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Stimulus Package Or Relief Aid?

As a response to the crisis caused by the pandemic, Serbia last year allocated as much as 12.7% of GDP for measures to support the economy and the population, which equates to almost six billion euros. The two main pillars of that support were almost universal assistance to the private sector of the economy with payments of more than four net minimum wages per employee and financial assistance of 100 euros for all adult citizens. This state assistance was generous by regional standards, and even further afield, which was very important not only in a financial sense, but also psychologically. In relative terms, this intervention was more than double that provided by all other Western Balkan countries, and was similar to the average in the European Union.

The assistance provided to the economy and the population certainly mitigated the negative economic and social impacts of the pandemic. The GDP fall, estimated preliminarily at 1.1% in 2020, is among the lowest declines in Europe and is certainly the lowest in Southeast Europe. Labour market trends were also relatively favourable overall. According to the Labour Force Survey, employment was only 17,000 (i.e. around 0.6%) lower in the fourth quarter of last year compared to the same period of the previous year, while the number of those registered as unemployed was up by 7,000.

Hidden behind this generally positive picture are great differences in how individual sectors and segments of the population traversed the previous difficult year. When it comes to economic sectors, the hardest hit – due to the very nature of the pandemic – were high-contact sectors, such as hospitality, tourism, passenger transport, personal services (e.g. hair and beauty salons, fitness centres and the like) and non-food retail products.

The Labour Force Survey helps us to have an overview of the variable impacts of the pandemic on the population’s activity and employment. While formal employment actually increased slightly during 2020, the number of informal workers fell sharply, by more than 30,000. According to age categories, the largest reduction in employment was recorded among younger workers aged up to 34, and, according to education level, among lower educated workers. Employment among members of the youth aged under 24 fell by 12,000, impacting young women the most. The share of young people, aged 15-24, who were neither working nor in education processes represented 17.6% of the total youth population, which denotes a yearon- year increase of 1.8 percentage points.

All in all, faring the worst on the labour market were those who had insecure and poorly paid jobs even before the pandemic. On the other hand, the highly educated and those employed in the ICT sector, manufacturing and agriculture fared the best. Employment increased in the public sector as a whole, and in healthcare in particular. Average earnings also increased, led by growth in the minimum wage and the growth of wages in the public sector, but also influencing its increase was the previously described effect of the reduction in lower paid jobs as a consequence of the pandemic.

Following last year’s major stimulus package, this year’s assistance package, which is worth at least 2.1 billion euros according to announcements, again surprised the general population and the professional public. Despite most domestic economists and international agencies having recommended that the new package be selective, in order to help the sectors, companies, families and individuals hardest hit by the pandemic, the Government of Serbia has remained true to its commitment to provide universal support to the economy and the population. On the other hand, additional, selective “assistance in distress” measures have also been announced for the worst hit sectors and individuals.

It became clear with this year’s package that Serbia’s economic authorities have opted to persevere in their Keynesian treatment of the pandemic crisis. Their desire is for Serbia to achieve the fastest cumulative growth in Europe in the coming period at any cost, and they plan to boost that growth by stimulating domestic demand, while the issue of compensating for the actual damage caused by the pandemic and providing relief for those in distress remains secondary, due – among other things – to the modest share of the hardest hit areas in GDP.

However, even such a non-selective aid package better protects those who need it more, due to its parametric solutions. Specifically, despite practically all employees receiving the same amounts of assistance, this assistance is relatively (in relation to earnings) higher for employees with lower salaries, who are on average – according to the data – more exposed to the risk of losing their jobs. Similarly, for someone who lives on social assistance benefits or has no regular income, 100 or 60 euros means much more than it does to someone with an above-average income. Indeed, simulations have actually shown that the combining of these two main measures managed to prevent the spread of poverty during 2020, and that universal assistance of 100 euros to adult citizens managed on its own to maintain the growth of income inequality.

The main criticism of this aid package design among the majority of domestic experts and the World Bank refers to what experts dub the error of inclusion – with unnecessary and thus wasteful assistance provided to companies that didn’t suffer losses, as well as individuals who aren’t at risk of poverty and haven’t experienced job losses or falling income. According to critics, on the one hand, those who are really endangered aren’t sufficiently protected by this, while, on the other hand, this package unnecessarily increases the public debt, which will need to be repaid in solidarity.

Nonetheless, the costs of measures aimed at mitigating the crisis are one-off in nature – as they don’t imply permanently increasing financial obligations in the future. Even the IMF told governments at the beginning of the pandemic to – spend, spend, spend. It can’t currently be said with certainty that the small drop in GDP is primarily a consequence of pandemic measures, but denying their positive impact is even harder. This is an empirical question, and time will prove to be the best judge of the effectiveness of the Government’s offensive approach to handling the pandemic.

A lot is dependent on the further course of the pandemic, both in Serbia and around the world, and that course remains difficult to predict. If the pandemic weakens relatively quickly and everyday life returns to normal, the country’s fiscal position will remain completely stable, with its starting position improved in relation to peer countries, and most of those who’ve lost out will quickly recover when the pandemic’s shock to supply abates. The transformation of the economic structure will be accelerated towards the faster development of ICT, modern services and high technologies. In contrast, a prolonged pandemic would threaten economic activity and cause a narrowing of fiscal space, while growth in the number of bankruptcies, unemployment, poverty and inequality would have to be suppressed through the use of redistributive measures like those that we saw during fiscal consolidation, with even stronger elements of solidarity.

The successful procurement of vaccines was an important first step in reducing the likelihood of a negative pandemic scenario, but comprehensive vaccination coverage is an absolutely essential second step – and, again, only time will tell whether or not it proves to be a completely sufficient step.

Under the scope of measures to support the economy in 2021, the state will pay three halves of the net minimum income per employee in the private sector, between April and June, regardless of the size of the enterprise registered. Registration is required for each individual payment (of around 16,000 dinars), although the granting of assistance is not dependent on a company’s revenue having declined. For three months after receiving the final payment, companies cannot lay off more than 10% of permanent employees, while they are forbidden from paying dividends until the end of the year. A total of 70 billion dinars has been allocated for this measure, with estimates suggesting that this amount will cover as many as 1.4 million employees. Additional assistance will be distributed to particularly hard hit sectors: hospitality facilities and hotels, passenger transport carriers, travel agencies and tour guides. The existing guarantee scheme for support credit to the economy will be expanded by a billion euros.

The main support measure for the population is a payment of 60 euros for all adult citizens and an additional 50 euros of assistance to pensioners. Plans also include additional assistance for the unemployed – at this juncture it has yet to be defined whether this aid will be granted to all those who are registered as unemployed or only to those who lost their jobs during the pandemic.

Comment by Zoran Panović

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