Governments spend resources in providing goods and services to the population and redistributing income. Government expenditures vary less than government revenues as they are less sensitive to the business cycle and reflect policy decisions. Expenditures provide an indication of the size of government, and therefore, its capacity to implement governance reforms and deliver services to the population. In order to curb the growth of expenditures and keep them at sustainable levels, governments can adopt fiscal rules and introduce performance budgeting.
Due to their demographic profiles, OECD and EU countries have high levels of spending, especially on social protection (e.g. old-age pensions) and health care. Governments in the Western Balkan region face the challenge of improving infrastructure and human capital in order to develop their economies, while honouring social spending commitments and wage bills, in the context of widespread informality and migration to more advanced economies.
In 2018, on average, the governments of the Western Balkan region spent 37.4% of GDP, which represents a decline of 3.3 p.p. compared to 2008. By comparison, EU countries spent 46.0% in 2018, a slight decline from 2008 (-0.4 p.p.); and the expenditures of OECD countries averaged 40.3% of GDP, a 0.5 p.p. decrease in the same period.
In 2018, the government in Montenegro spent 47.7% of GDP, which was above the EU average, and attributable to expenditures on large infrastructure projects, in particular the Bar-Boljare highway which connects the coast with Serbia (IMF, 2019). In 2017, due to increased debt for the project, Montenegro began a period of fiscal adjustment to compensate for spending on the highway project. As a result it decreased its expenditures by -3.4 p.p. relative to 2008.
Kosovo spent the least, 29.0% of GDP in 2018, a 4.7% increase from 2008. It was the only economy in the Western Balkan region to increase its expenditures over that period. The change is explained by war-veteran benefits, which surpassed the relevant spending targets, and high wages in the public sector, which included discretionary allowances and pay inequalities (IMF, 2018b).
Bosnia and Herzegovina recorded the biggest decrease in expenditures in terms of GDP: 41.0% in 2018, compared to 49.4% in 2008, an 8.4 p.p. difference. The explanation for the large decline was the general wage and hiring freeze, with the aim of reducing the size of the public sector (IMF, 2018a).
In per-capita terms, on average, expenditures in Western Balkans represented slightly more than a quarter of those of EU countries (USD 5 735 PPP compared to USD 20 446 PPP) in 2018. Nevertheless, the average growth rate of expenditures per capita between 2008 and 2018 was higher in Western Balkan countries (1.2%) than in the OECD (0.8%) and EU countries (0.6%).
Montenegro had the highest expenditures per capita in 2018 (USD 9 137 PPP) and Kosovo (USD 3 376 PPP) the lowest. Between 2008-18, Kosovo, 4.9% had the highest expenditure growth rate per capita, while Bosnia and Herzegovina (0.5%) had the lowest.
