The Croatian government is undertaking a "technical" revision of the country's budget for this year, because of non-implementation of the set target to reduce the budget deficit in 2012 by 1%, as envisaged in the fiscal discipline law. Two billion kunas (circa 266 million euros) is the over-expenditure the government has to deal with because of the failure of several ministries to effectively cut spending. The problematic ministries are of education, which has overspent 450 million kunas (60 mn euros); of the interior with 270 million kunas; of healthcare with 250 million; justice with 85 million and of social affairs with 50 million. Education Minister Željko Jovanović said a number of times that he could not fulfil the required goals simply because he had nowhere to cut from anymore. In a similar situation are the other ministries, and because of reduction of social benefits, last week protested police officers.
Prime Minister Milanović explained in an interview [in Croatian] for the Croatian national TV HRT that under technical revision should be understood a transfer of funds among ministries. There are ministries and public institutions that had not managed to spend their entire budgets, so the unspend money will be redistributed. Separately, this year there was an over implementation of the revenues part of the budget. Apart from the overspending of some ministries, additional pressure for the budget came from the debts of several shipyards, which have been a problem for Croatia for several years and the European Commission in every report on the country's progress toward EU membership recalls that the shipyards should be sold or left to bankrupt. The forthcoming revision of the budget this week, will include these obligations too, left out from the budget plans this year, totalling 300 million kunas for Brodosplit. The situation in another shipyard - "May 3rd" - is also severe and there is already word about bankruptcy which means several hundred workers on the street.
Prime Minister Milanović explained that the biggest reason for the failed implementation of the budget deficit target are the wages in the public sector. "We planned to spend 2 billion kunas less for wages in the public and budget sector. We failed and now we have to revise the revenues and the spending", he told HRT. A more significant reason for this, however, is the lack of economic growth. In Milanović's words, the price of the 10-year bonds was around 6.5% and in some markets it even reached 4%, but if growth is 2% and the debt is serviced at 4% then it is clear that we need higher growth, Mr Milanović explained. He added that Croatia was the only country in the region (he mentioned specifically Slovenia, Serbia, Bosnia and Herzegovina and even Italy), for which there is a forecast of "some economic growth" next year.
But this, however, will depend entirely on the environment in the EU. According to the autumn economic forecast of the European Commission published last week, Croatia will end the year with stagnation (zero growth) as a net result for 2012, and next year the country has chances to come up with a plus, but this is entirely dependent on the economic situation in the EU. The real GDP growth this year is expected to contract by 1.9%, thus scoring a fifth year in a row of recession of Croatia. The Commission analysis shows that the Croatian economy will continue to face "cyclical and structural headwinds". Because of contraction of the economic activity in many EU member states in 2012, especially among the most important trading partners of Croatia, the situation is deteriorating in addition to the loss of market share, being observed in the past years. High indebtedness of households and firms, as well as the unfavourable credit conditions additionally fuel uncertainty.
There is a lack of foreign investments as well, which is expected to change temporarily with the country's accession to the EU on July 1st, 2013. Pressure on GDP growth exercise the fiscal consolidation measures of the government as well. The Commission notes that the measures of the cabinet to control spending deliver and will lead to a slight decrease of the budget deficit, but in the same time the same fast pace of debt growth is projected as well, which already nears 50% of GDP, given that the EU ceiling under the Stability and Growth Pact is 60%. In 2012, a contraction of the budget deficit from 5.1% last year to 4.4% this year is expected, but these data seemingly do not take into account the upcoming budget revision. The forecast predicts in the next two years the fiscal deficit to decline by 0.5 pp which is half the goals set in the fiscal responsibility law.
"Without investments there is no economic growth", the World Bank announced. The bank's regional director, Peter Harrold, said a few days ago that Croatia should improve the investment climate in the country starting with the public sector by making it more effective. According to the bank, Croatia is not at the European economic bottom and is closer to the level of Bulgaria and Slovakia. According to the bank, around half of the country's trade is with the eurozone, Germany and Italy in particular. The euro area is a source of nearly three fourths of the direct foreign investments to the country.
The government has still not presented its ideas for the budget for 2013, which will be the harder task against the backdrop of growing social discontent and ongoing for months negotiations with the trade unions on collective bargaining. Croatia is facing challenges at the labour market as well, where the expectations for unemployment growth are high, although it is said that unemployment might slightly decline due mostly to demographic trends.