Serbia Should Swap Austerity for Transparency: Minister

Serbia was wrong to push through fiscal consolidation measures last year and should now focus instead on forcing the shadow economy to register its activities for more economic growth, the economy minister said.

Prime Minister Ivica Dacic’s revamped cabinet is drafting measures to kindle recovery -- it sees growth at 2 percent this year after a 1.7 percent contraction in 2012 -- and wants to lower labor costs for employers to encourage companies to legalize payrolls, Economy Minister Sasa Radulovic said today.

“We should not repeat last year’s mistake when we implemented fiscal consolidation and lifted some taxes, which led to contracting activity and a decline in retail trade,” Radulovic, an independent handpicked by Deputy Prime Minister Aleksandar Vucic for the post, told a business forum in Belgrade.

Serbia wants to cut the unemployment rate, now at more than 24 percent, and plans to introduce progressive taxes on wages to offset lost budget revenue from the lower burden on employers, Radulovic said.

Legalizing the shadow economy, which Radulovic said made up “around 30 percent of GDP,” is “the biggest chance to jump start the Serbian economy,” he said. “If we legalize just part of that activity, Serbian GDP will formally expand by 1 or 2 percent within two years on top of planned growth.”

That would also change ratios for public debt, currently at 60 percent of GDP, Radulovic said.

IMF Visit

Hampered by political turmoil, high borrowing costs and weak domestic demand, the biggest former Yugoslav republic has suffered two recessions in three years. Serbia needs to narrow its fiscal gap from 7.2 percent in 2012 to win backing for a potential new aid program from the International Monetary Fund. It is also trying to convince bond investors of its commitment to keeping public finances on track.

The IMF will send a mission to inspect Serbia’s economy and public finances on Oct. 1. The Washington-based lender stopped short of negotiating a loan in May on evidence the deficit would top 8 percent in 2013. Serbia sees the gap at 6.5 percent of GDP, above the 4.7 percent target in a revised budget.

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