it distributes for social protection, it can be seen that Bosnia-Herzegovina and North Macedonia have allocated for social expenses, respectively, 15.7% and 14.9% of GDP, with consistent will in recent years.

Montenegro and Serbia have a high consistency of budget distribution for social policies with a level that is respectively 13.1% and 12.9% of their GDP.

Albania in 2023 has a decrease in the share of the budget for social policies with a level of 11.1% of GDP, but with 2.8% of GDP less than two years ago.

Kosovo, like Albania, has not distributed a large part of the budget for social policies (as much as 11.2% of GDP), but shows an increasing will compared to two years ago.

In BP6 countries, general government spending averages 13.2% of their GDP, a level that is the same in recent years, but low compared to EU countries[4] (more slightly for 6.3% in relation to GDP).

For government administration expenses, Bosnia and Herzegovina has the highest level showing 10.6% of GDP, and Montenegro is also at these levels with administration expenses of 10% of GDP.

Serbia continues with the same level of spending as last year in 2023 as well, providing funds from the budget for the administration as much as 9.7% of the country’s GDP.

Even Kosovo has provided funds from the budget for the administration at a significant level or as much as 7.6% of the GDP, showing us a government with large dimensions starting from the level of expenses.

Meanwhile, Albania and North Macedonia have low levels of spending in relation to the average of BP6 countries[5] and respectively have spent 4.3% and 4.2% of their GDP on administrations or at least 1.7-1.8% more less than the average spending of EU countries on public services[6].

Expenses for administration and its productivity

In addition to the discussion of what is the optimal threshold to classify the size of a government according to the expenditures it carries out for itself, we have often discussed analyzes related to the increase in public service expenditures and their relationship with productivity (efficiency and effectiveness).

Indicators for “Government Effectiveness” as a whole should give us an overview of perceptions related to:

– the quality of public services,
– the quality of the civil service,
– the degree of its independence from political pressures,
– the quality of policy formulation and implementation, and
– the credibility of the government’s commitment to such policies.

From the KDZ data, it can be seen that among the WB6 countries, the effectiveness of governance[7] is the highest in Kosovo, followed by Montenegro, Albania, North Macedonia and finally Serbia.

Meanwhile, the expenses for the administration in North Macedonia and Albania present a more effective level of expenses and an indicator of governments with small dimensions.

However, all these expenditures carried out by WB6 countries must be seen with the specifications that each government has drawn up for a fairer fulfillment of tasks and in accordance with the level of digitization of public services and the increase in the quality of services[8].

The countries that present themselves with greater expenses for the administration are also those that have higher tax revenues than other countries, except for Kosovo.

With this level of spending, the Government of Kosovo, after consultations with the IMF, has found it necessary that public spending should achieve a balance between social transfers and the promotion of economic transformation and sustainability, ensuring the maintenance of the necessary expertise within the administration.

Relating government effectiveness to government spending as a percentage of GDP shows a different picture if we look at the chart below from the same institute as above.

From the position of each WB6 country, no clear correlation can be considered between government effectiveness and the share of government spending in GDP.

However, most WB6 countries show significantly lower shares of GDP for government spending. While the average for the EU27 is 22.1 percent, Western Balkan government spending averages 16.3 percent of GDP.

Starting from the low fiscal burden in the continuity of the last decade, in the last three years Albania has reduced budget expenditures, linking a good part of them with urban reform and infrastructure, and less for health, education, protection and for appropriate subsidies and support according to the requirements of different sectors and groups of the economy. Based on this policy, which is not suitable according to the requirements, but according to the priorities that the government thinks, it is seen that it does not effectively fill the gap between expenses and receipts from taxes and fees related to the orientations with weight where the budget should be distributed. This approach of the government can be understood as the logic of the political will that is applied to achieve high budget productivity, but with very high costs for all categories of individuals who mainly depend on budget transfers (social protection and pensioners), but even anemic sectors such as agriculture with its sub-sectors and producers as a whole.

While some countries have reduced the level of social spending, there is an increase in the level of spending for personnel in the public sector, which speaks of an increase in the level of wages in this sector in the face of the challenges that come from the processes of EU membership negotiations. Albania since 2023 has implemented a special salary increase policy, an initiative that is already trying to catch the reference salary level of the first WB6.

A sharp problem in the entire approach of governments remains the phenomenon of corruption, which spreads more from year to year, at least from the information we have from the reporters for 2023. Although the trends of digitalization as the main instrument to fight corruption are already being implemented at different levels among BP6 countries, it can be seen that this approach, not supported by other measures, does not have the necessary strength to face the increased flow of corruption.

If we look at the report for Albania[9] and in other countries[10], it can be seen that the situation is not better, but on the contrary, corruption has marked an increase and capture of governments in an express way in reports in most countries.

If the cost of administration is cheap, in addition to the budgetary benefit, the risk of incomplete and quality public services is likely to appear. But the other equally great damage applies to the circumstances when a government has delegated some functions to the private sector, easing the budget, but increasing the cost of services for the citizens, after their delegation and postponement by the public-private partnership.

However, the challenge remains for BP6 countries, as they need to strengthen their administrative capacities to influence more strongly the design and coordination of economic and fiscal policies, as well as to implement structural and regulatory reforms, requiring the cooperation of all the main political and economic factors. technician on site.

In the attempt to argue the effectiveness in the economy of investments with public funds, it is estimated that a significant increase in public investments can promote employment in the short term and based on the rapid growth of productivity in the coming decades, the budget benefits from its income from payment of dividends in significant amounts.

In the comparison between the tax burden on work and social expenses in 2023. It is seen that Bosnia and Herzegovina spends on social expenses as much as it benefits from labor taxes paid in the budget.

North Macedonia, Montenegro and Albania cover the main part of social spending with labor taxes. Kosovo and Serbia need guarantee funds from other budget items.

While regarding the appropriate level of public investments combined with foreign and private investments in the Balkan economies, there seems to be a clear focus on the benefits and quick recovery of the investment, concerns have been expressed regarding the fact of intelligent public investments by the public sector.

Even if the increase of public investments in traditional economic sectors can increase the performance of the economy, the financing needed for investments in sectors that do not have a high rate of return on investments can present economic distortions that will reduce growth in the long term.

This issue is worth discussing not only in relation to the fact that how many public investments should be undertaken (quantity), but also how/where the financing is carried out (quality).

Although BP6 countries would prefer to finance their public investment projects directly from the budget, as is done in developed economies that have great access to bond markets to finance their budget deficits, in fact Balkan governments have to seek external sources to finance projects that are mostly driven by political leadership rather than cost and benefit.

This access to markets has required additional efforts, creating new risks and potentially distorting policy priorities.

Financing investment projects (especially public-private partnership arrangements) have opened up new opportunities, but also presented new challenges and risks that most governments are not equipped to adequately address.

[1] Gross debt beyond the 55-56 percent of GDP limit is associated with lower economic growth

[2] a term used in macroeconomics to describe the total demand for domestically produced goods, including consumer goods, services, and capital goods

[3] the ability of a government to meet its revenue and expenditure targets during the fiscal year.

[4] in EU countries, general government spending in 2022 on social protection reached 3.098 billion euros or 19.5% of GDP.

[5] The average expenditure for the administration in BP6 is 7.7% of their GDP

[6] https://ec.europa.eu/eurostat/statistics-explained/index.php/Government_expenditure_on_general_public_services

[7] It shows the quality of public services, the quality of the civil service and its independence from political pressures, the quality of policy formulation and implementation, as well as the credibility of the government’s commitment to its stated policies..

[8] https://altax.al/en/public-administration-wage-increases-vs-the-motivation-to-be-corrupt/

[9] https://idmalbania.org/download/51918/?tmstv=1713877671

[10] https://balkaninsight.com/2024/01/30/little-change-in-balkan-corruption-perceptions-bar-decline-in-bosnia/