Unreal budget has cost us another year

The government presented the Proposal for amendments to the state budget of the Republic of Croatia for 2012 (or rebalancing) exactly on the date – November 15 – when it was required by the Budget Act to establish and submit the Proposal for the budget for 2013-15 to the Parliament, writes Katarina Ott.

As this Proposal was announced within a few days, the government did not leave the public, nor itself, time to analyze the rebalancing and draw necessary conclusions based on which future budgets could be better planned.

Ott writes that this is just a continuation of the previous practice of delays, as the Strategies of Government programs were also delayed by two months, and the Guidelines for economic and fiscal policy by a month and a half. The budget calendar is set by the Budget Act precisely to allow enough time for analyses, discussions, and the adoption of the best selections for future fiscal policies of the state.

As stated in the review “Rebalans državnog proračuna za 2012. godinu: nerealistično planiranje proračuna i/ili nesposobnost provedbe planiranog” the date for the publication of the rebalancing is not legally established, as it occurs if it is determined during the budget year that budget revenues are unrealistically estimated, or unforeseen expenditures arise. They can be caused by unforeseen circumstances in the domestic or global economy, but it can also be a consequence of the government’s inability to realistically plan revenues and expenditures. Although rebalancing should only occur in extraordinary circumstances (Ireland, for example, had only one budget rebalancing during the period 1996-2010, and that was in the crisis year of 2009), in Croatia they are a common occurrence, as previous governments had as many as 14 rebalancings over a period of 11 years. Since this rebalancing is not caused by revenue shortfalls, but by exceeding expenditures, this text deals exclusively with the stated increases in expenditures.

State expenditures consist of operating expenses and expenditures for the acquisition of non-financial assets. Operating expenses have been increased by 1.9 billion kuna through the rebalancing (1.1 billion for employees, 458.3 million for benefits to citizens and households, 415.8 million for financial expenditures, and 379.8 million for subsidies).

Expenditures for the acquisition of non-financial assets have been reduced by 424 million. What do the differences in amounts planned at the end of February and those stated now in November, within a span of less than nine months, indicate?

Let’s leave the largest increase in expenditures – for employees – for last and start with the expenditures for the acquisition of non-financial assets, which have been significantly reduced. Although fiscal consolidation implies reducing expenditures, it is not good if expenditures for the acquisition of non-financial assets are primarily reduced. This simply means that capital projects on which the government bases its recovery plan for the state are not being realized. The explanation that “no capital project is being abandoned, but for some of the planned projects, the preparation of tender documentation is taking a bit longer” indicates unrealistic planning of the time needed to prepare projects, and consequently unrealistic initial budget planning.

Subsidies have been slightly (by less than 1%) reduced for public sector companies, but have significantly (by 10.5%) increased for companies, farmers, and craftsmen outside the public sector. Almost 60% of that increase relates to shipbuilding, about 30% to stimulating agricultural production and market interventions, and the rest, for example, to active employment policy, manufacturing industry, tourism, traditional crafts, education for entrepreneurship and craftsmanship, and women entrepreneurship. The bulk of the increase is explained by the increase in support “in the process of restructuring the shipyard Split in accordance with the Proposal for the sale and transfer of shares of the Shipbuilding Industry Split and DIV shipbuilding”. However, even if we disregard the realism and profitability of such a sale, due to insufficient information about the negotiation process, the question arises whether this is yet another indicator of unrealistic planning of the government’s capacity to manage such large businesses, and consequently for budget planning? Unfortunately, the story with shipbuilding is not over; it will cost us a lot in future budgets, but we must hope that Croatia’s entry into the EU could lead to its resolution, and that shipbuilding – at least in the future – will not be one of the main causes of budget rebalancing. Financial expenditures relate to “interest that is rising primarily due to semi-annual interest payments on bonds issued this year and obligations taken on loans from shipyards”. Since the government took on obligations from shipyards back in April, and the decision to issue bonds was made in the first half of the year, how is it that it did not notice the inevitability of these additional expenditures earlier?

The increase in benefits to citizens and households is primarily caused by the increase in expenditures for employees in health institutions (as much as 510.4 million kuna). Why are these expenditures (which institutions and which employees are involved?) among the benefits to citizens and households based on insurance and other benefits, and not in expenditures for employees (position 37 instead of 31)? If these two amounts were presented in the same place, expenditures for employees would have increased by 1.6, not 1.1 billion kuna. Why is a distorted picture being created about the actual purposes of certain expenditures?

Expenditures for employees consist of gross salaries, other employee expenses, and contributions on salaries. Since gross salary determines contributions on salaries, and significantly also other employee expenses, and since expenditures for gross salaries have contributed the most to the increase in total expenditures of the state budget (837.5 million in gross salary expenditures accounts for 86% of employee expenditures, and 44% of total operating expenditures), it is worth taking a closer look at them.

From the chart in the analysis, it is easy to conclude that over 45% of the increase in gross salary expenditures relates to education (primary, higher, and secondary), and almost 40% to various forms of security and protection (primarily the Ministry of Interior).

The remaining 15% mainly relates to the Croatian Health Insurance Fund, the Ministry of Agriculture, the Offices of State Administration in counties, the Croatian Employment Service, and the Croatian Pension Insurance Institute, but it also includes numerous, significantly smaller users (e.g., the Croatian National Theatre Zagreb increases gross salary expenditures by 2.3 million kuna). It should be noted once again that the chart refers only to the 837.5 million kuna increase in gross salary expenditures of employees (position 311), excluding expenditures for employees in health institutions, which are recorded under benefits to citizens and households based on insurance and other benefits (position 37). Correctly recording all, including those, items in the budget would provide a different picture, but this cannot be read from this document.

Since in the nine months – from the adoption of the budget for this year to its rebalancing – there were no unforeseen circumstances in either the domestic or global economy, why did the government plan revenues and expenditures so unrealistically? Unrealistic planning of revenues and expenditures has inevitably led to significant differences in the financing account. Furthermore, Ott emphasizes that the state will unfortunately not achieve the planned 2 billion kuna in revenues from the sale of shares and stakes in the principal of credit and other financial institutions in the public sector this year. Although there is no explanation for this planning failure, it can be assumed that it concerns planned but unachieved sales of Croatia osiguranje and Hrvatska poštanska banka. However, by issuing securities, the state is borrowing as much as 3.7 billion more than the planned amount.

It is a great pity that due to unrealistic budget planning and/or due to the inability to implement the planned, another year has been lost. And this is precisely the first year of the mandate, which is considered the most suitable for any government to implement any measures, especially those that are “unpleasant”. In this way, unfortunately, not enough has been done to significantly improve state finances, concludes Ott.