The economic crisis is narrowing the scope for strengthening the competitiveness of the region through tax policy

The opportunity to improve the region’s competitiveness through tax policy is becoming more limited due to the economic crisis. Possible long-term global political and economic uncertainty will limit the flexibility of tax policies and their ability to foster competition.

In this case, Europe will start to fall behind China. Monetary policy reacts to inflation by raising interest rates, which can push the economy into stagflation, i.e. low growth rates. But when the source of inflation is a lack of supply, giving away purchasing power won’t do much it may even fuel future inflation.

The answer is to create demand. Economic policies in certain countries have become contradictory and the fiscal space for reacting is narrowing – said the former governor of the National Bank of Serbia, Dejan Šoškić, at the panel  “Tax policy in the service of investment promotion” as part of the “Core Days 2022 conference: Partnership for a more competitive region.”

The panel addressed questions of whether lowering tax rates is a sufficient factor in attracting investments or if other factors are needed. It was pointed out that the impact of tax policy is limited, therefore ensuring the quality of infrastructure and labor and political and macroeconomic stability is needed.

Sufficient public revenues are necessary for all of the above, while the pandemic has brought increased expenditures for preserving employment and investing in healthcare, with increased inflation due to the global closure of markets.

Current policies are such, that governments forgo revenue to get a return in a form of higher investment income. However, the question of how this affects the quality of services and whether the race to cut taxes is a race to the bottom or a successful strategy for luring investments and boosting employment rates remains.

Slobodanka Popović, Assistant Minister of Finance for the Fiscal System pointed out that the Government of Republika Srpska analyzes the tax burden on citizens and the economy every year, and as a result, creates recommendations for improvements.

Two tax policy reforms have been carried out in recent years. The first was the introduction of real estate taxes, which replaced property taxes, real estate sales, and inheritance and gift taxes. The improved real estate valuation model made it possible for revenues from this tax to be higher than the previous three taxes combined.

Also, income tax reform was implemented. The tax base is now the gross salary, while the health contribution has been reduced from 33% to 31% and the income tax from 10 to 8%, with the minimum wage also being increased.

 This made it possible for wages to be increased by almost 100% in the last 2-3 years in Republika Srpska, while the government’s intention was to continue to use tax policy to influence employers to increase wages due to the lack of labor and the impact of inflation.

Takođe, reforme su sprovedene i u oblasti neporeskih nameta. Formiran je registar koji je popisao 609 osnovnih nameta i omogućio ukidanje niza parafiskalnih davanja što je privredi smanjilo godišnje administrativno opterećenje za oko 15 miliona evra.

Reforms were also put into place with regard to non-tax levies. The annual administrative load on the economy was lowered by almost 15 million euros thanks to the creation of a registry that specified 609 essential taxes and made the abolition of a number of parafiscal duties possible.

The significant income tax change implemented in Montenegro was announced by the Director of the Secretariat of the Competitiveness Council of Montenegro, Marija Šuković. The reform came into force this year, so it lacks estimates of its effects. As part of the reform, the minimum wage was doubled, while the health contribution was abolished. This reduced the tax burden on wages from 39 to 20.4%.

According to Šuković, the goal was to help employees, especially those on the minimum wage, and to take in account the employers’ position that our tax burden was too high. Given that the new fiscalization that brought an increase in the collection of tax revenues started parallel to this reform it is difficult to accurately assess the effects of the reform.

The economy is satisfied and their sole issue is the difficulty of interpreting regulations,  while the local self-governments are dissatisfied, having lost part of their income, which has not been compensated yet. She continued by saying that in order to benefit its people and its economy, Montenegro also undertook the reform of non-tax charges. The Montenegrin register contains information on more than 2,000 fundamental non-tax charges or more than 27,000 when each levy is considered separately.