BELGRADE (Reuters) – The World Bank advised Serbia yesterday to cut spending on defense and public sector wages to ease the burden of costly economic reforms on its already strained budget. World Bank economist Sergei Shatalov presented a report in Parliament highlighting budgeting inefficiencies, and told deputies that Serbia’s wage bill – at 10 percent of gross domestic product (GDP) – was more than it could afford. Serbia has embraced a program of economic reform since the ouster of autocrat Slobodan Milosevic in 2000, but Shatalov said it must manage its budget better in future to cope with the cost of making a full transition to a Western-style market economy. «We have been impressed by the way the budget has been put together and managed, but as the financial situation eases, there are new risks ahead,» Rory O’Sullivan, the World Bank representative for Yugoslavia, told deputies in a speech. Yugoslavia comprises dominant Serbia and tiny Montenegro. His message echoed a separate report from the Organization for Economic Cooperation and Development (OECD), which said Yugoslavia had to cut the size of its government to bring it in line with the capacity of its economy. «State expenditure on the military and police establishment, and the civil service, are notably higher than in other countries,» said the report, adding that Serbia spent as much as some countries with double its average earnings. Serbia has drafted a $4.3 billion budget for the next year, $1.0 billion higher than in 2002. Spending will focus on pensions, public sector wages and foreign debt repayment. The projected 46.9 billion dinar ($769.8 million) fiscal gap would account for 4.0 percent of GDP. Public spending remains high at 48 percent of GDP, projected at some $15.0 billion for 2003. Serbia spent 10 percent of its 2002 budget on the police, while Yugoslavia spent 70 percent of its $1.0 billion federal budget on the army. The World Bank’s Shatalov told Reuters that Serbia’s economic future depended on keeping close track of spending. «If the financial discipline focus is maintained, that can be a good foundation for an economic progress. Financial discipline is the key for Serbia to start talks (to eventually join) the European Union,» Shatalov said. He said the Balkan country, recovering from a decade of war and sanctions, must also boost the capacity of its tax system to maximize revenues after banks take over payment processing from the old-style central tax office at the start of 2003.