Serbia’s 1Q 2026 fiscal shift: faster spending growth widens deficits and tightens financing

Serbia’s fiscal position in the first quarter of 2026 signals a clear pivot toward expansionary policy, with spending commitments and counter-cyclical measures driving the change. While revenue performance has remained comparatively stable, expenditure growth has surged, widening the deficit and putting medium-term budget sustainability under renewed scrutiny.

Deficit widens sharply early in the year

In the first two months of 2026, Serbia’s budget recorded a deficit of RSD 70.5 billion, up by RSD 44.8 billion year on year. Extending that trajectory into a first-quarter view points to a material deterioration in the fiscal balance, especially relative to the more contained deficits seen during 2025.

Revenue growth is modest, but consumption-linked receipts soften

Total budget revenues increased by 3.5% in real terms. Growth was supported mainly by non-tax revenues, corporate income tax, and donations. Corporate tax receipts appear linked to residual profitability in sectors such as automotive and services, while non-tax inflows reflect administrative and institutional sources rather than broad-based economic acceleration.

At the same time, key revenue lines tied to consumption weakened. Value-added tax, excise duties, and customs revenues declined, indicating softer consumption dynamics and lower import volumes. The pattern is consistent with broader macro signals of import compression and shifting demand.

Expenditure expansion accelerates—capital spending leads

The most significant development is on the spending side. Total expenditures rose by 15.2% in real terms, driven by capital spending, social transfers, and public sector wages. Capital expenditures grew even faster—up 41.2%—suggesting an acceleration in infrastructure and investment projects.

Social security transfers increased sharply amid demographic pressures and policy choices aimed at supporting household incomes. Public sector wages also rose, helping sustain aggregate demand but adding structural rigidity to the expenditure base over time.

Front-loaded volatility raises questions for full-year outcomes

Monthly figures show additional volatility: January featured a pronounced spike in expenditures before partial normalization in February. Even so, the overall profile suggests front-loaded fiscal expansion that could persist depending on political and economic priorities through the rest of the year.

Financing pressure grows as capital inflows weaken

The divergence between revenue and expenditure growth creates a structural gap that is unlikely to close without policy intervention. Financing conditions add another layer of constraint: the widening deficit coincides with weaker capital inflows reflected in Serbia’s balance of payments.

This combination increases the likelihood of greater reliance on domestic borrowing and external debt issuance. With global interest rates still elevated relative to prior cycles, higher borrowing costs are a risk investors will watch closely.

Pro-growth spending faces efficiency and flexibility tests

The composition of outlays matters for how sustainable this expansionary stance can be. Capital spending can support long-term growth, but its efficiency and execution remain critical variables for whether infrastructure translates into durable productivity gains. Meanwhile, rising current expenditures—especially wages and transfers—reduce fiscal flexibility and leave the budget more exposed to future shocks.

Overall, Serbia’s fiscal policy in a 1Q 2026 context can be characterized as pro-growth but increasingly constrained: it supports domestic demand and helps offset industrial weakness, yet it does so at the cost of larger deficits and reduced fiscal space. For investors and policymakers alike, this points to a transition toward a demand-supported growth model—one that may work in the short term but requires careful calibration to avoid crowding out private investment and undermining macro stability.