UNMIK/FR/003/01
FEATURE RELEASE 003 - 5 January, 2001
Behind the budget
Budget 2001: an exercise in reform and long-term sustainability
The basic facts of the Kosovo Budget 2001 were well reported: expenditure on
operations totalling DM 742.7 million, identified reconstruction and investment
needs totalling DM 2.8 billion over the three years 2001 to 2003, the general
government budget now two thirds financed by domestic revenues from taxes, fees
and user charges.
Less clear, and shortly to be published for broader debate in
the CentralFiscal Authority budget book Proposed Kosovo Budget 2001, is the
thinking behind the figures and the details of 29 sectoral spending programmes
foreseen for the next three years. UNMIK Direct will examine each one in turn over
the next weeks. Here we focus on theSRSG budget statement, the anticipated
resource availability and the public investment programme.
One thing to be borne in mind is that the planned expenditure of approximately
DM 225 per head on public services delivery is only part, perhaps only half, of
the story. The international organizations working in Kosovo (the UN, the EU,
OSCE, KFOR and many other UN, European and international agencies) have large
budgets that are quite separate from Kosovo Budget 2001. The contribution made
by KFOR to security and law and order, for example, is probably unquantifiable.
Nevertheless CFA estimates that together these organization probably spend as
much or more than the total of all expenditures envisaged in its own budget
proposals for 2001.
But whereas these other budgets will dwindle rapidly, especially after 2001,
a prime aim of UNMIK is establish both a budget process and levels of
public financing and expenditure that a sustainable in the long term. Budget 2001
is the first underKosovo international administration that integrates provision
for the operating costs of government with its capital investment needs: it
looks forward three years to when support from the international community
should no longer be critical to Kosovoeconomic survival when Kosovo itself
will be able start investing from its own resources to meet is developmental
needs.
Macroeconomic outlook
CFA admits up front that it does not yet have a reliable basis for assessing
the economy. No accurate measure of GDP or GNP have yet been possible.
Estimates of GNP per capita as low as $400 (i.e. South Asia levels, below those
in Sub-Sahara Africa) immediately after the conflict and $750-$1200 (i.e. from
Albania, Ukraine and Uzbekistan to Kazakstan) are for general orientation
only.
The challenge of economic management is to stimulate sound and sustainable
growth while ensuring that those unable to benefit or otherwise left behind are
provided for in ways the economy can sustain. Against a background of long-term
poverty, the budget statement identifies Kosovo=s main economic asset as a
young, flexible population with (internationally compared) low labour costs. It
specifically rejects complaints over how low wages are: they are not low, says
the statement, compared to permanent regional neighbours. Wages that even
approached those of the internationals here temporarily, would price Kosovo out
of local markets, it warns. Higher wage and salary levels are only sustainable
as productivity increases and the economy growthCand both are a function of
better educational facilities and high skill levels.
The way to take full advantage of this asset is to have it employed in
productive private enterprise, through the private sector growth and enterprise
evident already in the rapid development of small businesses. These however
depend on the right commercial environment, namely the right legal framework
and capital. Since capital will not come until the legal framework is in place,
regulations for businesses, open competition and secure property rights have to
have absolute priority. Only then will Kosovo attract the private investment it
so desperately needs.
Increasing taxes
Kosovo in 2000 wasprobably Europe least taxed economyC7.7 per cent of
GDP compared toIMF estimate of 18.6 to 46.8 per cent in eleven other transition
economies. This is not sustainable, CFA argues, if Kosovo aspires to the
standards of public infrastructure and services that are the prerequisites for
sustainable economic growth. In other words, a higher share of national income
has to go towards meeting the costs of government. Simply raising the share to
the level of the lowest of the other transition economies would be sufficient.
Revenue would be enough to meet the full costs of government and have something
left over for capital investment. That is the aim for Budget 2004.
Tax policy to bring this about will not only raise the taxation level, it
will also broaden the tax base and change the kinds of taxes levied. There will
be less reliance on on border and boundary taxes, for example, which
are inconsistent with trade policies andKosovo aspiration to an open,
free-market economy integrated with the European Community. Introduction of
value added tax and a business profits tax this year will both broaden the tax
base and remove some of the distortions and disincentives in existing taxes. A
strengthened and more efficient tax administration will be charged with cutting
lost revenue through tax evasion.
Another medium term taxation change will redistribute responsibility for both
raising revenue and for spending it between the municipalities and central
government. In line with recommendations by the IMF and others, the aim is to
have municipalities set up to administer and implement property taxes by
2003.
But alongside the plans to rationalize taxes, the budget statement also
highlights major concerns over a related area: non-payment of charges levied
for public services rendered. Less than half the revenue billed to electricity
consumers was actually paid last year; the billing itself was for less than
half the power consumed. Fees for water usage and district heating are
similarly low. The net effect is a subsidy paid by the rest of the community
for services consumed by those that fail to pay. Since the subsidy is one that
Kosovo can ill afford, special efforts are planning this year to bring service
charge collections up to acceptable levels.
In line with this, costs of services will be recovered from users wherever
practical. It will be a general requirements, the budget statement says, that
no such services will be subsidized from the budget after 2001.
Priorities
The vision of a private-sector growth-led economy does not call for huge
public investment in either the private sector or in state-owned enterprises. The
job ofKosovo government is to create the environment that lets the market place
operate and effectively and to grow. Policy development, implementation and
appropriate legislation are what is needed, the budget statement emphasizes,
not public investment.
Policy priorities will seek to developKosovo key asset, its young
population, by making it skilled as well as flexible towards new activities.
Education therefore remains the highest public sector investment target.
Education spending, however, has to be coupled with reformCto enhance its
quality, first to make it as good as the region, then as good as in any
country.
Perhaps even more in need of reform is the health sector, equally
important forKosovo future. Bringing the health system more in line with developed
countries will mean have first recourse to service through local practitioners
and primary health care facilities rather through the large hospitals. Health
spending will therefore emphasize community-based health services, while
replacing hospital services with fewer but more efficient, modernized and
specialized institutions linked in an integrated grid.
Infrastructure investment, the third area singled out for attention, must go
beyond reconstruction to upgrading. Capital investment will be required to
reaise standards to levels that will meet Kosovo=s long-term needs and address
the environmental degradation from which many parts of the territory suffers.
Roads need extensive upgrading, the airport is more appropriate to a provicial
town than Athe capital of the new Kosovo, the electricity system requires
massive investment to cope with rapidly growing demand, piped water and sewage
disposal must be brought to non-urban communities, and environmentally-sound
sewage systems are needed everywhere.
Sustainability test
Consistent with the requirement to set the cost of providing all services at
sustainable levels, proposals from administrative departments for new policies
and services will be subject to maintaining public sector salaries that are
sustainable in the long term and consistent with regional and private sector
levels. IAC endorsement, the budget statement implies, would depend on
satisfying such criteria.
Meanwhile the present Joint Administration will be focussing on building up
the civilservice administrative and technical capacity. A high budget priority,
in fact, is to provide Kosovar staff with the skills and experience they need
to replace international experts, whose presence can be reduced rapidly.
The day will come when national experts and Kosovo's elected representatives
will undertake the budget exercise without external help. Until then there is a
need to understand the principles to follow if donor interest in supporting
Kosovo is to be maintained, and commercial private flows to develop.
Budget 2001 both embodies those principles and, political ambitions apart, make
a statement of faith in the future of Kosovo as an autonomous self-governing
entity.
[Contact: P. Ellwood; (038) 504 604 Ext. 5471; E-mail: ellwood@un.org]