The fiscal balance indicates the extent to which a country’s government expenditures are covered by the revenues collected in a given year. Comparing the fiscal balance among Western Balkan economies, OECD and EU countries provides a relevant indication of the sustainability of the fiscal position of each group. A fiscal surplus occurs when the amount of revenues surpasses that of expenditures, in the opposite case, there is a fiscal deficit.
Recurrent large fiscal deficits are detrimental to the sustainability of public finances as funding them involves incurring in debt. When the level of debt is high, the cost of servicing it (interest payments) can push a country further into deficit, thereby hindering fiscal sustainability even more. When the fiscal position of a country deteriorates, it generally resorts to fiscal adjustments, which can have impacts on the size of the government and on its capacity to implement governance reforms and delivering services to citizens. Furthermore, fiscal imbalances can trigger budget reforms to improve the sustainability of public finances in the long term.
In 2018, on average, the Western Balkans experienced a fiscal deficit of 0.3% of GDP, which is significantly smaller than the average deficit across OECD countries (2.9%). However, there is significant variation within the Western Balkan region, four economies, Montenegro (6.3%), Kosovo (2.9%), North Macedonia (1.8%) and Albania (1.6%) experienced deficits while Serbia (0.8%) and Bosnia and Herzegovina (1.7%), reported surpluses. Between 2008 and 2018 the fiscal performance of the Western Balkans deteriorated in Montenegro, Kosovo and North Macedonia by 4.0, 2.9 and 0.8 percentage points respectively. For Montenegro this trend is explained by the development of large publicly-financed infrastructure projects (e.g. Bar-Boljare highway) that, while adding to economic growth, have strained public finances (IMF, 2019). In the case of Kosovo, the deficits partially reflect increased expenditure on social benefits, including pensions and war veteran benefits (IMF, 2018).
The primary balance, which is the fiscal balance excluding net interest payments on public debt, is also an important indicator of a country’s fiscal situation and its short-run sustainability. A primary deficit implies that a country is relying on debt to honour financial commitments. Financial markets are likely to punish such behaviour by increasing the cost of debt and eventually by restricting access to resources altogether. Raising debt for recurrent expenditure is riskier than raising debt for one-off activities or projects.
On average, in 2018, the Western Balkans reported a primary surplus of 1.40% of GDP, higher than for EU (0.9%) and OECD (-0.8%) countries. However, there was significant variation across the Western Balkan region. Albania (0.6%), Bosnia and Herzegovina (2.5%) and Serbia (3.0%) have indeed primary surpluses while Montenegro (4.1%), Kosovo (2.6%) and North Macedonia (0.6%) are actually running primary deficits, Bosnia and Herzegovina recorded the largest improvement in the primary fiscal balance (5.9 p.p.) from a deficit of 3.4% in 2008 to a surplus of 2.5%. Along with favourable economic conditions, the government incorporated a medium term perspective in its budgetary process, strengthened its compliance with budgetary targets and improved its tax systems.
