4th December 2021, Skopje – The process of Budget adoption reminds me of a quote by Former US Secretary of the Treasury, Jacob Lew: “The budget is not just a collection of numbers, but an expression of our values and aspirations”. Having this concept as a starting point, in addition to the concrete numbers, the Budget we propose is an expression of our commitments to the defined goals and principles we will adhere to. Each citizens’ denar invested has to be properly invested towards generating greater benefits. It is a Budget with greater value for money, with accountability included, and five-year policy performance indicators are put in place therefore. In addition, 2022 Budget has been designed according to the golden rule of government spending, i.e. budget deficit is lower than capital expenditures, meaning that borrowing will be used only to finance capital expenditures, which are projected in the highest amount ever compared to any other budget. It will encourage investment cycle, which will contribute to accelerated economic growth, with the green agenda, support to innovations and digitalization providing for sustainable development and better quality of life of the citizens. The Budget also includes support programs amid crisis, as well as steady trend of fiscal consolidation on the medium term, which is especially important if one takes into account the fact that the new Organic Budget Law, which is pending parliamentary procedure, envisages introduction of fiscal rules and a Fiscal Council.
Inclusive and Constructive Debate on the Draft Budget
We presented the 2022 Draft Budget to the Financing and Budget Committee and the Legislative Committee this week. I had the possibility, through constructive discussion, to present the Budget and to exchange views for the key set goals and planned policies. I would like to use this opportunity to express gratitude to the MPs for the constructive discussion during the 10-day debate on the 2022 Draft Budget. This is yet another proof that inclusiveness in this process yields results and improves the quality of our work. During the debate on the amendments, 23 amendments were accepted, 8 out of which submitted by the opposition MPs, 4 by the ruling party MPs and 2 by the Parliament, whereby 9 amendments were proposed during the Committee debate and supported unanimously. As regards accepted amendments, total amount is Denar 382 million, being estimated by the MPs and the Parliament services as one of the broadest amendments made via amendment-related debate, speaking in favour of the inclusiveness of the Budget adoption process and the democratic capacity of our country. Following its adoption by the Government, the Draft Budget will be debated at a plenary session at the Parliament, when I expect for the debate to continue with the same spirit and a broad support to vote for the 2022 Budget.
Budget in Times of Crisis and Uncertainty
Key priorities for the next year, reflected in this document, are further economic recovery and accelerated growth through investments, health protection amid the still present risks stemming from COVID-19 pandemic, as well as support to the standard of living of the citizens.
We faced many challenges during the past period. It is situations like this when state interventions, fiscal policy in particular in our case, are crucial to overcoming the challenges and implementing development policies. Fiscal policies are essentially counter-cyclical, i.e. they are to be supportive at a time of economic crisis and consolidated in times of economic prosperity. Increased fiscal stimulus amid crisis is aimed at preserving jobs, maintaining purchasing power of the citizens and boosting economic activity. This so-called “market distortion” or state intervention, which, by choice, adheres strictly to market principles, should, among other things, take into account the social component as well, i.e. limit the crisis impact on the socially most vulnerable categories. In the light of this context, our fiscal policy during the past period focused, first and foremost, on protecting the health of the citizens, supporting the vulnerable categories and the affected companies, as well as creating policies to boost economic growth.
Taking these postulates into account, substantial and swift economic measures were introduced in support of those most affected by the recent crisis. Six sets of measures were implemented in the last two years, geared towards supporting the enterprises and the employees in the most affected sectors. According to Ministry of Finance estimations, decline of economic activity was mitigated by 4.2 p.p. in 2020 with the initial four sets of measures alone, including the multiplying effects, as noted in the IFIs reports. Simply put, if it had not been for the measures, the drop of economic activity in 2020 would have been -8.7% as opposed to the actual decline of 4.5%. Effects from the 5th and the 6th sets of measures, which are still ongoing, will be estimated at the beginning of next year, with the initial estimates indicating quite positive expectations as regards the effects.
In fact, respond by the governments throughout the world was instant and vigorous, underpinned by huge financial support packages. For comparison purposes, according to UNCTAD data, fiscal stimulus packages in 2020 in the developed economies was by 270% higher compared to the stimulus packages provided during the global financial crisis of 2008/2009. As regards the developing economies, funds mobilized increased by 18%. In 2020, developed countries injected 9.7% of GDP in the economies, compared to 2.6% of GDP during the global financial crisis, while the developing countries mobilized 5.5% of GDP as opposed to 4.6% of GDP during 2008-2009. It shows the intensity of the crisis we have faced and the need to react quickly.
As for our country, six sets of anti-crisis measures, amounting to around one billion two hundred million euros, i.e. around 11% of GDP, have been adopted since the outbreak of the pandemic. Total fiscal stimulus covers not only the direct budget costs, but also the tax relief and exemptions, available guarantees, etc. For comparison purposes, according to IMF data, fiscal stimulus packages in the countries in the region range from 2.4% of GDP in Bulgaria, to 3% in Bosnia and Herzegovina, 3.3% in Albania, 4% in Montenegro, 5% in Kosovo, 7% in Croatia, 13.6% in Serbia, to around 14% of GDP in each Slovenia and Greece.
Still, effects of the protracted pandemic are felt in 2021 as well. However, our economy has started to recover, reaching 13.1% growth in Q2, and we expect to end the year in line with the projected 4.1% GDP growth, with a possibility to exceed it.
With respect to the global economic developments, global economy is recovering, projected to grow 5.9% in 2021 and 4.9% in 2022, as per the October IMF forecasts. EU, i.e. Germany, as our major trading partner, is expected to generate 5.1% growth in 2021, i.e. 3.1%, while forecasts for 2022 are encouraging as well, with 4.4% expected growth in EU, i.e. 4.6% in Germany.
It is important to mention that 2022 Budget is going to be adopted in a delicate moment for both our economy and the global economy. We are exposed to continuous uncertainty, challenges, as well as new possibilities. Therefore, it is time for a development budget which will result in accelerated growth through scaled-up investments, with a capacity to mitigate the crisis and the risks we face.
The Budget as a Reflection of Our Values and Aspirations
Taking into account the setting of our and the global economy and the upcoming challenges, to the end of achieving the priorities for raising the standard of living of the citizens, improving the quality of life and accelerated economic development, 2022 Draft Budget comprises four main objectives.
First, continuing the care for health protection of the population. Second, economic recovery and accelerated growth. Third, scaled-up investments when implementing fiscal consolidation, and fourth, support to reform processes in the judiciary and Euro-Atlantic integrations and uninterrupted financing of the basic functions of the state.
Considering the national and the global setting, and recognizing the need to establish predictability and consistency towards reforms and strategic priorities, the Budget, as a strategic document, is designed on medium-term basis. To the end of underpinning the objectives of the 2022 Budget, following strategic documents have been adopted: Fiscal Strategy, Public Debt Strategy, Fiscal Sustainability and Economic Growth Support Plan, Growth Acceleration Plan, Public Investments Plan and Economic Reform Program, all covering the medium-term period 2022-2026, against the backdrop of the commitment to SMART Finance, i.e. strategical, maintainable, accountable, reform-oriented and transparent public finances.
Public finance management and achieving these objectives will be driven by the value for money principle, performance-based budgeting, transparency and monitoring specific indicators. It is important to point out the fact that 2022 Budget adheres to the golden rule of government spending. Hence, capital expenditures exceed the budget deficit, i.e. overall borrowing will be targeted solely for capital expenditures. As a matter of fact, it is well-known that long-term borrowing is justified and righteous, if the generations settling certain debts are also to reap the investment benefits. Alternative approach would be increasing the taxes which would deny the present generations. Therefore, borrowing for the purpose of financing projects and capital expenditures, the benefits of which are to be enjoyed by many generations, is justified from the point of view of intergenerational justice and adds value to the way of planning and managing public finances.
Transparency and accountability become main principles in the Budget execution. Citizens should always be informed about their money being spent efficiently and as per their purpose, hence, the Ministry of Finance continues the efforts aimed at improving the transparency in public finance management. To that end, Open Finance portal has been introduced, which makes, on continuous basis, the transactions from the state Budget and the ones from the local government budgets available to the public.
Moreover, Ministry of Finance has introduced Fiscal Counter on its website, publishing daily data on cumulative collection of budget revenues, execution of budget expenditures, percentage of their collection/execution and monthly data on government debt, as well as Tax Compliance Calendar, providing for tax certainty and transparency.
Development Budget with Innovative Financing Instruments
Under the 2022 Draft Budget, expenditures are projected in the amount of Denar 272.4 billion, being higher by 1.4% compared to 2021, accounting for 35.2% of GDP. On the other hand, revenues are by 7.4% higher compared to 2021, accounting for 31% of GDP or Denar 238.9 billion. Hence, budget deficit is projected at Denar 33.5 billion or 4.3% of GDP. This downward trend of the budget deficit is within the plan for gradual fiscal consolidation, with the support to the economy amid crisis being continued. The budget deficit drops compared to 8.1% in 2020 and the projected budget deficit of 6.5%, with a possibility for its further decline in 2021.
Investments make a substantial portion of the 2022 Budget. In 2022, capital expenditures are projected at all-time record high level, amounting to Denar 38.2 billion. 2022 Budget reflects a significant change from a structure point of view as well. Capital expenditures account for 14% of the total expenditures, increasing by 28.3% compared to 2021, at the same time cutting down the non-productive budget expenditures. It is envisaged in the Growth Acceleration Plan 2022-2026, aimed at financing the recovery of the economy affected by the crisis and supporting an accelerated and sustainable growth, thereby maintaining fiscal stability.
As regards improved dynamics of implementation of capital investments, initial results from the CAPEF mechanism are already visible. Growth Acceleration Plan 2022-2026 envisages an institutional framework to manage projects at national level by establishing new project management and coordination units. To this end, Ministry of Finance will introduce innovative instruments for Budget financing such as development bonds, green bonds, project bonds and inflation-indexed bonds. Moreover, with the aim of boosting investments, public-private partnerships, Fund for Research and Development, Fund for Local and Regional Development, Energy Efficiency Fund, Fund of Funds will be promoted, including the functioning of the Guarantee Fund, all part of the new instruments used by the Government to mobilize additional funds from the private sector in support of the growth acceleration objective.
Such manner of financing will add value to our economy from several aspects. First, maximum funds will be mobilized from domestic and foreign sources, all to the end of accelerated implementation of the necessary physical infrastructure projects, green agenda, digitalization and innovations and technological development. Second, it will contribute to capital market development, with the investors, including the citizens, acquiring alternative reliable investment instruments. Third, which is of major importance, two key features, generally known by the economists, of the private and the public sectors will be blended, the efficiency of the private sector and the reliability of the public sector. Inclusion of the citizens and the domestic private sector as investors will provide for increased efficiency when implementing the projects and allocating resources, thereby ensuring against the risk and the costs, with the government as the key stakeholder.
These measures, as well as many other envisaged, will contribute to the expected scaling up of gross investments by 8.5% in real terms in 2022. Coupled with the consumption projected to increase by 3.1% and the export activity of the domestic companies expected to surge by 8.1%, as well as the positive trends on the labour market, with the number of employees expected to grow by 3.1%, they will contribute to growth acceleration in 2022. Hence, growth in 2022 is projected at 4.6%.
Scaled-up capital investments are prevalent topic, being crucial part of the developed countries’ growth strategies. Just a few days ago, record-high US 1 trillion bipartisan infrastructure bill was passed in the USA, and Great Britain announced 10-year plan worth £ 650 billion investments in infrastructure, transition towards green economy and accelerated digitalization. EU also announced EUR 800 million recovery package, supplementing the 2021-2027 long-term Budget.
According to the Growth Acceleration Plan 2022-2026, investments in the amount of EUR 4 billion public funds in the next five years are projected by mobilizing additional EUR 8 billion invested by the private sector. I would list the major infrastructure projects, such as Corridor 8 road and rail infrastructure, energy infrastructure, gas pipeline, interconnections and distribution networks, investments in renewable energy sources, photovoltaics, windmills and hydropower plants, as well as other projects in the field of environment, water management, waste management, air protection and utilities infrastructure. All this will contribute to boosting the competitiveness of our economy and improving the quality of life of the citizens.
Support to the Business Sector, the Vulnerable Categories, Local Development and Better Quality of Life
Improving the standard of living of the citizens is one of the top priorities of the Government. Accordingly, in addition to the policies aimed at strengthening the support to the private sector in terms of its competitiveness and better working conditions for the employees, 2022 Budget also envisages wage increase in the key sectors of the state administration to the end of strengthening their capacity and operating performance. Increase of wage-related expenditures includes the approved 10% increase for the inspectors, 8% increase for the higher education staff in 2021 and additional 7% in 2022, 5% for the health personnel, 15% for the judiciary and prosecution staff, 5% in the Ministry of Internal Affairs, 15% for the IPA structure personnel, as well as additional staffing for the key positions in diplomacy and the needs of the Ministry of Defence in line with NATO standards. Thereby, Budget liquidity will be maintained as regards payment of wages and pensions, as well as performing the basic function of the state and supporting the judiciary reforms and the EU integration process.
Moreover, Government of the Republic of North Macedonia remains consistent on the measures for support of the economy and the vulnerable categories in times of crisis. Subsidies for the most affected by the COVID crisis and the energy crisis will continue in 2022 as well, with Denar 5.4 billion being projected therefore, while the other programs including a flexibility component will be adjusted to the needs. It is in line with the Joint Conclusions of the Economic and Financial Dialogues with the EU to continue the well-targeted and temporary fiscal support to vulnerable categories. Support for the agriculture sector will also proceed, with the Intervention Fund for the agriculture sector functioning next year.
Significantly increased funds are projected with respect to the plan for increased revenues of local government units and fiscal decentralization. Percentage of VAT grants is increased from 4.5% to 5%, as part of the plan for gradual increase of municipal revenues collected on the basis of VAT and PIT up to 6% by 2024. Thus, LGUs revenues will be increased by 21% on the basis of VAT compared to 2021. Fiscal capacity and autonomy in spending the municipal funds are thus strengthened, the municipalities acting as the most direct representative of the LGUs interests. Three funds will be established: Equalization Fund, Performance Fund and Fund for Regional and Local Development.
Social transfers are projected in the amount of Denar 124.5 billion. Most of the funds, i.e. Denar 64.4 billion, are earmarked for payment of pensions to provide for a dignified standard of living for the elderly. Support to the healthcare remains to be priority, with Denar 36 billion projected therefore, and wages of all employees in PHIs will be increased, supply of necessary pharmaceuticals and quality of healthcare services will be ensured, infrastructure in the health sector will be improved. With respect to social protection, Denar 11 billion is projected, including the social protection system reforms by introducing minimum guarantee income. Moreover, active employment policies and measures will continue to be implemented and unemployment benefit will continue to be paid.
Challenges and Prospects
Taking into account the setting in which 2022 Budget is going to be adopted, i.e. considering that the economy has not fully recovered from the health crisis and the multiple soaring of energy prices on the global stock market, we should be aware of the upcoming challenges. Risk of occurrence of new virus variants and continued rise in commodity prices on the global stock market remain as major challenges to public finances. Considering the above-mentioned risks, I believe that 2022 Budget is designed to address all possibilities and upcoming challenges. Thereby, strengthening the capacities to make the projected capital investments in the public sector will also pose a challenge. Furthermore, prolonging the negotiation date with the European Union will be an additional challenge for the investors and the growth of our economy.
At the end I would point out that the Budget is a key document which incorporates the planned activities of the fiscal policy in support of the economic development, improving the welfare of all citizens, exploiting these possibilities and mitigating the risks. Hence, aware of this need and the setting we are in, I would like to sincerely appeal for a broad support for the 2022 Budget by the MPs in the Parliament, expecting a constructive debate in the coming days.
Fatmir Besimi, Minister of Finance
