Fiscal deficit financing and public debt optimization in republic of Serbia

In recent years in Serbia fiscal irresponsibility is in the spotlight question (unsustainable) fiscal imbalances. The fiscal program of the Government of the Republic of Serbia, especially since 2006 as a combination of tax cuts and increases in public spending, has led to a large, primarily structural deficit in the budget. The global economic crisis hit Serbia in the fourth quarter in 2008. The immediate impact of the crisis on the fiscal sector is manifested in a significant decline in the real level of public revenue and unsustainable increase in the fiscal deficit. Foreign borrowings, as standard way of deficit financing in Serbia leads to a drastic increase in the level of public debt in comparison with national income. The consequences of this scenario are record- high interest rates, declining investment, reducing the potential medium-term growth rates and the threat of a debt crisis: the termination payments or debt restructuring. Doctoral dissertation examines the causes of the fiscal deficit. It analyses its longterm consequences and examines to which extent the government and the private sector are forced to borrow from their own country and abroad. The impact of fiscal deficits on macroeconomic variables depends on the manner of its financing. Given the limited opportunities for further foreign debt (gross external debt in 2012 was 97 % of GDP), doctoral dissertation examines the necessity to cover the fiscal deficit by fiscal consolidation. In addition, fiscal consolidation through expenditure reductions and revenue is politically unpopular, while at the same time it leads to a decrease accumulative capacity of the economy. Based on the empirical results, the aim of this paper is to show the perspective of fiscal deficits in the Republic of Serbia and to show the possible ways of its funding in terms of sustainability of public debt. Based on both extensive research material and the use of numerous scientific research methods thesis points out the prospects of fiscal deficits in the Republic of Serbia and the possible ways of its funding in terms of sustainability of public debt. By analysing the movement of structural and cyclical fiscal deficit in the dissertation, the effectiveness of fiscal policy in the Republic of Serbia and the foundation of knowledge necessary policy actions of economic policy in the future are determined. Bearing in mind the limited fiscal space in the Republic of Serbia, economic and institutional determinants of fiscal deficit are identified through quantitative analysis of the political, economic and institutional determinants of fiscal deficit in the thesis. The fiscal deficit is largely structural nature where it stands out as the primary cause of the size and structure of the coalition government. The immediate factors that may cause the appearance and increase the fiscal deficit are: growth of current spending, launching public investment since 2006 the tax cuts and weakening financial discipline. The results of quantitative assessment of the effects of alternative sources of financing fiscal deficit served as a basis for assessing the medium-term sustainability of the fiscal position and the macroeconomic implications of fiscal adjustment through tax policy and expenditure policy. The research was set aside as the optimal way of financing the deficit for fiscal consolidation and expenditure side of the budget. On a very similar methodological way the thesis carried out the analysis of (un) sustainability of the public debt of the Republic of Serbia. Empirical evaluation of the level of public debt and the traditional econometric methods clearly identify its determinations and optimization from the standpoint of macroeconomic position. The results are reported as a product of conceived objectives and tasks are conditioned to a large extent to specific parameterization of the model in order to analyse the fiscal deficit and public debt. So, there is a possibility that the modified parametrization and conclusions were different. A key contribution of this paper lies in the definition and application of modern analytical instruments for the empirical analysis, and the development of scientific thought about the phenomena of the fiscal deficit and public debt