Serbia’s fiscal landscape in the first quarter of 2026 has shifted towards an expansionary policy, influenced by structural spending commitments and counter-cyclical measures. This change has been marked by a substantial increase in expenditures, leading to a widening fiscal deficit that raises concerns about medium-term sustainability, despite stable revenue performance.
In the initial two months of 2026, the budget recorded a deficit of RSD 70.5 billion, which is an increase of RSD 44.8 billion compared to the same period last year. This trend indicates a significant deterioration in fiscal balance relative to the more contained deficits observed in 2025.
Revenue growth during this period has been modest, with total budget revenues rising by 3.5% in real terms. This increase is primarily attributed to non-tax revenues, corporate income tax, and donations. Notably, corporate tax revenues benefited from ongoing profitability in sectors such as automotive and services. However, non-tax revenues primarily reflect administrative inflows rather than a robust economic acceleration.
Conversely, consumption-linked revenue sources have shown signs of weakness. Revenues from value-added tax, excise duties, and customs have declined, indicating softening consumption dynamics and lower import volumes. This trend aligns with broader macroeconomic patterns of reduced imports and changing demand dynamics.
Expenditure growth has been significantly more pronounced, with total expenditures increasing by 15.2% in real terms. This rise is driven by capital spending, social transfers, and public sector wages. Capital expenditures alone surged by 41.2%, highlighting an acceleration in infrastructure and investment projects.
Social security transfers have also increased sharply due to demographic pressures and policy initiatives aimed at supporting household incomes. Additionally, public sector wages have risen, contributing to overall demand but also embedding structural rigidity within the expenditure framework.
Monthly expenditure dynamics have revealed volatility; January experienced a notable spike in spending followed by a partial normalization in February. Nonetheless, the overall trend suggests a front-loaded fiscal expansion that may continue throughout the year depending on political and economic priorities.
A critical observation is the widening gap between revenue and expenditure growth rates. While revenues are growing at a moderate pace, expenditures are rising rapidly, creating a structural gap that is unlikely to close without policy intervention.
From a financing perspective, this expanding deficit coincides with weakened capital inflows as indicated by balance of payments data. This situation increases the likelihood of greater reliance on domestic borrowing and external debt issuance, which may come at higher costs given the current global interest rate environment.
The composition of spending warrants scrutiny as well. Although capital expenditures can foster long-term growth, their efficiency and execution are essential factors. Rising current expenditures—particularly wages and transfers—diminish fiscal flexibility and heighten vulnerability to economic shocks.
In summary for Q1 2026, Serbia’s fiscal policy appears pro-growth yet increasingly constrained. While it bolsters domestic demand and mitigates industrial weaknesses, it does so at the expense of mounting deficits and diminished fiscal space. The overarching implication points toward a demand-supported growth model where fiscal policy plays a crucial role in maintaining economic activity; however, careful calibration will be necessary to prevent crowding out private investment and compromising macroeconomic stability.
