IMF: fiscal performance to worsen

Tirana Times
By Tirana Times July 12, 2019 13:01

IMF: fiscal performance to worsen

TIRANA, July 10- In an analysis from the International Monetary Fund (IMF) the fiscal performance outlook in Albania appears weak. The analysis predicted that budget revenues in relation to GDP will decrease during the 2019-2024 medium term. As the economy of Albania is expected to grow by 4 percent over the medium term, tax revenues will not grow. 

In 2024 the budget revenues in percentage of GDP are expected to reach 26.9 from 27.6 percent at the end of 2018. During the decade 2015-2024, the peak of fiscal output was reached in 2017 with 27.7 percent of GDP, according to the IMF analysis. This year is expected to be closed with 27.2 percent of GDP, with a 0.4 percent drop compared to 2018.

The history of budget revenue performance has a clear link to the political mandates of government. After the 1997 riots, when the socialist government came to power, budget revenues saw the highest growth rate in relation to GDP, going from 26.6 percent in 1998 from 17.8 percent in 1997. Year 1999 marks the record as the GDP grew 27.8 percent, a performance which was not achieved in any other fiscal year. Subsequently, the revenue cycle continued to decline until 2005 when the political mandate of the government passed to the Democratic Party.

The Berisha government changed the fiscal policy by applying the flat tax. Budget revenues to GDP ratio increased in the first mandate from 25.4 percent of GDP to 26.9 percent in 2008. Government misconduct in the second term combined with the global economic crisis that also negatively affected Albania, made the budget revenues to fall to 24.2 percent of GDP in the last year of the election mandate in 2013.

With the return to the government of the Socialist Party in 2013 which applied a progressive tax that increased the fiscal burden on direct taxes, the revenues in relation to GDP grew reaching 27.7 percent in 2017. But during the second mandate of SP the revenue growth rates have dropped, although the economy is expected to grow by more than 4 percent. 

An empirical research on fiscal policy effects on the Albanian economy, by Meri Papavangjeli from the Research Department at the Bank of Albania, has found that a tax revenue shock has a higher effect on economic activity in the short run compared to government spending, while its effect extinguishes along longer horizons.

GDP and private consumption react positively to a blow to government spending and adversely to a blow on tax revenues. Capital expenditures and government purchases have a similar effect on GDP, but the effects of capital spending are more extended in time. Based on this, mid-term policies could minimize the adverse consequences of fiscal consolidation in economic growth, offsetting some current spending cuts with rising capital spending, the Bank of Albania’s study suggests.

Albania remains the country with the highest tax burden in the region along with Serbia but fails to justify it with income. The country has never been able to have revenues higher than 28 percent of GDP, ranking the last in the region and among the lowest levels in Europe. Although with similar tax burdens, Serbia is expected to collect record revenues in the region at the level of 41.8 percent of GDP in 2019, according to official reports of the Ministry of Finance in the economic program of the 2018-2020 reforms. Montenegro is expected to collect 40.1 percent, and Macedonia has a 29 percent of GDP fiscal revenue, which has been declining in recent years as a result of flat tax.

Tirana Times
By Tirana Times July 12, 2019 13:01