Report Thierry Warin Macedonia 2009

Fiscal
Thierry sustainability
Warin
of the Republic
of Macedonia
December
2009
THIERRY WARIN
FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA
I would like to express my gratitude and deepest thanks to Mr. Prime Minister Nikolai Gruevski for
his attention and consideration. I would like to extend my best wishes to the staff members of the
Public Debt Management Department and in particular to Mrs. Ana Stojkova for her hospitality and
to Mr. Dejan Despotoski at the Ministry of Finance. Eventually, my sincerest regards go to Mr.
Aleksandar Stojkov whose inner knowledge of the Republic of Macedonia was of a tremendous help.
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BIOGRAPHY
Thierry Warin is Associate Professor of Economics and Director of the International Studies Program at
Middlebury College (USA) and Associate Fellow at CIRANO (Center for interuniversity research and analysis
on organizations, CANADA). Thierry authored over 25 academic publications and 7 books.
Prior to coming to Middlebury College, Thierry has held positions in several academic institutions (Essec
Business School, HEC Paris, HEC Montreal, Ecole Polytechnique de Montreal). His research is mainly on
International Economics topics, with a particular interest on the European economic integration.
An alumnus of the Minda de Gunzburg Center for European Studies at Harvard University, Thierry
completed his Ph.D. in Economics at Essec Business School (Paris).
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PROJECT DESCRIPTION AND MANDATE

This project is of a paramount importance for the Republic of Macedonia in light of the accession to
the European Union. The lately issued “2009 progress report on the Former Yugoslav Republic of
Macedonia” from the European Commission (14 th of October 2009) highlights great
accomplishments and areas of necessary improvements in the economic and financial track. In this
context, this PDPL2 project is of great relevance to both develop a rule-based model for fiscal
sustainability specific to the Republic of Macedonia’s economy and also doing it while keeping in
mind the future accession to the European Union.
The goal of this report is to allow staff members to replicate the results. Some
statistical/econometric techniques will be used, but in a way that will allow an educated reader to
replicate the results. This goal was kept in mind all along the writing of this report. Some
technicalities remain and are necessary due to the complex nature of the goal of the assignment.
When this happens, ‘boxes’ are used to provide with some essential background.
BACKGROUND INFORMATION
The Ministry of Finance is dedicated to create a set of sustainable policies. In this context, it is of a
paramount importance to put the Republic of Macedonia in a situation of both being able to service
its debt and allow the financing of structural policies.
Medium and long-term objectives must be drawn for medium and long-term fiscal sustainability.
Setting the quantitative targets for the level of the general government and total public debt, in the
Public Debt Management Strategy is not based on the quantitative support from a sustainability
analysis. Maastricht criteria include the maximum level of budget deficit and general government
debt, but these convergence criteria cannot be fully implemented in a developing country like the
Republic of Macedonia.
Given the current Government infrastructure investment program, Public Debt Management
Department is facing serious challenges in raising funds for financing various development projects.
The implementation of these projects will increase the level of public debt, as well as the future
interest expenditures. Hence the growing need for developing fiscal sustainability on the medium
and long term.
OBJECTIVE OF THE ASSIGNMENT
The project should result in developing the framework/model for measuring the sustainability of
the fiscal policy of the Republic of Macedonia, which in the future will be used for quantitative
support in assessment of important decisions made in the field of public finance.
1 The usual caveats apply. This report relies on available data from the Ministry of Finance, the Statistical Office of Macedonia, and the IMF. Its conclusions are based on the availability
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and quality of the data. It is possible that some mistakes can be found, although the author tried to be as careful as possible in the short time frame imposed by this assignment.
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EXECUTIVE SUMMARY
In the Republic of Macedonia, there is no autonomous monetary ‘policy’. The interest rate decided
by the Central Bank shall contract the money base to remain pegged to the euro. Theoretically, the
benefit is a lower risk premium and a lower inflation rate, the cost is a higher nominal interest rate.
In practice, since the pegged-exchange rate mechanism has been successful since 1997, revisiting the
system is not a priority in particular in light of the future accession to the EU and the EMU.
However, this choice of a pegged-exchange rate mechanism has impacts on the fiscal policy, in
particular on the servicing of the debt (through the domestic interest rate, and also through the
credibility level on the Eurobonds market for instance) as well as on the targets of the fiscal policy.
Therefore, the fiscal policy should target investments in capital (infrastructure) as a priority.
With a high structural unemployment rate and a structural current account deficit, it is important to
put forward reforms of the labor market, business law, and a deepening of the financial markets
(commercial banks regulations, minimum reserve requirements, etc.). Tackling the current account
deficit is of a high priority, by using the fiscal and structural policies altogether. An example of the
goals would be to aim at diversifying the Macedonian economy, while reinforcing its consumption
of domestic products (import substitution) and develop its labor market. Another priority is to
expand the tax base, without increasing the tax burden.
Furthermore, the road to Europe (EU and EMU) should be placed at the top priority and
completed as soon as possible, in particular in light of the global financial crisis consequences
(higher global interest rates, higher global inflation rates, higher taxes implying a reduction in global
consumption).
Now, when it comes to the specifics of the fiscal policy, the pattern, though still sustainable in 2009,
is pushing public finances towards a zone of turbulences. A first recommendation is to keep the
public deficit under control, and even to reduce it to gain some leeway to face the future challenges
of the global financial crisis. A second recommendation is to use the fiscal policy in a counter-
cyclical way. A third recommendation would be to keep building up the credibility of the Republic
of Macedonia at the international level (contingent on the strict control of public deficits) by issuing
Eurobonds. A fourth recommendation is to work at the political level to issue joint bonds with a
Western European country to help reduce the risk-premium and improve the Republic of
Macedonia’s credibility. The Republic of Macedonia would be the first country (with its partner) to
issue joint bonds in the world. The innovation would appeal to financial markets, in particular if the
issuance occurs when public finances are sound.
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13 policymix based recommendations:

1. The government must consider the sources of the inflationary pressures. Its
tools are either well targeted taxation or relevant public expenditure in areas
where the government does not generate an increase in the aggregate demand.
2. An upgrade in the finetuning operations of the monetary policy would be
necessary.
3. Based on the average wage rate, the sector represented by manufactured
goods should be expanded to integrate the unemployed youth, and rebalance
the current account.
4. The minimum reserve requirements should be lowered at a smooth pace in
preparation for the entrance into the EMU.
5. The European agenda should be a top priority for the government, and would
legitimate ex post the monetary policy of the Republic of Macedonia.
6. Integrate the business cycles into the design of the fiscal policy.
7. Fixing the procyclicality of the fiscal impulse so that the fiscal policy becomes
countercyclical would be necessary.
8. In the midst of the global financial crisis, this downward direction of the degree
of sustainability must be taken seriously in 2010, 2011 and 2012 to prevent
from entering into the negative area.
9. The tax gap is becoming positive. An expansion of the tax base (no increase in
tax rates) is advisable. A law offering a tax amnesty could be used for a year,
before enforcing the new tax regulations.
10. The fiscal policies for 2010, 2011 and 2012 (during the downward business
cycle) must be kept under control and ideally using the baseline as a very
maximum that may be crossed due to a deterioration of global macro
economic conditions but only for exceptional reasons.
11. The next five years must be expected to face a rise in global interest rates,
inflation rates, a reduction of global consumption and some pressures on the
liquidity of the international financial markets. All this will happen with
various degrees. The next five years will be of the utmost importance for the
stability of the Republic of Macedonia’s economy.
12. Public deficits should be lowered compared to the forecasts expecting a
toughening of the debtrefinancing conditions.
13. The Republic of Macedonia should seek issuing joint bonds with a Western
European country to (1) increase its international credibility, and (2) to lower
its costs of debt servicing.
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INTRODUCTION
T his report addresses the question of establishing a framework to analyze the sustainability of the
Republic of Macedonia’s public finances2. Various indicators exist in the academic literature or
generated by the research teams of international organizations, central banks and governments. From
the “primary gaps” to the Golden Rule of public finance, the choice is vast.
However, as noticed by the IMF or the European Commission, even if a quantitative analysis is a wonderful
tool to set up guidelines and benchmarks, very often the quantitative analysis must be accompanied by a
qualitative analysis.
Indeed, the model specifications rest very often upon forecasts and projections that require some serious
qualitative interpretation. For instance, the future of a country’s demographics, interest rates in the medium-
term, inflation rates in the long-term or the stability of the global financial markets require some good
judgment.
This is why, before presenting in the third part of this report a framework to analyze the sustainability of the
Republic of Macedonia’s public finances, the first part will be devoted to a short macro-economic
presentation of the Republic of Macedonia. The strengths and weaknesses will be highlighted and both will
serve for the calibration and interpretation of the results presented in the third part. The second part will be
reserved to a thorough review of the literature on fiscal sustainability. This literature review will help for the
training of the middle-office people in the Ministry of Finance, or anyone interested in learning the rationales
of these financial criteria. It will also present the criteria in a scholarly way, justifying their use in the third part
for the assessment of Macedonia’s financial stance.
The criteria selected in this report are relevant not only for this assessment, but also to prepare the Republic
of Macedonia on its path to the European Union. The literature review and the framework presented in the
third part are the common language used by researchers and analysts from international organizations like the
IMF or the European Commission.
2 In what follows, we will use the constitutional name ‘Republic of Macedonia’ since this document is written for domestic use.
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Part I
[MACRO-ECONOMIC
CONDITIONS OF THE
REPUBLIC OF
MACEDONIA]
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INTRODUCTION
W
ith a little more than 2 million inhabitants, the Republic of Macedonia has had a very stable
demographic situation in the past ten years (see figure 1). The essential of the population
belongs to the age group 15-64, with a relatively steady age group 0-14, as well as 65+.
0-14
2007
15-64
2001
1997
65+
0 20 40 60 80
FIGURE 1. POPULATION BY AGE GROUPS. SOURCE: STATE STATISTICAL OFFICE, 2008.
When it comes to health, based on basic health data (see figure 2), the number of doctors per 1000 habitants
is well below the Western European average, but the numbers of doctors is on the rise.
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1996 2000 2006

Doctors-Total 4464 4455 5134
Specialists 2732 2892 3301
Dentists 1078 1129 1175
Pharmacists 342 311 187
Number of doctors per 1000 inhabitants 2.3 2.2 2.5
Number of dentists per 1000 inhabitants 0.5 0.6 0.6
Hospital beds 10311 10248 9343
Number of inhabitants per hospital bed 192 198 218
FIGURE 2. BASIC DATA ON HEALTH. SOURCE: STATE STATISTICAL OFFICE, 2008.
In terms of human capital now, the situation depends, not surprisingly, on the level of education (see figure
3). The number of entry generation in primary and lower secondary education decreased from year to year, as
well as the total number of students. The number of enrolled students in primary and lower secondary
education in school year 2007/2008 is smaller for 13.9% compared with 1997/1998.
With regards to upper secondary education and tertiary education, the situation is better than in primary and
lower secondary education, where the coverage of the enrolled students has been increased. In upper
secondary education, the number of enrolled students in 2007/2008, compared with 1997/1998 was higher
by 9.9%, while in tertiary education the number of enrolled students was higher by 100.5%.
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FIGURE 3. BASIC DATA ON EDUCATION. SOURCE: STATE STATISTICAL OFFICE, 2008.
The essential share of the population has either a lower secondary diploma or a higher secondary diploma
(see figure 4). An interesting break down would be to see whether this is more technical or professional
education than general education.
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Doctorate
Master's degree
Faculty, academy
higher school
Upper secondary school
Primary and lower secondary school
Incomplete primary and lower

secondary education
No education
Still in the process of primary and

lower secondary education
0 200000 400000 600000
FIGURE 4. POPULATION OF 15 YEARS OF AGE AND OVER, BY HIGHEST COMPLETED SCHOOL.

SOURCE: STATE STATISTICAL OFFICE, 2008.
MONETARY POLICY
In 1995, the Republic of Macedonia made a clear choice in terms of monetary policy by entering into a
pegged-exchange rate mechanism with first the ECU, and since 1999 with the Euro. Apart from one episode
of devaluation in 1997, the National Bank of Macedonia has always been successful at keeping the pegged-
exchange rate mechanism (see figure 5).
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100
90
80
70
60
50
40
30
20
10
0
2003 2004 2005 2006 2007
CHF GBR USD EUR 100 JPY
FIGURE 5. AVERAGE ANNUAL EXCHANGE RATES. SOURCE: STATE STATISTICAL OFFICE, 2008.
Under a pegged-exchange rate mechanism, a country deliberately decides to abandon its monetary policy. The
fiscal policy and the structural policy are the ultimate devices to develop and support the economic activity. A
pegged-exchange rate mechanism has benefits and costs. One benefit is to import the credibility of the
monetary policy to which the Macedonian monetary policy is pegged. The results in terms of inflation are
relevant. Between 2003 and 2007 for instance (see figure 6), M2 increased from 76 billion Denars to 164
billion Denars without generating too high an inflation rate.
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180000
160000
140000
120000
100000
Money supply (M1)
80000
Money supply (M2)
60000
40000
20000
0
2003 2004 2005 2006 2007
FIGURE 6. MONEY SUPPLY (MILLION DENARS). SOURCE: STATE STATISTICAL OFFICE, 2008.
With better credibility, the hope is also to reduce the risk premium international markets put on a country-its
treasury bonds or its central bank bills-when the country is trying to raise money on international markets.
But in open macro-economics, we know that the risk premium may not be as low as the risk premium from
the pegged currency, and even worse, it can actually deteriorate if financial markets do not believe in the
pegged exchange rate. In the context of the Republic of Macedonia, although the risk always exists, evidence
is that since 1997 the pegged exchange rate mechanism has been effectively managed.
Due to a lower risk premium than under a floating exchange rate mechanism, this earned credibility may lead
to a lower interest rate overall. This conclusion holds true if the policy-mix with the fiscal policy and the
structural policy is efficient. In effect, the coordination with the fiscal policy and the structural policy is of the
utmost importance in this specific context.
Indeed, the central bank is contracting the monetary policy year after year to remain pegged to the euro. The
hope is to control the inflation rate. But since the secondary objective is inflation, the government must
implement policies considering this secondary objective as well. Inflationary pressure will come from the
current account, the capital account, the fiscal policy, and the structural policy. The fiscal policy as well as the
structural policy must be decided in light of their impacts on the national economy while considering the
inflation rate. If not, the gains in productivity will lead in the short-term to inflationary pressures. Under a
pegged exchange rate mechanism, these inflationary pressures will translate into pressures on the current
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account, and hence pressures on the amount of reserves. In this context, the central bank will need to issue
central bank bills (a reverse repo) to be able to accumulate the reserves necessary to sustain the pegged-
exchange rate mechanism. Domestic interest rates will go up as a matter of facts, and will backlash on the
fiscal policy.
To leave this locked-in scenario, the government must consider the sources of the inflationary pressures. Its
tools are either well targeted taxation or relevant public expenditure in areas where the government does not
generate an increase in the aggregate demand. To help decide, one needs to know the distribution of
household expenditures (see figure 7).
FIGURE 7. DISTRIBUTION OF HOUSEHOLD EXPENDITURES. SOURCE: STATE STATISTICAL OFFICE,

2008.
Interestingly, a little more than 60% of household income goes to food, clothing and housing. Housing is
very stable, though dwellings are increasing at a higher pace every year (see figure 8).
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5 and more rooms
4 rooms
2007
3 rooms
2001
1999
2 rooms
1 room
0 500 1000 1500 2000 2500
FIGURE 8. BUILT DWELLINGS IN TOTAL. SOURCE: STATE STATISTICAL OFFICE, 2008.
Recommendation 1:
To leave the lockedin scenario, the
government must consider the
sources of the inflationary
pressures. Its tools are either well
targeted taxation or relevant public
expenditure in areas where the
government does not generate an
increase in the aggregate demand.
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And apart from passenger car, “luxury goods” as defined by the income elasticity are on the rise in
households (see figure 9).
Air conditioner
Personal computer
HiFi sound equipment

2007
CD Player/recorder
2001
Passenger car
mobile phone
0 20 40 60 80 100
FIGURE 9. SUPPLY OF DURABLES IN HOUSEHOLDS (%). SOURCE: STATE STATISTICAL OFFICE, 2008.
Housing is what contributes most to the consumer price index (see figure 10), though prices seem to be kept
relatively stable likely as a result of the new dwellings (see figure 8).
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FIGURE 10. CONSUMER PRICE INDEX. SOURCE: STATE STATISTICAL OFFICE, 2008.
The inflation rate was on the rise before the global financial crisis (see figure 11). This is likely a result of the
fiscal expansion as well as the Balassa-Samuelson effect capturing a rise in productivity.
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12.0
10.0
8.0
6.0
4.0
2.0
0.0
I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX I V IX
2.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
4.0
6.0
FIGURE 11. INFLATION. 1999=100. SOURCE: STATE STATISTICAL OFFICE, 2008.
As shown on figure 11, although is stays under

control on a yearly average basis, inflation on a
monthly basis displays a great deal of volatility. This Recommendation 2:
may be explained by the one-month tender
procedure. A better fine tuning of the monetary Improve the finetuning
policy could help (weekly tenders for instance, as is of the monetary policy.
the case for the ECB).
FISCAL POLICY
It seems relevant to look at the Republic of Macedonia’s fiscal situation based on past examples of similar
countries. Llorca & Redzepagic (2008) perform an econometric study of eight new member states of the
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European Union. They look at these member states in light of the SGP requirements (government budget
deficit, and gross public debt). They show that there are considerable differences across the CEECs, offering
a heterogeneous picture of fiscal policy in the new EU members. They identified two distinct groups of
countries that are following different fiscal strategies with sharp differences in the behavior of their budget
deficits and debts:
1. A group with a prudent and sound fiscal policy: the Baltic States (Estonia, Latvia, Lithuania) and
Slovenia;
2. The Visegrad group (the Czech Republic, Hungary, Poland and the Slovak Republic) with high and
growing budget deficits.
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The chronic character of fiscal imbalances in the Visegrad group seems to have emerged in the earlier stages
of their post-communist transitions (Dabrowski & Rostowski, 2001). More precisely, the Visegrad group’s
fiscal troubles have their roots in high public expenditure, particularly related to social commitments
(redistributive objectives). Indeed, this group is characterized by a high proportion of so-called mandatory
social expenditure, for example on pensions and social benefits. According to EBRD 2001, it appears that the
persistently high relative levels of public expenditure and revenue in the Visegrad group may be seen as part
of the command economy legacy from the omnipotent role of the state, as well as the cushion against the
high social cost of systemic transformation. Only Slovakia has managed to move from a big to a small
government (Schneider & Zapal, 2005): its expenditure fell from 47% of GDP in 1995 to 35% in 2008.
About the debt, in the Czech Republic, Slovakia and Slovenia for instance – which started from a position of
little or no debt – the growth of the public debt has been rapid and substantial. Indeed, the growth of public
debt in the Slovak Republic has been phenomenal because of the large bank restructuring costs. In the Czech
Republic, poor management of contingent liabilities and over-generous privatization schemes left the
government with massive increases in debt levels. Slovenia is a borderline case because it already had some
debt and fiscal management capacity before independence, due to the much greater decentralization of
economic policy making in the former Yugoslavia.
The new member states have relatively small and illiquid domestic debt markets. In the early 1990s, domestic
government debt markets were non-existent or shallow; and, during the transition process, because of the
unstable macroeconomic conditions, the domestic debt market in these transitional market economies did not
develop much. Interestingly enough for the Republic of Macedonia, since the mid-1990s the ratio of foreign
debt to GDP in CEECs has been steadily falling while the share of the domestic debt has increased. Public
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FISCAL SUSTAINABILIT
SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA
debt reduction was facilitated by some generous debt underwriting. This was the case in Poland with the
decisions taken in 1992-1993
1993 by Polish official and private creditors (Paris and London clubs) to forgive up to
40% of the country’s external debt inherited from the command economy (Rapacki & Prochniak, 2009).
Finally, according to the empirical

irical findings
findings, inflation was being used to reduce debt ratios in may larger
CEECs (Poland and Hungary), and once inflation slowed, debt ratios began to rise more sharply. However,
such a strategy was ruled out under a currency board as in Estonia and Bulgaria since mid
mid-1997. The Republic
of Macedonia entered in a pegged exchange rate mechanism with the Ecu in 1995.
Moldova
1.0
8.0
FIGURE 12. FISCAL DEFICITS. SOURCE: IMF, 2009.
When compared to its neighbors, the Republic of Macedonia seems in a reasonable fiscal position (see figure
12).
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Albania
2009 Croatia
Montenegro, Rep. of
Bosnia & Herzegovina
Serbia, Republic of
Moldova
2008 Romania
Macedonia, FYR
Bulgaria
0.0 20.0 40.0 60.0 80.0
FIGURE 13. GOVERNMENT DEBTS IN 2008 AND 2009 (% GDP). SOURCE: IMF, 2009.
The Republic of Macedonia’s gross debt in 2009 is among the lowest debts in the region, apart for EU
member Bulgaria (see figure 13), and it compares positively with Croatia’s debt, which is interesting since
Croatia is a candidate country to the European Union as well.
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FIGURE 14. FISCAL POLICY DURING 2005-2008 (% GDP). SOURCE: IMF, 2009.
Bulgaria and Croatia between 2005 and 2008 have a similar pattern in terms of revenue and expenditure
growth (see figure 14). Macedonia is following a different pattern this time, which may explain the pressure
on inflation in 2007-2008.
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4.0
2.0
0.0
2.0 2008
4.0 2009
6.0
8.0
10.0
FIGURE 15. FISCAL POLICY DURING 2009. SOURCE: IMF, 2009.
As a consequence of the global financial crisis, real revenue growth is negative in Macedonia like in most
countries, and real expenditure growth is slightly positive (see figure 15). In light of the deflationary pressures
of the late 2009, the fiscal adjustment could have been used even a little more.
However, over time, the Republic of Macedonia raises less money and spends more (see figure 14). And
although this seems to be a little better than most of the neighbors, this can still be worrisome in light of the
aftermath of the global financial crisis: higher inflation, higher interest rates, and higher taxes.
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STRUCTURAL POLICY
When studying the structural policy, many items can be considered. Here we will focus on the labor market
and innovation.
LABOR MARKET
FIGURE 16. LABOR FORCE. SOURCE: STATE STATISTICAL OFFIE, 2008.
Female participation is lower than male participation (see figure 16), which highlights another issue of the
labor market: the unemployment rate is incredibly and rigid at 34.9% in 2007.
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FIGURE 17. ACTIVITY RATE AND UNEMPLOYMENT IN AN INTERNATIONAL PERSPECTIVE. SOURCE:

STATE STATISTICAL OFFICE, 2008.
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This high unemployment rate is an anomaly compared to the European Union or some neighbors (see figure
17). Interestingly enough, the activity rate is similar to many European countries but the structure of the
economy does not seem to be able to integrate the unemployed.
FIGURE 18.UNEMPLOYED PERSONS BY DURATION OF UNEMPLOYMENT. SOURCE: STATE

STATISTICAL OFFICE, 2008.
This is confirmed when one looks at the duration of unemployment (see figure 18), and two thirds of the
unemployed are unemployed for 4 years or more in 2007. The situation worsened compared to 1997. This
unemployment rate is mostly a structural unemployment rate with strong hysteresis phenomena. This is
another priority for the government.
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FIGURE 19. UNEMPLOYED BY AGE GROUPS, 2007. SOURCE: STATE STATISTICAL OFFICE, 2008.
In terms of age groups, most of the unemployed are young (see figure 19). This may seem like a very negative
situation, but in a transitory economy like Macedonia, it may be a chance since the youth is more incline to
adjust easily to the new technologies (see figure 20).
FIGURE 20. EMPLOYED BY AGE GROUPS, 2007. SOURCE: STATE STATISTICAL OFFICE, 2008.
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180
160
140
120
100
Nominal
80
Real
60
40
20
0
1996 1997 1998 1999 20002001 2002 2003 2004 2005 2006 2007
FIGURE 21. INDICES OF NOMINAL AND REAL WAGES. 1995=100. SOURCE: STATE STATISTICAL
OFFICE, 2008.
The real wage is regularly increasing since 2001 by approximately 30% in 6 years, which may also explain why
in the short-term the unemployment rate did not change (see figure 21).
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PRODUCTION
350000
300000
250000
200000 1997
150000 2001
2007
100000
50000
0
Wheat Grape Apple Tomato Barley Tobacco
FIGURE 22. AGRICULTURE, PRODUCTION OF MAIN CROPS. SOURCE: STATE STATISTICAL OFFICE,
2008.
In terms of structure of the production, agriculture is slightly going down (see figure 22). Metal-based
production is on the converse on the rise (see figure 23).
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FIGURE 23. INDUSTRIAL PRODUCTION. SOURCE: STATE STATISTICAL OFFICE, 2008.
This situation seems to illustrate the fact that Macedonia exports metals and imports more final products,
which does not help fix the current account deficit (see figure 23).
Energy dependency
Net energy imports / Gross inland consumption 45.20%
Energy efficiency
final energy consumption / Gross inland
consumption 58.20%
Efficiency of thermal power stations 35.1%
FIGURE 24. ENERGY. SOURCE: STATE STATISTICAL OFFICE, 2008.
In terms of energy, most of the energy is imported, which again does not help the current account deficit in
particular in times when energy prices are highly volatile (see figure 25).
In terms of productivity and medium-term, gross capital formation is increasing steadily in the three sectors:
agriculture, industry, and service. (see figure 26).
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NACE
sector Purpose of investment 2002 2003 2004 2005 2006
Total 40448 42110 47286 48868 56485
Agriculture, hunting and
A+B forestry+fishing 1237 1379 1730 1603 2030
Industry including energy and
C+D+E+F construction 20754 23391 26881 27823 32985
G to O Services 18457 17340 18675 19442 21470
FIGURE 25. GROSS FIXED CAPITAL FORMATION BY PURPOSE OF INVESTMENT (IN MILLION
DENARS). SOURCE: STATE STATISTICAL OFFICE, 2008.
60
50
40
30
2005
20 2006
10
0
Nonfinancial Nonprofit Financial State Households
corporations institutions corporations
FIGURE 26. GROSS FIXED CAPITAL FORMATION BY INSTITUTIONAL SECTORS. SOURCE: STATE
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INNOVATION
In terms of innovation, we are just using the Internet use as a proxy. One third of the population has access
to Internet (see figure 27) compared to more than 50% in the European Union.
2007 2008
Population with Internet access 468198 661653
Had Internet access at:
home 190958 409928
work 103108 137820
place of education 88664 118701
Internet café and other public places 227954 241213
FIGURE 27. INTERNET USE BY POPULATION AGED 15-74. SOURCE: STATE STATISTICAL OFFICE, 2008.
Significant improvements have been accomplished in terms of having access to the Internet at home (see
figure 28).
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35
30
25
20
15
10
0
2007 2008
FIGURE 28. HOUSEHOLDS WITH INTERNET ACCESS AT HOME (%). SOURCE: STATE STATISTICAL
OFFICE, 2008.
The Internet has made an incredible penetration at home and is on the rise. Needless to say that access to
Internet is not the only proxy for innovation: total investments in research and development (R&D), persons
employed in R&D, number of patents, etc. are other proxies to measure the dynamism of an economy. 3
INTERNATIONAL STANCE
In terms of international trade, The Republic of Macedonia has a structural current account deficit (see figure
29).
3 We did not have access to these data at the time of this study.
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THIERRY WARIN
100
Households final
80 consumption including
NPISHs
General government final
60
consumption
40 Gross fixed capital

formation
20
Changes in inventories
0
2002 2003 2004 2005 2006
20 Balance of exports and
imports
40
FIGURE 29. DISTRIBUTION OF THE COMPONENTS OF GROSS DOMESTIC PRODUCT BY

EXPENDITURE METHOD (% GDP). SOURCE: STATE STATISTICAL OFFICE, 2008.
In the short-run, the Republic of Macedonia should improve its trade relationships with wealthy countries like
Germany and Italy. This would help the balance of trade in terms of value and diversification. In 2007, the
first trading partner was Serbia, followed by Germany, Greece, Italy and Russia (see figure 30).
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20
18
16
14
12
10 Exports
8 Imports
6
4
2
0
Serbia Germany Greece Italy Russia
FIGURE 30. EXPORTS AND IMPORTS BY COUNTRIES, 2007 (% GDP). SOURCE: STATE STATISTICAL
OFFICE, 2008.
Interestingly enough, the Republic of

Macedonia does not sustain itself in terms
Recommendation 3:
of food products (see figure 31). And in
Based on the average wage
2007, one fifth of the imports are mineral
fuels. Also, based on the average wage rate,
rate, the sector represented
the sector represented by manufactured by manufactured goods
goods should be expanded to integrate the should be expanded to
unemployed youth, and re-balance the integrate the unemployed
current account (see figure 32). youth, and rebalance the
current account.
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FIGURE 31. FOREIGN TRADE ACCORDING TO THE SITC SECTORS (IN THOUSANDS $US). SOURCE:
STATE STATISTICAL OFFICE, 2008.
This priority is reinforced by the numbers from the foreign direct investments showing that manufacturing is
of special interest to foreign investors (see figure 32).
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FIGURE 32. FOREIGN DIRECT INVESTMENT BY ACTIVITY (IN THOUSANDS $US). SOURCE: STATE
Based on the previous analyzes in terms of monetary, fiscal and structural policies, we have a better
understanding of the expectations and the challenges the Republic of Macedonia is facing. One tremendous
help-direct through the form of the Copenhagen criteria and indirect through the form of lower risk premia
(may and will be the path towards the European Union and later) though as soon as possible-the Economic
and Monetary Union.
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THE ROAD TO EUROPE
The road to Europe consists of two ways: (1) entering into the European Union, and then (2) entering into
the Economic and Monetary Union. By entering into the European Union, the Republic of Macedonia will
have to abide by the Stability and Growth Pact, and by entering into the Economic and Monetary Union, the
Republic of Macedonia will have to abide by the new exchange rate mechanism (ERM-II).
THE STABILITY AND GROWTH PACT EXPLAINED
Formally, the SGP consists of three elements: a political commitment, a preventive element, and a dissuasive
element.
THE POLITICAL COMMITMENT
Peer support and peer pressure are an integral part of the Stability and Growth Pact: the Council and the
Commission are expected to motivate countries to adhere to the pact, and make public their positions and
decisions at all appropriate stages of SGP procedure. The idea is to make the SGP more transparent. Member
States may also establish a committee of experts to advise them on the main macroeconomic projections, a
notion that has roots in the economic literature (Wyplosz, 2005). With this aim, Council Regulation 1466/97
reinforces the multilateral examination of budget positions and the coordination of economic policies.
The SGP foresees the submission of all Member States to stability and convergence programmes. Stability
and convergence programmes must present information on the adjustment path and the expected path of the
general government debt ratio, as well as the main assumptions made about expected economic development.
New to SGP II and in line with the recommendations of the literature, structural reforms are encouraged by
the possibility of taking them into account on the path towards adjustment.
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THE PREVENTIVE ARM OF THE SGP
The preventive arm of the Pact was, for the first time, given real substance with the implementation of the
Medium Term budgetary Objective (MTO). In the 1997 version of the SGP, the MTO was the same for
every country: a close-to-balance or surplus budget. Since 2005 the MTO has been given a new definition and
is part of a broader new addition to the SGP: the code of conduct. Member States have to define a specific
MTO in cyclically adjusted terms. Thus, cycles are now taken into consideration. As recommended by the
literature, country specificities must be taken into account. This new device means that surpluses from
periods of economic growth are required to be used for debt and deficit reduction.
The goals of the MTO are threefold. The first is to provide a margin with respect to the three per cent of
GDP deficit ceiling. This margin is calculated by taking into account the past output volatility and budgetary
sensitivity to output fluctuations of each Member State. The second goal is fiscal sustainability, for instance,
taking into account the economic and budgetary impact of aging populations. Influenced by the economic
literature (Buti, Eijffinger, & Franco, 2003; Fatas, 2005), the third goal is to take into account the need for
public investment and represents the structural side of the SGP. The MTOs are revised every four years or
whenever a major reform is implemented.
The Council also has the leeway to issue an ‘early warning’ to Member States before an excessive deficit has
occurred. Articles 6(2) and 10(2) of Council Regulation 1466/97 state that:
“In the event that the Council identifies significant divergence of the budgetary position from the medium-
term budgetary objective, or the adjustment path towards it, it shall, with a view to giving early warning in
order to prevent the occurrence of an excessive deficit, address, in accordance with Article 103 (4) a
recommendation to the Member State concerned to take the necessary adjustment measures.”
THE DISSUASIVE ELEMENT
If a country breaches the three per cent value for three consecutive years, it is considered to be in violation of
the SGP. In order to dissuade countries from excessive deficits, Council Regulation 1467/97 establishes the
Excessive Deficit Procedure (EDP). When the council decides that an excessive deficit exists, it makes
recommendations to the Member State and establishes a deadline of six months (raised from four) for
corrective policies to be implemented. If a Member State fails to implement the policies based on the
Council’s decisions, the Council imposes sanctions (deposits, and then fines), which are levied within ten
months of the first report of an excessive deficit. A country cannot avoid the deposits, and ultimately the fine,
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THIERRY WARIN
unless the Council decides to abrogate some or all of the sanctions. Abrogation depends on the significance
of the progress made by the participating Member State concerned in correcting the excessive deficit, if the
breach has resulted from an unusual event or a major economic decline (that is, an annual decline in real
GDP of at least two per cent), or if the country’s deficit is due to ‘relevant factors’. Any fines already imposed
are not reimbursable. Interest on the deposits lodged with the Commission, and the yield from fines, are
distributed among Member States without an excessive deficit, in proportion to their share in the total GNP
of eligible Member States (Warin, 2009).
MONETARY POLICY
The entrance into the EMU will take at least two years after the entry into the EU. To qualify for the
Economic and Monetary Union, the Republic of Macedonia will have to follow a set of criteria for two years
in a row: an interest rate benchmark, the Stability and Growth Pact, an inflation benchmark, and the ERM-II.
Since the Republic of Macedonia has a pegged-exchange rate mechanism, it is already in great shape to
qualify. However, a particular
point will need to be adjusted
and may create some Recommendation 4:
distortions of the monetary
policy: the minimum reserve The minimum reserve requirements
requirements. It is currently at should be lowered at a smooth pace
10% for bank accounts in in preparation for the entrance into
Denars. This will need to be
the EMU.
adjusted to 2%. Obviously, the
adjustment cannot be done
overnight, and will take some time at a rate of 2% every 6 months on average, the minimum time to contract
the minimum reserve requirements to 2% will be 2 years. Of course, it is advisable to start as soon as
possible, and to do it as smoothly as possible.
Lowering the minimum reserve requirements will change the capacity of the central bank to hold foreign
reserves and ensure its credibility. It is really difficult to think of a highly probable scenario, since it will
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depend on when the Republic of Macedonia will enter into the EMU, when the global financial crisis will be
over, and what will be the thinking of foreign investors.
It is likely that the declared candidacy to the EMU will actually reassure the foreign investors, and will hence
prevent speculative attacks. In this scenario, the National Bank will be able to lower the minimum reserve
requirements without needing as many foreign reserves as in the alternative scenario of speculative attacks.
Therefore, we should not expect a rise (or too high a rise) on the central bank bills’ interest rates. If this holds
true, then the Macedonian economy will enjoy a higher liquidity, pressures downward on the interest rates,
higher investments.
CONCLUSION
The road to Europe will be of an incredible help for the Republic of Macedonia in terms of economic
transformation. Not only the
European Union provides the
guidelines for sound economic Recommendation 5:
development, but also reassures
the international markets, The European agenda should be a
allowing new members to top priority for the government,
benefit from improved financial
and would legitimate ex post the
conditions. The European
agenda should be a top priority
monetary policy of the Republic of
for the government, and would Macedonia.
legitimate ex post the monetary
policy of the Republic of
Macedonia.
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Part II
[INSTRUMENTS TO
MEASURE FISCAL
SUSTAINABILITY]
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INTRODUCTION
T
here are two distinctive reform choices discussed in the literature about the quality of public
finances: first, expenditure target analyzed through the “gaps” indicators; and second, the golden
rule of deficit financing. The first choice focuses on how expenditure rules can link the annual
budgetary process to a multi-annual policy framework (Buti, Eijffinger, & Franco, 2003). For
instance, Brunila (2002) argue for expenditure targets for central governments, and balanced budget
requirements for local governments. In contrast, the golden rule allows for the spreading of capital projects
over several different generations of taxpayers. This golden rule provides an answer to the criticisms of
maintaining close to balance or surplus budget positions, because capital expenditures would not necessarily
have to come out of the current revenues (Buti, Eijffinger, & Franco, 2003; Fatas, 2005).
Fiscal sustainability is an important question in recent economic policy debates. Numerous empirical studies
focus on the developed countries (the United States, the European Union, Japan or Canada) (Ehrart &
Llorca, 2007), but very few address the question of public finances sustainability in the Central and Eastern
European countries. The first empirical studies emerged of course right after the transition from communism
to capitalism (Dabrowski, 1996; Budina & van Wijnbergen, 1997; Ambrus-Lakatos & Schaffer, 1997).
Another batch of papers appeared notably due to the official start of the negotiations for membership to the
European Union in 1999 (Green, Holmes, & Kowalski, 2001; Radulescu, 2003).
Public finances scrutiny and in particular the question of fiscal sustainability has become a central issue for
the CEECs since the EU enlargement in May 2004 and for any country on the road towards the Eurozone
(Buiter, 2004). The new member states have at some point to abide by two principles: (1) they are expected to
comply with the Stability and Growth Pact rules for government budget deficit and debt rules (3% and 60%
of GDP, respectively), and (2) the fiscal situation has to be judged as sustainable in the medium term.
As for a case study, the three new member states with the best fiscal and macroeconomic performance
entered the ERM-II in June 2004 (Estonia, Lithuania, and Slovenia). However, even these best cases can
exhibit serious fiscal imbalances. As a result, they were put under the “excessive deficit procedure” by a
decision of the Council of Ministers on July 5, 2004 taken under Article 104(6) of the Treaty on the European
Union and the SGP. They were all given at least four years to undertake the adjustment, within a rather loose
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framework (Llorca & Redzepagic, 2008). No sanctions were imposed, although they could be prohibited from
drawing financial resources from EU cohesion Funds (see European Commission 2004, pp.69-72 for further
details).
Why is fiscal sustainability of the utmost importance for policy-makers in particular in a country such as the
Republic of Macedonia with a pegged-exchange rate mechanism? The answer is easy and extremely relevant:
large fiscal deficits and growing debt ratios will lead sooner of later to adjustment. Under a pegged-exchange
rate mechanism, the adjustment will be only twofold: from the fiscal policy, and from the structural policy.
The effects of the adjustment from the fiscal policy will depend on the tools chosen to tackle the imbalance:
more taxes or cuts in public expenditure. This relies obviously on the capacity of the country to raise new
taxes or cut expenditure without too big social costs (rising poverty, inequalities and political unrest). On the
structural side, this is conditional to the country’s ability to pass new labor regulations, reform the public
sector, reinforce the judicial system in particular the business law component, and accompany the private
sector in its development.
As we can understand, the costs of the adjustment will depend on whether the adjustment is preventive, in
other words initiated by the government soon enough before the markets question the sustainability of the
country, or on whether the financial markets force the hesitant government to bring in measures that can be
unpopular. The latter is obviously more costly since it results in a loss of credibility of the country leading to
higher risk premia as well as the necessity to implement policies (fiscal or structural) that are by definition
costly adjustments. The rise in risk premia is the main reason why one should detect any unsustainable
policies with a sufficient lead so that policy-makers have time to act and to mitigate the costs ensuing from
the fiscal correction.
The high costs of adjustments explain why economists have spent so much time trying to define fiscal
sustainability and to develop various sustainability indicators.
The aim of this part is to describe the notion of fiscal sustainability that is currently accepted by the
mainstream literature. Indicators of fiscal sustainability will be presented and the extent to which they draw
upon the theoretical definition will be assessed.
A thorough review of the literature on fiscal sustainability was made by Balassone & Franco (2000). The
theory has proposed different conditions for sustainability—from a non ever-rising tax rate to an inter-
temporal discounted budget constraint. The requirement that the tax rate should not rise forever is one of the
first definitions of sustainable fiscal policy and is based on Domar’s model.
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In line with Buiter (1985), Blanchard (2000), chief economist at the IMF, explains that sustainability is about
whether, based on current fiscal policy, a government is headed towards excessive debt accumulation. To
make this rather general statement operational, Blanchard defines sustainable fiscal policy as a policy that
ensure that the ratio of debt to GDP converges back towards its initial level. Blanchard was well aware of the
complexities involved in measuring the asset/liability position of the government, but in his definition he paid
attention to debt dynamics rather than to the precise content of the word debt.
The major problem with defining sustainable policy as a policy under which the debt-to-GDP ratio converges
back towards the initial level is the apparent arbitrariness of such a definition. The definition is arbitrary in at
least two ways. Firstly, there is no theoretical reason why the debt ratio should be required to return to its
initial level and not to any other stable level, be it lower or higher. Secondly, one can easily conceive of a
policy under which the debt ratio initially rises to levels that are likely to be perceived as excessive by market
participants and it is only later when the debt comes down and returns to “safe” levels.
The former strand of criticisms was resolved by making the definition of sustainability more general. The
requirement of convergence of the debt ratio towards its initial level is only a special case of a more general
definition which states that fiscal policy is sustainable if the present value of future primary surpluses is equal
to the current level of debt. This definition is derived from the inter-temporal budget constraint.
The latter strand of criticisms led some authors to distinguish between solvency and sustainability. The
government is said to be solvent if it is capable, over an infinite time horizon, of paying its debt via future
primary surpluses. In other words, the government is solvent if the inter-temporal budget constraint is
fulfilled. This rule prevents the Ponzi scheme, which is when a government borrows to service its debt.
From this general statement, we will explain the indicators highlighted in the economic literature in the next
section. We will start with the more general indicators to narrow down to a different and specific approach.
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BACKGROUND
What is a good indicator of fiscal sustainability? A good indicator must be one that signals when current
policy appears to be leading to a rapidly growing debt-to-GDP ratio. Moreover, it should not only signal the
need for readjustment, but also indicate the magnitude of the needed adjustment.
The most widely used indicators of sustainability are six fold:
(1) Net debt, net worth indicators

(2) The inter-temporal primary gap, which measures the change in the primary balance required to
equate the present discounted value of future primary balances to the current level of debt. This
measure thus indicates the adjustment required to stabilize the debt at a level that is permanently
sustainable (not just attained in a certain year, as is the case with the first indicator);
(3) the tax gap;
(4) the debt-target primary gap, which measures the difference between the current primary fiscal
balance (that is, revenue less non-interest expenditure) and the primary fiscal balance required to
reach a target level of gross public debt-to-GDP ratio in a certain year;
(5) the current threshold balance;
(6) and the Golden Rule.
The construction of the primary gaps (inter-temporal or debt-target) and the tax gap is based on the same
approach. Firstly, the sustainable level of the fiscal variable at hand is calculated, most of the time using a
Hodrick-Prescott filter. Secondly, the gap is defined as the difference between the sustainable and the current
level of the primary deficit or the tax ratio. The sustainable level of the fiscal variable is such that it ensures
convergence of the debt ratio towards a finite value.
Let’s formalize first the inter-temporal gap since it serves as the starting point for derivation of other
indicators of fiscal sustainability.
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NET DEBT, NET WORTH AND INDICATIVE NET LIABILITIES
What to put on a public sector balance sheet is actually straightforward: sum up all financial and nonfinancial
assets accumulated over the years on the credit side, and all debt and other liabilities on the debit side. The
net worth will be the difference between the credit and the debit. In doing so, analysts can assess the impact
of fiscal policies on net worth and determine trends in net worth over time. This exercise will serve to
evaluate the sustainability of fiscal policies.
The difficulty however is to determine which assets have been acquired over the years, which ones do they
owe? It is particularly true in transitioning economies. Prices at which these assets and liabilities should be
marked are also difficult to decide in practical terms. In the case of the Republic of Macedonia, it is still too
early to have an idea of the net worth. This is why this first indicator will not be used in the third part of this
report.
THE INTER-TEMPORAL PRIMARY GAP
In what follows, we will use the mathematical presentation used by Krejdl (2006). The inter-temporal primary
gap analyzes the change in the primary balance—calculated as the present value of the future primary
balances—compared to the current level of debt. It concludes that the present value of future primary
surpluses must be equal to the initial value of debt. The latter is the sustainable level of debt. Closing the
inter-temporal gap guarantees that the debt ratio stabilizes at a permanently sustainable level (considering for
instance age-related expenditure in countries facing demographics issues). According to the IMF, a
sustainable level of debt for developing countries would be around 25% of GDP. If the Republic of
Macedonia were to follow the inter-temporal primary gap, 25% would thus serve as the benchmark.
GENERAL APPROACH
By definition, the public debt (B) at time t is the sum of the debt in the previous periods (t-1) and the public
deficit at time t. Also by definition, the deficit can be broken down into the primary deficit (PD) and
interest payments (IP) on the debt. Interest payments are a function of the interest rate and the previous
period debt level:
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(1)
1
(2)
All the variables are expressed in real terms. r is an implicit real interest rate. The primary deficit (or surplus)
is indicated by a positive (or negative) value. As economies grow over time and consequently governments’
capacity to repay their debt increases, it is appropriate to re-write the latter equation in terms of GDP ratios:
1

(3)
1
where y stands for the real GDP growth rate, and 1

/1 is defined as the growth-adjusted
interest rate.
Simplifying the notation, we obtain:
1
(4)

1
The latter equation is the public debt as a percentage of GDP. In order to write this equation in an inter-
temporal way to measure sustainability, it can be solved backwards to an initial period 0. Hence the public
debt as a percentage of GDP at time T (bt) can be written as the sum of the present value of the initial debt
and the present value of all past primary deficits:

1
1

(5)
1 1

In order to find our condition for sustainability with the inter-temporal primary gap, let’s re-write the latter
equation in this format:

1
1

(6)
1 1

To identify a condition for sustainability that is not too complicated to compute, we need to make two related
assumptions: (1) the first one is an infinite time horizon ( → ∞); and the second one (2) is a present value of
the public debt as a percentage of GDP is equal to zero. Based on the first assumption, we obtain:
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1
1

lim
lim
1
1

(7)
→∞ →∞

Based on the second assumption, we obtain:
1

lim 0
1

(8)
→∞
Therefore:

1

lim
1

(9)
→∞

This is our condition for sustainability. It says that the present value of future primary surpluses must be
equal to the initial value of debt.
Condition for sustainability for the inter-temporal primary gap indicator:
The present value of future primary surpluses must be equal to the initial value of
debt.
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EXTENSION 1: THE ENHANCED CRITERION FOR THE INTER-TEMPORAL

PRIMARY GAP INDICATOR USING THE PUBLIC DEBT AS A MEASURE
Sustainability defined in this way is ensured not only when the present value of the debt is equal to zero, but
also when the debt ratio diverges from its initial level. This is true so long as its growth rate is lower than the
difference between the real interest rate and the real GDP growth rate. This extension comes from the
following relationship:

1 1
1 1

lim 0⇔ 1
1 1
(10)
→∞
stands for the growth rate of the debt ratio.
Enhanced criterion 1 for the inter-temporal primary gap indicator:
Sustainability defined in this way is ensured even if the debt ratio diverges from its
initial level, so long as its growth rate is lower than the difference between the real
interest rate and the real GDP growth rate.
Public revenue, expenditure, deficit and debt have an impact on other macroeconomic variables, of which the
interest rate and the growth rate of GDP are of utmost interest for sustainability. Unfortunately, economists
have not reached any significant agreement about the theory governing the interaction between the public
budget and the economy. Thus, the common practice in assessing fiscal sustainability is to assume that the
interest rate and the growth rate of GDP are exogenous to fiscal policy and the possible interactions are only
analyzed outside the model.
From there we can build up an indicator that captures the ‘magnitude of sustainability/un-sustainability’:
1
100.
1
1
(11)
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If this indicator is positive, then public finances are sustainable.
EXTENSION 2: THE ENHANCED CRITERION FOR THE INTER-TEMPORAL

PRIMARY GAP INDICATOR USING THE PRIMARY DEFICIT AS MEASURE
Here, we are looking for using the primary deficit as a benchmark--instead of the public debt in the prior
paragraph--to satisfy the condition of sustainability. The infinite geometric series of discounted primary
deficits can be summed up and the sustainable primary deficit can be expressed as follows:
∗
(12)
And the inter-temporal primary gap becomes:
∗
(13)
When we calculate the primary gap, we only need to know:
1. The current primary deficit

2. The public debt
And we need to make assumptions about:
1. The long-run expected average values of the interest rate

2. The growth rate of real GDP
If the current primary deficit is greater than the sustainable one ∗ 0, the debt ratio will rise
without any limits and fiscal policy can be called unsustainable.
Enhanced criterion 2 for the inter-temporal primary gap indicator:
If the current primary deficit is greater than the sustainable one ∗ 0,
the debt ratio will rise without any limits and fiscal policy can be called
unsustainable.
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Why is this an interesting criterion? Well, the sustainable primary deficit (∗ ) can be used directly as a target
guiding the government towards a sustainable deficit path, while considering the interests on the debt. It
helps design the fiscal policy by focusing it on the primary deficit, which is the instrumental part of the
budget. It is an interesting indicator, since it helps define a reasonable public deficit: “a reasonable public
deficit is a deficit that follows this criterion: 1 <(r-y).”
This definition serves also as base for the definition of the tax gap.
THE TAX GAP
Following a budget rule based on a reasonable public deficit definition is of the utmost importance in
particular in countries like the Republic of Macedonia.
The utility of using in practical terms the inter-temporal primary gap is mainly twofold: (1) to define a
Medium-Term Objective; and (2) to serve as an early warning procedure in case of economic shocks. In the
future, public expenditure may rise (e.g. as a result of aging) and maintaining the primary deficit at the
sustainable level (∗ ) will require an adjustment of public revenue or expenditure. To take into account
future economic shocks, the assumption of a constant primary deficit must be relaxed.
The primary deficit can be calculated as the difference between (1) public expenditure represented by g public
consumption (including investment) and h transfers (social transfers); and (2) tax revenue represented by
the tax ratio:

(14)
All variables are measured in terms of GDP ratio.
Substituting the latter equation into the inter-temporal equation, and solving for
, we obtain the sustainable
tax ratio:
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1
∞

∗

1 1
(15)

By subtracting the current tax ratio from the sustainable level ∗ , we get the so-called tax gap indicator:
_ ∗ (16)
This indicator is easy to interpret: if the sustainable tax ratio ( ∗ exceeds the current tax ratio , i.e. the tax
gap is positive, the fiscal policy will have to be adjusted in order to avoid a path towards excessive debt
accumulation.
A positive tax gap suggests that the current tax ratio is not high enough to finance future spending and to
service the debt. In order to satisfy the inter-temporal budget constraint, it will be necessary to either reduce
public expenditure, or increase the tax revenue the latter can be done in two ways: (1) by increasing taxes, or
(2) by increasing the tax base. This is particularly true in the context of the Republic of Macedonia where the
unemployment rate is above 30% of the labor force in 2009, and where there is an important grey economy.
Tax gap indicator:
_ ∗
If the sustainable tax ratio ( ∗ exceeds the current tax ratio , i.e. the tax gap is positive,
fiscal policy will have to be adjusted in order to avoid excessive debt accumulation.
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THE DEBT-TARGET GAP
The debt-target primary gap measures the difference between the current primary balance (i.e. public revenue
minus non-interest expenditure) and the primary balance required to reach a target level of gross public debt-
do GDP ratio in a certain year.
Both the inter-temporal primary gap and the tax gap were derived from the condition of sustainability
proposed by Blanchard. Both indicators relied on the assumption of an infinite time horizon, which is
different from the debt-target primary gap.
Relaxing the infinite time horizon is not an issue, since of course in practical terms it is impossible to forecast
the future and one has to rely on assumptions. However, closing the debt-target gap is sufficient for achieving
for instance the Stability and Growth Pact target of 60%, but does not prevent an explosive situation of the
debt thereafter generated by issues such as age-related expenditure. In other words, none of the indicators are
ideal indicators, but one should know the limits and advantages of each method so that the conclusions
drawn are realistic.
The construction of the debt-target primary gap requires the acceptance of a debt target at the end of the
period (see equation 5). Again, the IMF recommends a level of public debt of 25% of GDP for developing
countries. This could serve as a benchmark for the Republic of Macedonia.
GENERAL APPROACH
As in equation (5), we will again calculate the sustainable primary deficit. Since we are interested in a
constant value of pd, let’s determine the following equation:

1 1

∗
1
1 1 1
(17)
From equation (16), we can conclude that given the initial debt level ( ), pd* now stands for the value of
the primary deficit that will ensure that the debt ratio reaches the value of ( ) at time T. This indicator is
of a paramount importance when the Ministry of finance has identified the sustainable level of public
debt for the Republic of Macedonia.
Again, by definition the debt-target primary gap indicator is the difference between the sustainable and
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current level of the primary deficit ∗ .
Since we are looking for the primary deficit that will stabilize the debt ratio at the initial level
at time T, then equation (16) can be simplified as follows:

1 1
∗ 1 1
1 1 1 1
(18)
From a formal point of view, the expression for the primary deficit stabilizing the debt ratio at a finite
horizon (17) does not differ from the sustainable primary deficit satisfying the inter-temporal budget
constraint (9).
Debt-target primary gap rules of thumb for the specifications:
The difference between the debt-target and the inter-temporal primary gap is in
the choice for r and y. When calculating the primary deficit that will stabilize the
debt ratio at the desired level within, for example 3 years, the forecasted values of
r and y for the next 3 years will be applied. One rule of thumb says that the target
period should be the longest maturity of T-bonds, here 10 years in the Republic
of Macedonia. Another rule of thumb would be to calculate a weighted average of
the maturity of the different T-bonds.
Let us calculate now the sustainable tax ratio for a finite horizon:
1 1

1 1
(19)

As in the case of the infinite horizon sustainable primary deficit, equation (18) can be solved for by
summing the finite geometric series of the discounted tax ratios, which yields:
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1 1 1

∗
1

1 1 1 1
(20)

The indicator calculated by equation (19) requires a debt-target, which can be arbitrary (see the 25% rule
from the IMF).
EXTENSION
Now, if the debt-to-GDP ratio at time T is required to equal the initial level, (19) becomes:

1 1

∗
1

1 1 1
(21)

As can be seen from (20), in the real world, a forecast of future expenditure is necessary for instance on
age-related expenditure (represented by h) and on non-age related expenditure (represented by g). Also,
the target value of debt and the time horizon (T) must be determined by the policy-makers.
The gap indicators corresponding to the tax gap indicator (15) and (19) are easier to interpret, as they
express the adjustment needed to prevent the debt ratio from deteriorating and do not require an explicit
debt target to be set.
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Empirical specifications:
As for the choice of T, Blanchard (1990) proposes to use three indicators of fiscal
sustainability. Each of the indicators should be associated with a different time horizon,
equal to 1, 3-5 and 30-50 years.
Blanchard justifies the choice of t equal to one year by the fact that such an indicator does
require a forecast as the budget data are widely available. As a result, such an indicator can
easily be constructed from published data. On the other hand, the one-period gap may give
a distorted picture of the amount of adjustment that would reasonably be required. Firstly,
the actual primary deficit or tax ratio may be affected by transitory events (a hike in non-
interest spending or short-lived spending cuts, one-off revenues) or by cyclical factors.
Secondly, it does not take account of predictable changes in spending trends resulting from
events such as population ageing.
To diminish the influence of transitory and cyclical factors, it is appropriate to construct

medium-term indicators (T of three to five years). The application of gap indicators may,
however, be limited by data availability. But these days, three-to five- year projections are
often made by national fiscal authorities or international organizations.
Although less relevant in the case of the Republic of Macedonia, population aging may still
be an important driver of future expenditure. It is advisable to compute gap indicators for a
very long time horizon of 30 to 50 years. Calculation of long-term gaps is fairly ambitious
because very long forecasts have to be made and these are necessarily subject to wide
margins of uncertainty. Despite all the uncertainties, international organizations, mist of
national authorities of developed countries and independent researchers publish long-term
projections.
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THE CURRENT THRESHOLD BALANCE
According to Blanchard (1990), the debt will be sustainable when the value of current debt is lower than
the net present value of future primary balances. Another approach is to determine the dynamics of debt,
which evolves according to a limited number of parameters. The starting point is the fiscal budget
constraint of the government, which can be expressed, after some algebra, as:

∗ Δ

Δ

1 (22)
Where is the primary balance and is the stock of public debt at the end of time t, both expressed
as a ratio of GDP. There are two different types of debt to be considered: (1) the domestic debt, and (2)
the external debt, which have respectively a share and 1 in the total stock of debt, and their real
interest rates are and ∗ . Δ is the change in the nominal exchange rate – where an increase in e
represents an exchange rate depreciation – and is the real growth rate.
Primary surpluses, which reflect the excess government resources over expenditure, reduce the debt
stock, which is an increasing function of the domestic and foreign real interest rates and the exchange rate
depreciation, and a negative function of growth.
From equation (21), a useful indicator of fiscal sustainability can be simply derived. By just setting Δ
0, the threshold value for the primary balance which would render the debt stable is obtained. Above that
threshold, public debt will be sustainable. We will denote this value as the current threshold (primary)
balance : such that Δ 0, that is:

∗ Δ

1 (23)

Due to the pegged-exchange rate mechanism in the Republic of Macedonia, this methodology is
eventually identical to the inter-temporal primary gap indicator.
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THE GOLDEN RULE
The definition of the Golden Rule is as follows: over the course of the economic cycle, allow the fiscal
deficit to average out at a figure no greater than the level of net public investment.
This rule allows a government to run a public deficit if it is no greater than the level of public investment
in capital as a percentage of GDP. This rule is assessed over the course of the economic cycle, which is
approximately 7 years. A Hodrick-Prescott filter can be used.
The Golden Rule allows a government to borrow if it is only to invest in capital.
This rule is a little too stringent since it includes the service of the debt, which reduces by as much the
amount of money going to public investment. A variant of this rule would be to consider the primary
deficit and to allow the primary deficit to be as great as the public investment. The risk of un-
sustainability would still exist for countries that are highly indebted and would need to service their debt
each year leading to an even greater deficit.
Sustainability indicators from the International Organizations
In what follows, we will briefly describe the approaches covered in three major international
organizations of special interest to the Republic of Macedonia: The OECD, the European
Commission and the IMF.4
The OECD
The first broad report on the long-term sustainability of public finances from an international
perspective was published by the OECD in 2001. Demographics are highlighted in this report since
they are one of most important items on the OECD countries’ list of pressing issues. The report
covered most of the spending items deemed dependent on the age structure of the population, e.g.
4 See the very survery in Krejdl, (2006).
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pensions, health care, long-term care, child-related programmes and education. The results are based
on national models using a set of assumptions about macro-economic and demographic
developments.
Long-term sustainability is evaluated on the basis of the evolution of the primary balance and debt,
throughout the projection and by calculating the ‘primary balance needed to offset the impact of
ageing” (Dang, 2001). The latter is in fact the primary balance in the given initial year, observance of
which would ensure achieving a pre-determined debt ratio at the end of the year 2050. After
subtracting the initial primary balance, it essentially corresponds to the tax gap indicator. The OECD
work became an inspiration for the sustainability analysis that is now carried out by the European
Commission.
The European Commission

In a 2007 article, Hauner, Leigh, & Skaarup (2007) use two standard indicators to assess the
evolution of fiscal sustainability: (1) the first indicator is the debt-target primary gap and (2) the
second indicator is the inter-temporal primary gap. The two indicators belong to the family of the
primary gap indicators that are based on the European Commission’s (2004) approach to assessing
fiscal sustainability.
For obvious reasons, the European Commission seems to be the most active player in the field of
analyzing and evaluating the long-term fiscal sustainability of its member states. It systematically
develops, calculates and applies indicators for assessment of public finance sustainability. The
sustainability indicators make use of the information from long-term budgetary projections
calculated on the basis of commonly agreed coverage, methodology and underlying assumptions.
Starting in 2001, the EC supplemented its projections of the fiscal implications of ageing populations
with long-term indicators denoted T1, T2 and T3, later replaced by the acronyms S1, S2 and S3.
S3 has the strongest theoretical foundation since it is fully compatible the inter-temporal budget
constraint and the sustainable tax ration (equation 14). It is an infinite horizon tax gap calculated on
the basis of projected fiscal trends up to 2050 and extended beyond 2050 under the assumption of
preserving the tax and spending ratios at the levels achieved in 2050. S1 and S2 are the finite horizon
tax gaps gauging the magnitude of adjustment needed to reach the pre-defined debt level in 2050,
given the projections up to 2050. S2 assumes that the 2050 debt ratio will amount to 40% of GDP.
The arbitrariness of this target, which is used for countries with very different starting positions, has
led the EC to abandon this indicator. Construction of the S1 indicator was motivated by the
provisions of the pre-reform Stability and Growth Pact, which required the member states to
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achieve balanced budgets in the medium term. Under a balanced budget, the nominal value of debt
does not change (Bt=B0) and the target value of debt can be expressed as follows:
1
1
24
1

The SGP reform triggered changes in the assessment of public finance sustainability. The currently
used quantitative indicators comprise S1, S2 and the Required Primary Balance (RPB). The former
S2 indicator has been renamed S1 and its definition has changed. S1 currently measures the required
change in the tax ratio that guarantees a debt-to-GDP ratio of 60% in 2050. The re-definition of S1
reflects the intention to have an indicator consistent with the Maastricht targets. The current S2
indicator is the old S3 based on observance of the government inter-temporal budget constraint. To
make the indicators more understandable for policy-makers, the EC will calculate and publish the
Required Primary Balance. The RPB should facilitate transformation of the quantitative indicators
into policy prescriptions, since it indicates the required structural primary balance (in terms of GDP)
over the five-year horizon respecting the inter-temporal budget constraint. It is obtained by
subtracting the S2 indicator from the current primary deficit. Policy-makers can use the RPB directly
as a fiscal target in their medium-term fiscal frameworks.
The assessment of public finance sustainability carried out by the EC does not rest on quantitative
indicators only. The EC is well aware of the fact that the information given by the quantitative
indicators is conditional upon the results of uncertain long-term projections. The uncertainty is
partially circumvented by qualitative judgment. When pursuing sustainability analysis, the EC takes
into account information on the current level of the debt ratio, the current level of the tax burden,
the impact of structural reforms and the reliability of the projections. Sustainability analysis is not a
mere exercise. It results in concrete recommendations and guidelines for the member states.
The IMF
Assessment of fiscal (together with external) sustainability is an important part of the IMF’s analysis
carried out in the context of Article IV surveillance and Fund-supported programmes (IMF, 2002).
The IMF is pre-occupied with medium-term projections, usually not exceeding 5-10 years. Due to
the timeframe covered, the sustainability assessments abstract from the impact of the evolution of
age-related spending on sustainability. They consist in projecting revenues, expenditures and the
resulting evolution of the fiscal balance and debt under alternative macro-economic assumptions.
Apart from the baseline projections, several stress tests are usually performed in order to evaluate
the resilience of the fiscal position to adverse shocks. The debt-stabilizing primary surplus is often
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calculated and compared with the existing primary balance to show whether the current fiscal policy
is, in the medium term, consistent with a stable debt ratio.
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CONCLUSION
In retrospect, to measure the fiscal sustainability of the Republic of Macedonia in line with methods used in
international organizations of special interest for the future of Macedonia, while considering the specificities
of the country, we will develop a framework based on 3 indicators: (1) the inter-temporal primary gap, (2) a
combination of the tax gap and the debt-target gap and (3) the degree of sustainability.
The framework will consist of two stages: (1) we will analyze the cyclicality of the fiscal response (pro or
counter cyclical) to economic shocks to assess whether the fiscal policy is used according to sound economic
principles. The cyclicality will be examined using Macedonian data, and will help fit the model. (2) The second
stage will consist in a depiction of the Republic of Macedonia’s fiscal stance in light of the three indicators
aforementioned.
This framework and its application to the Republic of Macedonia will be presented in the next part of this
report. All the resources and techniques used to assess the fiscal sustainability of the Republic of Macedonia
will be presented in the appendices.
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APPENDIX 1. THE COSTS OF INACTION: MEASURING DELAYS

IN FISCAL ADJUSTMENT
Even if sustainability indicators point to a significant fiscal gap, policy-makers tend to be hesitant to adopt
corrective measures and are often tempted to postpone adjustment. However, the decision to postpone
adjustment is not costless and it is important to know the costs before such a decision is made. The costs of
delayed adjustment can be quantified as the difference between the fiscal gaps (e.g. tax gaps) prevailing at two
distinct points in time. Delaying adjustment results in a more rapid accumulation of debt, which goes hand in
hand with rising debt servicing costs and ultimately leads to lower primary spending (or higher taxes). In fact,
the broadening of the fiscal gap indicates the volume of spending that will be foregone in future in exchange
for temporarily higher spending. We will derive the costs of delay for an infinite tax gap, which is the most
comprehensive and theoretically sound indicator.
Delaying fiscal adjustment by a year is, due to higher debt servicing costs, translated into a higher sustainable
tax ratio. On the basis of equation (12), we can write:
1
∞
∗

1 1
(24)

Substituting for the debt ratio b1 the expression from equation (5), and expressing the primary deficit as the
difference between primary spending and revenues yields:
1 1
∞
∗

1 1 1
(25)

1 1 1 1 ∗
∞
∗

1 1 1 1 1 1
(26)

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If equation (23) holds, the tax gap at any future point in time can be derived on the basis of the tax gap in the
initial period and the interest rate/growth rate differential:
1
_ ∗ _ (27)
1
∗
1
_ _ (28)
1
Correspondingly, the change in the tax gap takes the following form:

Δ ∗ ∗ _ (29)
1
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Part III
[ASSESSING THE
REPUBLIC OF
MACEDONIA’S FISCAL
SUSTAINABILITY]
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INTRODUCTION
I
n this third part, we compute the sustainability indicators presented in the second part of this report for
the Republic of Macedonia. We start with short-term fiscal sustainability and conclude with medium-
term indicators. Due to the lack of data, we cannot assess the long-term path of public finances as we
would need to know the change in the population structure.
The short-term and medium-term indictors are based on the official forecasts of the Ministry of finance for
2010, 2011 and 2012 and on simulations (Hodrick-Prescott filter for calibration and bootstrapping).
However, making these medium-term projections requires adopting assumptions, which may not always be
realistic due to economic developments and political changes in the future. We should also note that we are
making projections and not forecasts. Projections rely on assumptions based on past data and forecasts of
endogenous variables.
For modeling purposes, the analysis in the report assumes that spending and taxation policies at the end of
the short-term forecast are continued in the future. The nature of these assumptions does not mean that the
government has made a commitment to continue current policy. Similarly, it does not mean that there will be
no changes to spending and taxation in the future.
Now, the short-term indicators are more relevant than the medium-term indicators. Based on the nature of
the data (quality and availability), the report uses techniques to circumvent some of the difficulties. For a
thorough medium-term or long-term perspective, again it should be appropriate to compile data on
demographics and ageing in particular.
In what follows, 6 steps are highlighted. They represent the necessary steps
for a thorough review of fiscal sustainability. They are implemented here
using the available data. The conclusions are interesting and lead to relevant
economic policy recommendations.
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CYCLICALITY OF THE FISCAL RESPONSE
Fiscal policy is expected to play an important stabilizing role over the

business cycle. When the economy is accelerating, the fiscal authorities
should be able to moderate activity by restraining the fiscal stance and, STEP 1
vice versa, in downturns fiscal policy can help stimulating the The first step is to
economy. Therefore, under these circumstances, fiscal policy is assess the counter or
procyclicality of the
expected to behave counter-cyclically.
fiscal policy.
We have used two methodologies to de-trend the actual output Automatic stabilizers
and fiscal impulse
(measured by the real GDP). The first one is the Hodrick-Prescott
indicators are
(HP) filter. The second one is the Baxter-King (BK) filter. The therefore computed.
Hodrick-Prescott filter provides us with better results and we will
present only the HP filter results for clarity reasons.
CYCLE AND POTENTIAL OUTPUT USING THE HODRICK-PRESCOTT

FILTER 5
In the next box, the Hodrick-Prescott filter will be explained. It is a very standard way of measuring business,
with benefits and costs. The Baxter-King filter is a little more often preferred or some other econometric
techniques. However, due to the limitations created by the data, the Hodrick-Prescott filter seems to provide
robust results.
5Both the HodrickPrescott and the BaxterKing filters have been experimented. Due to the short timespan, the Baxter
King filter did not provide better results than the HodrickPrescott filter. The output gap can be computed by using two
different λ in the HodrickPrescott filter: λ=6.7, as recommended by Maravall & del Rio, (2007), and λ=100, which is the
usual figure and we chose in this report.
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FISCAL SUSTAINABILIT
SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA
Box 1: The Hodrick--Prescott filter
The Hodrick-Prescott
Prescott filter is a mathematical tool used in macroeconomics,
especially in real business cycle theory. It is used to obt
obtain a smoothed non--
linear representation of a time series, one that is more sensitive to long
long-term
term
than to short-term
term fluctuations. The adjustment of the sensitivity of the trend
to short-term
term fluctuations is achieved by modifying a multiplier λ. The
Hodrick–Prescott
Prescott filter affects such a break down by minimizing the following
equation:
The first term above is the sum of squared cyclical components (y is the series,
is the cycle component) . The second term is a multiple of the sum of squares
of the trend component’s second differences. This second term penalizes
variations in the growth rate of the trend component: the larger the value of ,
the higher is the penal
penalty and hence the smoother the trend series.
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FIGURE 33. BUSINESS CYCLE (HP) (MILLIONS OF DENARS). SOURCE: OWN COMPUTATIONS.
The Hodrick-Prescott filter provides us with the cycle of the series, here the business cycle. The Republic of
Macedonia enters into a downward cycle in 2010,
2011 and 2012 before returning to an upward
cycle. This information is of a paramount Recommendation 6:
importance for calibration of forecasts. Indeed,
this cycle is related to past data and does not Integrate the business
integrate too much information from the global cycles into the design of
financial crisis. When we consider the effects of the fiscal policy.
the global financial crisis, we may assume that this
downward phase will be magnified by the global
financial crisis as well as the length of the phase.
Moreover, it is important to remember that the global financial crisis will linger for a couple of years as the
bubble is still there, having changed from a monetary policy-fueled bubble to a fiscal-policy fueled bubble.
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FIGURE 34. POTENTIAL OUTPUT (HP). SOURCE: OWN COMPUTATIONS.
By definition, the difference between the potential output and the actual output is the output gap. A positive
difference highlights inflationary pressures, due to a rise in the aggregate demand outpacing the rise in the
aggregate supply.
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FIGURE 35. OUTPUT AND ABSORPTION GAPS (% OF POTENTIAL OUTPUT). SOURCE: OWN
COMPUTATIONS.
CYCLICAL BEHAVIORS OF FISCAL BALANCES
Automatic stabilizers work as a tool to dampen fluctuations in real GDP without any explicit policy action by
the government. It is a government program that changes automatically depending on GDP and a person’s
income and acts as a negative feedback loop on GDP. The size of the government deficit tends to increase as
a country enters recession, which helps keep national income high through the multiplier.
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0
2004 2005 2006 2007 2008 2009 2010 2011
1
2
Automatic Stabilizers, year on year change (% potential output) GDP growth rate
FIGURE 36. AUTOMATIC STABILIZERS AND GROWTH. SOURCE: OWN COMPUTATIONS.
A positive (negative) automatic stabilizer represents a cyclically-adjusted contraction (expansion). As seen on

figure 36, when GDP growth rates are stable in 2004 and 2005. In 2006, there is a small contraction of
automatic stabilizers related to a small decrease in the GDP growth rate. In 2007, the rise in GDP growth is
accompanied by a contraction of the automatic stabilizers, easing the pressures on the fiscal policy. There are
two other years of contraction in 2008 and 2009, although GDP growth rates decline a bit in 2008 and remain
stable in 2009. In 2010, a forecasted expansion of the automatic stabilizers will accompany a negative GDP
growth rate, putting pressure on the fiscal stance.
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3
2
1
0
1 2004 2005 2006 2007 2008 2009 2010 2011
2
3
4
5
6
7
Fiscal impulse (not including interest payments), year on year (% potential

output)
Automatic Stabilizers, year on year change (% potential output)
Cyclically adjusted primary balance
FIGURE 37. CYCLICAL BEHAVIOR OF FISCAL BALANCES. SOURCE: OWN COMPUTATIONS.
A positive (negative) fiscal impulse represents a cyclically-adjusted contraction (expansion). As seen on figure
37, there has been some fiscal impulses from 2006 to
2009 greater than the contraction in automatic
stabilizers when the economy was growing. This pro- Recommendation 7:
cyclical fiscal policy led to a deterioration of the
cyclically-adjusted primary balance. However, in 2010, Fix the procyclicality
although the GDP growth rate will be negative (the of the fiscal impulse
economy will be in recession), the automatic stabilizers so that the fiscal
will be in expansion, but no fiscal impulse will come
policy becomes
from the public budget, reinforcing the pro-cyclicality
of the fiscal policy. This rule of sound fiscal policy is
countercyclical.
obviously a little too harsh for a country like the
Republic of Macedonia, since there is a trade-off
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between fiscal sustainability and economic development. It may not seem unreasonable to use the fiscal
policy even in good times to invest in capital for instance. The question is to know whether this pro-cyclical
fiscal policy has been well exploited. Later, we will see where the Republic of Macedonia stands vis-à-vis the
golden rule of public finance.
The cost of a pro-cyclical fiscal policy is to incapacitate the government from using a fiscal impulse in hard
times. Indeed, when the government uses a pro-cyclical fiscal policy, it increases the primary deficit or
reduces the primary surplus, and cannot use more leeway in hard times otherwise risking to put the public
finances on an unsustainable path.
The next section will now be devoted to the study of whether the public finances are on a sustainable path or
not.
SHORT-TERM INDICATORS
In this section, we will first analyze some of the accounts of the

public expenditure line. We will also use the inter-temporal primary
gap indicator to assess the sustainability of public finances. We will STEP 2
also check the robustness of the conclusions drawn on the inter- Proceed to the
temporal primary gap by using a version of the tax gap indicator. analysis of primary
public expenditure,
public revenue and
primary balance.
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ANALYSIS OF PRIMARY PUBLIC EXPENDITURE, PUBLIC REVENUE AND

PRIMARY BALANCE
9
8
7
6
5
4
3
2
1
0
2009 2010 2011 2012
Education State pensions Health
FIGURE 38. PRIMARY PUBLIC EXPENDITURE (% GDP). SOURCE: MINISTRY OF FINANCE, 2009.
Education spending is projected to remain stable and even to represent a lightly lower share of GDP. State
pension spending is projected to slightly decrease as a share of GDP. And health spending is also projected to
decrease as a share of GDP (see figure 38).
As a result of the projected spending and revenue trends, the general government primary balance is expected
to remain in deficit in the short-term.
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1.5
0.5
0
2005 2006 2007 2008 2009 2010 2011 2012
0.5
1
1.5
2
2.5
FIGURE 39. PRIMARY BALANCE (% GDP). SOURCE: MINISTRY OF FINANCE, 2009.
Figure 39 shows a structural primary deficit due to projected gradual increases in public expenditure.
PROJECTIONS FOR THE INTEREST OF THE DEBT
The interest of the debt is an interesting criterion to study (see figure

40).
STEP 3
Analysis of the
interest of the debt
and its projections.
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FIGURE 40. INTEREST OF THE DEBT (% GDP). SOURCE: MINISTRY OF FINANCE, 2009.
As we can see on figure 41, the interest of the debt was declining until 2009, but is from 2009-on expected to
rise.
When one looks at the interest of the debt, one should also consider three other factors: (1) the GDP growth
rate, (2) the change in public revenue to capture how much of the growth generates revenue and (3) the
change in the primary balance to see how much of this revenue is captured by the public expenditure and is
not destined to pay the debt back.
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FIGURE 41. INTEREST OF THE DEBT AND OTHER INDICATORS. SOURCE: MINISTRY OF FINANCE,
2009.
As we can see on figure 41, the interest on the debt is expected to rise in 2010 to then remain stable.
However, figure 11 shows that the GDP growth rate is declining, leading to a smaller growth of public
revenue. In the mean time, the primary balance is deteriorating, meaning that the rise in public expenditure is
greater than the rise in public revenue.
In retrospect, until 2009, GDP growth was stable and has generated higher public revenue in 2007, 2008 and
2009. However, this growth in public revenue has been largely offset in 2008 and 2009 by higher public
expenditure leading to a deterioration of the primary balance. In the future, this deterioration will lead to a
higher debt with as a result a higher interest of the debt. As we can see on figure 42, the Ministry of finance
expects to stabilize the interest of the debt starting in 2011. However, in times when the GDP growth will
degrade and tax revenue will degrade too to remain almost constant, the goal of stabilizing the interest of the
debt relies on two assumptions: (1) a reduction in primary public expenditure to a level that balances the
primary balance and (2) stable conditions on the servicing of the debt. Due to the global financial crisis, the
latter seems optimistic.
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THE INTER-TEMPORAL PRIMARY GAP
The inter-temporal primary gap analyses the change in the primary

balance compared to the current level of debt. It concluded that the
STEP 4
present value of future primary surpluses must be equal to the initial
level of debt. The calculation of the
intertemporal
The methodology used here to calculate the inter-temporal primary primary gap.
gap will be the one relying on equation 10 and consists in the
‘enhanced criterion for the inter-temporal primary gap indicator
using the public debt as a measure’.
To calculate the inter-temporal gap, we first need the primary deficit (see figure 42).
FIGURE 42. PRIMARY BALANCE (SURPLUS/DEFICIT). SOURCE: MINISTRY OF FINANCE.
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The Republic of Macedonia has entered in 2008 into a zone of primary deficits. Although not high, these
deficits by definition do not include the yearly interest of the debt.
Then we will use two ways of calculating the ‘growth-adjusted interest rate’. (1) The first way will divide the
real interest rate, as measured by the Central Bank bills adjusted for inflation (CPI), by the GDP growth rate.
However, when one does that, the decrease in the public debt ratio does not correspond to the definition
provided by equation 4. This is certainly due to allocations from the public revenue to the reimbursement of
the debt (to be verified). Hence, (2) we decided to approximate the ‘growth-adjusted interest rate’ by using
equation 4 and isolating (1+r)/(1+y). This is our second way to calculate the inter-temporal primary gap, and
check for the sustainability of public finances.
FIGURE 43. GROWTH-ADJUSTED INTEREST RATE AND % CHANGE IN PUBLIC DEBT. SOURCE: OWN
COMPUTATIONS.
A one percentage point increase in the initial debt stock increase the inter-temporal primary gap indicator by a
factor related to the growth-adjusted interest rate.
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FIGURE 44. MEASURE OF PUBLIC FINANCES’ SUSTAINABILITY/UN-SUSTAINABILITY. SOURCE: OWN

COMPUTATIONS.
Figure 44 shows the degree of sustainability/un-

sustainability. It is calculated by subtracting (1+b) to the
growth adjusted interest rate. When positive (negative),
Recommendation 8:
it indicates the sustainability (un-sustainability) of public
In the midst of the
finances.
global financial crisis,
It looks like the Republic of Macedonia has made great this downward
efforts in the past to curb down the observed rise in the
direction of the
public debt, but is a little too close to the border with
un-sustainability and would need to work on getting
degree of
some leeway to better adjust to unforeseen sustainability must be
macroeconomic changes such as for instance the future taken seriously in
impacts of the global financial crisis in the years to come 2010, 2011 and 2012
(higher global interest rates, higher global inflation rates,
to prevent from
higher global tax rates leading to a reduction in global
consumption).
entering into the
negative region.
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Indeed, the trend is negative and is pointing into the direction giving the first warning of an un-sustainable
pattern. Moreover, when we look at the projected rise in public expenditure and as a matter of fact the rise of
public deficits for 2010, 2011 and 2012, we can conclude that the government should be aware and adjust to
this first warning.
AN ADJUSTED TAX GAP INDICATOR
In what follows, we will use an ‘adjusted’ tax gap indicator. We will rely
on equation 46, but the initial level of debt will be replaced by the
assumption of a no change in debt compared to the previous period. This STEP 5
will lead to a version of the debt-target indicator with the debt target The calculation of the
being the previous debt level. This indicator is useful to check the adjusted tax gap
indicator.
robustness of the conclusions drawn by using the inter-temporal primary
gap indicator.
Let us first present the public balance in the following figure.
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FIGURE 45. PUBLIC BALANCE (% GDP). SOURCE: MINISTRY OF FINANCE, 2009.
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60
50
40
30
20
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Public debt
FIGURE 46. PUBLIC DEBT (% GDP). SOURCE: MINISTRY OF FINANCE, 2009.
As shown on figures 45 and 46, the Republic of Macedonia has improved its public debt situation and
consolidated the public balance from 2004 to 2008. The public deficit is expected to rise again in 2009 on.
This situation is too high to ensure a non-increasing debt ratio.
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THIERRY WARIN
45
40
35
30
25
20
15
10
5
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Public revenue Public expenditure
FIGURE 47. PUBLIC REVENUE AND PUBLIC EXPENDITURE (% GDP). SOURCE: MINISTRY OF
FINANCE, 2009.
As seen on figure 47, the rise in 2009 expenditure is partially offset by a rise in the revenue, though not at the
same pace. This will have an impact
on the tax gap measure. Very likely,
the tax gap indicator will tell us that Recommendation 9:
fiscal adjustments are needed in
terms either (1) of a reduction of The tax gap is becoming positive.
public expenditure, (2) of an increase An expansion of the tax base (no
in the tax rate or (3) an increase in increase in tax rates) is advisable.
the tax base.
A law offering a tax amnesty
The question thus arises of what could be used for a year, before
adjustment to current policy would enforcing the new tax
be needed in order to prevent the
regulations.
government debt from rising. To
answer this question, we calculate
the sustainable tax ratio according to
equation 14 for one year.
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THIERRY WARIN
As a reminder, the tax gap is defined as the difference between the computed ‘sustainable public revenue’ 6
and the actual public revenue (as a percentage of GDP):
_ ∗ (30)
When the tax gap is positive, it means that the public revenue that would be necessary to sustain the debt is
higher than the current level of public revenue. In other words, it would call for adjustments: (1) a lowering of
public expenditure,(2) a rise in taxes, or (3) an expansion of the tax base.
50
40
30
20
10
0
2005 2006 2007 2008 2009
10
Sustainable public revenue (tax ratio)

Tax_gap
Public expenditure
FIGURE 48. SUSTAINABLE PUBLIC REVENUE, PUBLIC EXPENDITURE AND TAX GAP. SOURCE: OWN
COMPUTATIONS.
As figure 48 shows, public expenditure is on the rise, and hence the sustainable public revenue. The tax gap is
slightly positive in 2009, and signals a need to constrain the fiscal policy.
6 It is usually defined as the sustainable tax ratio, but we prefer the current appellation ‘sustainable public revenue’ since
it matches with the nature of data available at the time of this report.
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THIERRY WARIN
MEDIUM-TERM
In what follows, we are not ‘forecasting’ the future of the Republic of

Macedonia’s economy. We are in fact making projections on the next
STEP 6
decade. We determine a baseline using filtering and bootstrapping
techniques (see box 2). The data shown here are in no way indication of Projections for the
what the government should do, it just serves as a baseline in case the general government
primary balances
conditions assumed here realize. Therefore, the government may take all
decisions pertaining to adjusting to the macro-economic environment,
hence changing the assumptions presented here.
For each projection, we will consider three scenarios:
1. The baseline: this scenario captures the behavior of the variable from the past and assumes the
government will act and react as it did in the past. It also captures the years 2008 and 2009 with the
global financial crisis. It may not be enough since the global crisis will have replications in the next 5
years at least. Let us conclude then that this baseline is realistic, though a little on the optimistic side.
2. The worst case scenario: each standard deviation figure is calculated from the bootstrapped data for
until 2020. Then we sum up (when appropriate, and subtract otherwise, for instance for the GDP
growth rate) this standard-deviation figure to the baseline figure. This scenario is definitely
pessimistic since it assumes the worst every year.
3. The best case scenario: following the same methodology as for the worst-case scenario, we construct
the best scenario for each year considered. This is a very optimistic scenario, that tends to assume the
global financial crisis is going to be over very soon.
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THIERRY WARIN
Box 2: Time-series filtering and bootstrapping
We use a combination of techniques and assumptions to be able to make projections

(not forecasts). Due to the small number of observations through time for each
variable considered, we decide to use a Hodrick-Prescott filter on each variable of
interest. For instance, the public revenue is de-trended. We obtain the cycle:

,
,
From there, we calculate the average of the cycle. So for each variable, we have one
average for the series. Then we use the bootstrapping technique to generate samples
(calibrated to 50 to have enough observations to project until 2020) and calculate the
average of each sample. Each cycle average is then added at the end of the original
series up to 2050 following this formula using a moving average:

3
!!" #$% $&,
The moving average serves as a method to obtain the trend (the Hodrick-Prescott
cannot be used here). Adding the average of bootstrapped cycle of time t to the
moving average re-creates an observation for the series considered at time t.
MACRO-ECONOMIC CONDITIONS
Here, we study the three scenarios in light of three important macro-economic indicators: the real interest
rate (CB Bills rate deflated), the inflation rate and the GDP growth rate.
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THIERRY WARIN
14
12
10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2
4
real interest rate (CB Bills) baseline

real interest rate (CB Bills) worst case scenario
real interest rate (CB Bills) best case scenario
FIGURE 49. REAL INTEREST RATE SCENARIOS. SOURCE: OWN COMPUTATIONS.
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THIERRY WARIN
FIGURE 50. INFLATION RATE SCENARIOS. SOURCE: OWN COMPUTATIONS.
1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2
GDP growth rate baseline GDP growth rate worst case scenario
GDP growth rate best case scenario
FIGURE 51. GDP GROWTH RATE SCENARIOS. SOURCE: OWN COMPUTATIONS.
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THIERRY WARIN
Although in these simulations the macro-economic variables are essentially exogenous to the model, there are
indirectly captured by the cycles generated by the Hodrick-Prescott filter. For a more thorough perspective, a
general equilibrium model would be best, but this would require a high quality and availability of data at the
national and a local level for calibration purposes.
PUBLIC FINANCES
Based on the three scenarios, we are going to present now the impacts on both public balances and public
debts. The next two graphs are related since when the public balance deteriorates, it negatively impact the
public debt, and conversely.
FIGURE 52. PUBLIC BALANCE SCENARIOS. SOURCE: OWN COMPUTATIONS.
As we mentioned earlier, the best case scenario is very optimistic and tends to under-represent the effects of
the global financial crisis. On the other hand, the baseline is a little optimistic. Based on these projections, the
Page 104
THIERRY WARIN
government should aim at targeting therefore better public deficits than the ones represented by the blue
bars.
FIGURE 53. PUBLIC DEBT SCENARIOS. SOURCE: OWN COMPUTATIONS.
Noticeably, the worst case

scenario is alarming. Interestingly
Recommendation 10:
enough, it shows how fast public
The fiscal policies for 2010, 2011
finances can degrade after a
regime of public deficits that
and 2012 (during the downward
were high on a yearly basis (see business cycle) must be kept under
figure 24), but that may not be control and ideally using the
striking year after year. In this baseline as a very maximum that
scenario, it would be extremely
may be crossed due to a
difficult for the Republic of
Macedonia to finance its yearly
deterioration of global macro
deficits, and service its debt. The economic conditions but only for
baseline scenario is a little more exceptional reasons.
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THIERRY WARIN
realistic, and projects a public debt ranging between 34% and 37% in the next decade. The optimistic scenario
again tends to under-represent the effects of the global financial crisis, and projects a debt between 27% and
30% during the next decade.
CONCLUSION
Recommendation 11:
In this report, we intended to achieve various goals.
The first one is to help the Ministry of Finance of the The next five years
Republic of Macedonia identify indicators to measure
must be expected to
public finance sustainability. Beyond the identification,
it is also to be able to do the analyses and
face a rise in global
recommendations before the budget is approved and interest rates,
implemented. The hope is that the staff members will inflation rates, a
be able to replicate the analyses drawn upon these reduction of global
indicators.
consumption and
Another goal was to create an example of how a report some pressures on the
to an international organization is presented. Part III of liquidity of the
this report will be of a particular importance in this
international financial
context.
markets. All this will
To be able to draw conclusions on public finance happen with various
sustainability, the policy-mix must be considered.
degrees.. The next five
Policy-mix should even be defined in a broad way. It
should concern the fiscal policy with regards to the
years will be of the
monetary policy but also vis-à-vis the structural policy. utmost importance for
This is why this report starts with a first part dealing the stability of the
with the economic aggregates available at the time of Republic of
this study to document the three categories of policies.
Macedonia’s economy.
In retrospect, when it comes to the public finances, the
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THIERRY WARIN
conclusions of the analyses presented in part III are threefold:
1. Public finances were well managed until 2009.

2. Leaving the changes induced by the global
financial crisis, the Republic of Macedonia is Recommendation 12:
entering into a downward business cycle for the
next three years. Therefore, the forecasts for
Public deficits should
public expenditure should be adjusted to take be lowered compared
into consideration not only an expected smaller to the forecasts
growth but also a rise in the automatic stabilizers. expecting a
3. Including now the global financial crisis, the next
toughening of the
five years must be expected to face a rise in
global interest rates, inflation rates, a reduction
debt refinancing
of global consumption and some pressures on conditions.
the liquidity of the international financial
markets. All this will happen with various
degrees.. The next five years will be of the utmost importance for the stability of the Republic of
Macedonia’s economy.
The Republic of Macedonia should seek

issuing joint bonds with a Western
Recommendation 13:
European country to (1) increase its
international credibility, and (2) to lower The Republic of Macedonia
its servicing of the debt by lowering its
should seek issuing joint bonds
risk premium.
with a Western European
country to (1) increase its
international credibility, and
(2) to lower its costs of debt
servicing.
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THIERRY WARIN
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THIERRY WARIN
LEXICON
Absorption: Absorption is the total demand for all final marketed goods and services by all economic agents
resident in an economy, regardless of the origin of the goods and services themselves. As the absorption is
equal to the sum of all domestically-produced goods consumed locally and all imports, it is equal to national
income minus the balance of trade.
Absorption gap: it is the difference between the potential absorption and the actual absorption.
Automatic stabilizers: it is the year-on-year change of the variable named ‘adjustments from the gaps’ or
‘cyclical primary balance’.
Balassa-Samuelson effect: gains in productivity will lead to rises in prices for non-traded goods, pushing
the inflation rate to higher numbers.
Baxter-King Filter: it is a time-series based technique to filter a series of observations in order to obtain a
trend and a cycle.
Bootstrapping: statistical technique used to generate new samples from an initial sample of a population
based on the statistical properties of the original sample.
Degree of sustainability/un-sustainability: it is the difference between the ‘growth-adjusted interest rate’

(corrected for inflation) and the percentage change in public debt.
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THIERRY WARIN
Eurobond: A Eurobond is an international bond that is denominated in a currency not native to the country
where it is issued. It can be categorized according to the currency in which it is issued.
Fiscal impulse: it represents the year-on-year change of the cyclically adjusted primary balance.
GDP deflator: the GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all
new, domestically produced, final goods and services in an economy.
Hodrick-Prescott filter: it is a time-series based technique to filter a series of observations in order to obtain
a trend and a cycle.
Hysteresis: Hysteresis is a hypothesized property of unemployment rates: that there is a ratchet effect, so a
short-term rise in unemployment rates tends to persist.
Inter-temporal primary gap: the inter-temporal primary gap analyses the change in the primary balance
compared to the current level of debt. It concluded that the present value of future primary surpluses must be
equal to the initial level of debt.
Output gap: the output gap is the difference between potential GDP and actual GDP or actual output. The
calculation for the output gap is Y-Y* where Y is actual output and Y* is potential output. If this calculation
yields a positive number it is called an inflationary gap and indicates the growth of aggregate demand is out
pacing the growth of aggregate supply
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THIERRY WARIN
Primary deficit: the primary deficit is the pure deficit which is derived after deducting the interest payments
component from the total deficit of any budget. In other words the total of primary deficit and interest
payments makes the fiscal deficit.
Tax gap: A positive tax gap suggests that the current tax ratio is not high enough to finance future spending
and to service the debt.
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THIERRY WARIN
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THIERRY WARIN
BIBLIOGRAPHY
AmbrusLakatos, L., & Schaffer, M. E. (1997). Fiscal policy in transition. London: Centre for Economic
Policy Research.
Balassone, F., & Franco, D. (2000). Assessing fiscal sustainability: a review of methods with a view
to EMU. In B. d'Italia, Fiscal sustainability essays. Rome.
Blanchard, O. (1990). Suggestions for a new set of fiscal indicators. OECD Working Paper (79).
Blanchard, O. (2000). Suggestions for a new set of fiscal indicators. OECD Working Paper (79).
Brunila, A. (2002). Fiscal Policy: Coordination, Discipline and Stabilization. Brussels.
Budina, N., & van Wijnbergen, S. (1997). Inflation stabilization, fiscal deficits and public debt
management in Poland. Tinbergen Institute Discussion Paper , 96.
Buiter, W. H. (1985). Guide to public sector debt and deficits. Economic Policy: A European Forum .
Buiter, W. (2004). To purgatory and beyond: when and how should the accession counties from
Central and Eastern Europe become full members of EMU? Discussion Paper Centre for Economic
Policy Research .
Buti, M., Eijffinger, S., & Franco, D. (2003). Revisiting the Stability and Growth Pact: Grand Design or
Internal Adjustment. Economic Papers (European Commission) (180).
Commission, E. (2004). Public finances in EMU 2004. Brussels: European economy reports and
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Dabrowski, M. (1996). The struggle for fiscal consolidation during the economic transition. Acta
oeconomica , 48 (12), 3158.
Dabrowski, M., & Rostowski, J. (2001). The Eastern Enlargement of the EU. (M. Dabrowski, & J.
Rostowski, Eds.) Kluwer Academic Publishing.
Ehrart, C., & Llorca, M. (2007). A global perspective of fiscal sustainability: evidence from a panel of
20 OECD countries. Working paper presented at the 11th international conference on macroeconomic
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Fatas, A. (2005). Is There a Case for Sophisticated BalancedBudget Rules? OECD Economics
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Krejdl, A. (2006). Fiscal sustainability Definition, indicators and assessment of Czech Public
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Fiscal

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

PROJECT DESCRIPTION AND MANDATE

OBJECTIVE OF THE ASSIGNMENT

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

13 policy­mix based recommendations:

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FIGURE 1. POPULATION BY AGE GROUPS. SOURCE: STATE STATISTICAL OFFICE, 2008.

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

1996 2000 2006

FIGURE 2. BASIC DATA ON HEALTH. SOURCE: STATE STATISTICAL OFFICE, 2008.

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FIGURE 3. BASIC DATA ON EDUCATION. SOURCE: STATE STATISTICAL OFFICE, 2008.

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

Upper secondary school

Primary and lower secondary school

Incomplete primary and lower

Still in the process of primary and

0 200000 400000 600000

FIGURE 4. POPULATION OF 15 YEARS OF AGE AND OVER, BY HIGHEST COMPLETED SCHOOL.

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

CHF GBR USD EUR 100 JPY

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FIGURE 7. DISTRIBUTION OF HOUSEHOLD EXPENDITURES. SOURCE: STATE STATISTICAL OFFICE,

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

5 and more rooms

0 500 1000 1500 2000 2500

FIGURE 8. BUILT DWELLINGS IN TOTAL. SOURCE: STATE STATISTICAL OFFICE, 2008.

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

Hi­Fi sound equipment

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FIGURE 11. INFLATION. 1999=100. SOURCE: STATE STATISTICAL OFFICE, 2008.

As shown on figure 11, although is stays under

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

Finally, according to the empirical

FIGURE 12. FISCAL DEFICITS. SOURCE: IMF, 2009.

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FIGURE 15. FISCAL POLICY DURING 2009. SOURCE: IMF, 2009.

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FIGURE 16. LABOR FORCE. SOURCE: STATE STATISTICAL OFFIE, 2008.

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FIGURE 17. ACTIVITY RATE AND UNEMPLOYMENT IN AN INTERNATIONAL PERSPECTIVE. SOURCE:

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FIGURE 18.UNEMPLOYED PERSONS BY DURATION OF UNEMPLOYMENT. SOURCE: STATE

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

FISCAL SUSTAINABILITY OF THE REPUBLIC OF MACEDONIA

13 policymix based recommendations:

HiFi sound equipment

where y stands for the real GDP growth rate, and 1

(4)

stands for the growth rate of the debt ratio.

current level of the primary deficit ∗ .