The government in Zagreb is in a blind alley - in the middle of its term, with a constantly growing unemployment and public debt, without economic growth. Confidence in the governance and especially in the prime minister is on steady decline. The fact that the opposition, too, does not seem less impotent, does not help. It could have been much different if the coalition government had withstood the pressure and had continued the reforms that made for sometime of the minister of finance the most liked politician in Croatia. The person who started putting things in order everywhere. However, currently Linic is involved in a conflict within the cabinet and, separately, is under pressure by the European Commission to cut spending to reduce the budget deficit and the public debt.
The fact that the European Commission was to launch an excessive deficit and debt procedure against Croatia should have been known for a long time, at least because the country participated on a voluntary basis in the European semester and is supposed to have learnt what measures the member states that are in an EDP procedure have to implement. And those countries are 16. Among them are those with adjustment programmes in the euro area. But the government was too busy with war with the European Commission over Josip Perkovic, with the conflict with the war veterans over the introduction of Cyrillic alphabet in war sensitive zones, and also with the search of ways to awaken the economy.
Thus occupied with domestic problems, Croatia woke up on January 1st, 2014, with the task to draw measures by April 30 for reduction of the budget deficit. A little before the end of last year, the government called an unexpected news conference during which one of the deputy prime ministers presented a set of nine measures. Those, however, lacked any specific costs or expected results. On January 28th the EU finance ministers endorsed the European Commission's proposal to launch an excessive deficit and debt procedure against Zagreb. And although it was known since the autumn that that day was to come and was inevitable, the cabinet neglected the situation. The topic was discussed at an urgently called meeting of the coalition partners, but was not included on the agenda of the government's regular session on January 29th.
The expectations of society and media was that the government would discuss the issue during the open part of its session on January 29th and will send clear messages what it wants to do. Instead, the minister of finance was sent even before the end of the session to present the measures agreed by the coalition partners for spending cuts worth 7 billion kunas (some 1 billion euros) and to take the cross fire of media questions. Linic's measures include an increase of revenues by 4.7 bn kunas and a reduction of spending by 3.6 bn kunas. The revenues will be increased by taxing profit from games of fortune, the concession fees will be significantly raised as the minister finance said were very low, the privileged pension contributions will be transferred from the second pension pillar to the first which is expected to bring a revenue of 1.8 billion kunas this year.
In addition, the profits of state-owned companies will also be confiscated as well as all unspent surpluses from budget organisations. That measure is expected to deliver another billion. Wages will be cut by 370 million, 1.3 billion will be cut from capital spending and subsidies, while healthcare costs will be reduced by 600 million. A tax on deposit incomes will also be introduced. Next year, the government plans to repeat all these operations and as of 2016 it plans to introduce a new tax - on real estate because then the transfer from the second pension pillar will have ended. This, though, is not the only reason. Slavko Linic proposed introducing the tax last year, as even it was supposed to enter into force on March 1st, 2013. Surprisingly, though, the junior coalition partner - the HNS Liberals of Vesna Pusic, the first deputy prime minister - rebelled and firmly rejected to support the tax.
From Ms Pusic's statement last week it becomes clear that the positions within the coalition are not at all closing up on this issue. On her way out of the government session she briefly said that currently there is one coalition agreement and in 2016 there will be another. This means that a possible introduction of a real estate tax will be left to the next government.
The big question is why has the government now taken the issue of reducing the deficit and the debt seriously given that in the past two years it constantly spoke of the need this to happen. Prime Minister Zoran Milanovic stated many times that the country should not spend more than it earns and with this kind of talk he joined the group of austerians, while the minister of finance at one point gave up and passed everything onto the government. Asked by this website whether the coalition was aware before Croatia's EU accession that it "had fulfilled all criteria" to enter an excessive deficit procedure, Mr Linic made a kind of a confession which lasted more then eight minutes (you can watch the entire speech in English in the attached video). Visibly nervous, Linic spoke without any order, as if he really was confessing for what has been done, what not, what was expected and what failed.
From his explanation it becomes clear that the government was aware from the very beginning that there was deficit, but it was trying to convince the European Commission the situation was extraordinary. This means the Croatian economy has been in recession for five years with a weak perspective to exit this year. Under the pressure by the European Commission, the cabinet had to urgently start selling the shipyards that had been generating losses for years, but in recession times in the EU as well finding the right buyer proved difficult. That is why, the budget had to consume the debts. Selling the shipyards was a precondition of the European Commission for years, but was fulfilled in the very last moment when it practically threatened the very accession of Croatia to the EU.
Linic said the government had embarked on a long-put-off restructuring which costs. "We knew it cost", he added. At the moment, the government is trying to get rid of another big enterprise which generates losses - the cargo railway company HZ Cargo. There was a potential buyer from Romania but he got arrested for bribes literally a day before Croatia entered the excessive deficit procedure. Without quoting this incident, the government called the deal off. Slavko Linic said there was simply no interest in the Croatian cargo railway company. And this means that restructuring will, again, fall on the state. "Restructuring brings new losses, new deficits, but the biggest problem is that it brings new public debt". At this stage, there is no interest in concessioning the Croatian motorways - some of the most expensive ones in Europe which, however, are completely unable to make enough money to cover for the loans taken to build them.
The only space for manoeuvres, at this stage, remains restructuring the public sector. In the week when the first Ecofin meeting took place this year, the government held a meeting with the chiefs of all state-owned companies and demanded from them severe reforms, cuts and their profits. To what extent will this deliver, however, is yet to be seen. The government is unable to convincingly say what results does it expect. Slavko Linic's confession makes it clear that the expectations from the opening of the European single market for Croatia to bring a serious boost to Croatian companies and therefore tolead to growth of the gross domestic product, vapourised. He blamed the private sector, too, for not being reformed. He again renewed his accusation against the EU because now the Croatian budget is burdened with a contribution to the common EU budget and with costs for co-financing of projects. "Europe imposes a battle for competition", Linic said, pointing out that there already is a ban on state aid.
The only escape Slavko Linic sees is in economic growth. This, however, depends on whether companies will start exporting to the single market. It also depends on their competitiveness and on the economic environment in the EU this year.
Two years ago Prime Minister Zoran Milanovic seemed a true reformer. His speeches were inspiring and aired confidence. Nothing of that conviction, eloquence and sharpness has remained. In an interview with the Croatian Nova TV on January 29th in the evening, Milanovic failed to convince both the presenter and society that he knew what was necessary. He even failed to answer firmly the question if all partners in the ruling coalition stood behind the planned measures. Before, it seemed difficult even for the most experienced journalist to wedge him. Until that evening last week when he only managed to mention that the only accusation against his government was that it worked and that all problems were stemming from its work. Still, given Mr Milanovic's character, it can safely be suggested that there will be another clash between Zagreb and Brussels. This time on spending. In his interview for Nova TV, he said the cabinet would try and reduce spending, but will not allow a Greek scenario.
Zagreb has to present its final plans for deficit and debt reduction by April 30th. Then, the big negotiations begin. For now, Croatia can hope for more time because of the change of the European Parliament and the Commission this year. That could lead to some change of the austerity policy the Commission has been prophesying. But as long as Angela Merkel is in power in Berlin, that change will not be radical.