Economists: Spajić’s “Euro Model” will have to be financed by raising VAT from 21 to 25 per cent

Almost all well-known economic analysts agree on one point when it comes to Prime Minister Milojko Spajić’s “Euro Model”: the state will have to raise VAT to replace several hundred million euros of revenue that it gives up for wage increases, writes the Montenegrin newspaper Dan.

The possibility of a VAT increase, according to an analysis by the newspaper Dan, was mentioned first by the former state secretary of the Ministry of Finance, Mila Kasalica, and then, in the middle of the week, also by the President of the state, Jakov Milatović. Both mentioned a VAT rise from 21 to 25 per cent. Milatović calculates that the net effect of the “Euro Model” will be around €500 million; after EU accession around €200 million a year could be drawn, so a budget hole of €300 million remains — and it can be filled by raising VAT from 21 to 25 per cent, since a one-point VAT rise brings the budget around €70 million.

Economics Faculty professor Mirjana Kuljak, one of the few experts who support the “Euro Model”, says the model invents nothing new, but takes proven tools from Denmark, Romania and European practice: Denmark has proven for decades that the state can guarantee pensions from the budget without drowning wages in contributions; Romania in 2018 proved that a radical reconfiguration of contributions and a reduction of the tax burden push net wages up and stop the exodus; different minimum wage levels according to qualification are standard European practice.

Economic analyst Novak Svrkota counters: in Denmark the coverage of imports by exports is 107 per cent and VAT is 25 per cent — so in Montenegro too VAT will have to rise so that part of the burden on wages shifts to consumption, and a significant reduction of employees in the public sector will be needed. Kuljak replies that we will pay the price according to the state of the economy: “whether immediately or gradually is a matter of a ‘social agreement'”.

Prime Minister Milojko Spajić presented the “Euro Model” reform programme in a video statement after the government’s telephone session, writes Dan: six laws that provide for a minimum wage of €1,000, €1,250 and €1,400 according to qualification, the abolition of contributions for pension and disability insurance and an increase in profit tax from 12 to 15 per cent for profit over €100,000; the government approved the six laws in a WhatsApp group, while Finance Minister Novica Vuković did not comment. So far the government has offered no fiscal analysis of the effects and has not mentioned the possibility of a VAT increase.

Employers warn that they cannot implement the drastic wage increases in the short term and demand a postponement of the “Euro Model”, warning of layoffs in small businesses. Spajić has been firm, as Dan reports: the “Euro Model” starts implementation on 1 January.