Results of Fiscal Consolidation in Republic of Serbia

Fiscal adjustment or fiscal consolidation is being performed on both the revenue and expenditure side of the budget. The authorities have at their disposal two instrumental variables available: taxes and public expenditure, divided into public spending, investment and transfer. To be able to achieve the desired effect, fiscal policy aims aligning these instrumental variables that are available to it. However, achieving the proper balance is difficult and it is uncertain which of the two instrumental variables have the strongest effect on economic activity. Traditional Keynesian theory holds that the changes within public expenditure are more effective instrumental variables than tax changes. This is because the concerned procurement of goods and services have a direct impact on GDP, while taxes shows its indirect effect trough decisions of households and businesses on consumption and investment. The Serbian Government has taken several measures in recent years, both on the revenue and on the expenditure side of the budget. The main aim of these measures is to reduce the budget deficit and consequently public debt, which is located at an alarming level. The aim of this study is to analyze the effects of the undertaken measures and suggesting possible effective measures to solve these problems.