RBA: Growth is Set Too Optimistically

Considering the structural weaknesses of the Croatian economy, the lack of stronger reform measures, and a very fragile and uncertain external environment, in our assessments, growth is set too optimistically, say RBA analysts regarding government growth projections for 2013.

Following the budget rebalancing for 2012 last week, the Government of the Republic of Croatia submitted the Proposal for the State Budget of the Republic of Croatia for 2013 to parliamentary procedure from yesterday’s session, along with projections for 2014 and 2015. The new budget proposal for 2013 is based on a real economic growth of 1.8 percent and an average inflation of 3.2 percent.

-Considering the structural weaknesses of the Croatian economy, the lack of stronger reform measures, and a very fragile and uncertain external environment, in our assessments, growth is set too optimistically and is again based on investments, predominantly public, which are directed towards sectors that contribute poorly to foreign exchange. Therefore, it is very difficult to agree with the assessment that the projected revenue growth (from 110.34 to 113.65 billion kuna) will be partly a result of the recovery of economic activity.- write RBA analysts.

Moreover, the unencouraging environment for private investments, the exhausted real sector, and the extremely weak labor market do not provide hope for recovery during 2013. Analysts believe that revenue growth will solely be a result of better collection (fighting tax evasion and fraud) and changes in the tax system that are largely a result of alignment with the EU legal acquis (abolition of the zero VAT rate on bread, milk, books, medicines, orthopedic aids, and cinema tickets, changes in excise duties). In conditions of rising expenditures, they are therefore not surprised by the postponement of further relief of labor costs and tax pressure, which is at an exchange high level. The needs of the state remain high, and fiscal consolidation on the expenditure side of the budget has this time been absent even in the budget plan itself.

Namely, total expenditures are planned to increase to 124.5 billion kuna (+3.5% or 4.2 billion more compared to 2012). The increase is predominantly caused by the rise in interest expenditure (2.1 billion kuna), contributions of the Republic of Croatia to the EU budget (1.7 billion kuna), and state aid for the restructuring of shipbuilding (0.9 billion kuna). Savings on the wage mass (of 1.7 billion kuna) primarily relate to the science and education system, internal affairs, and the salary system of health institutions.

In such conditions, the state budget deficit will increase both in absolute and relative amounts and should amount to 10.9 billion kuna or 3.1% of GDP for 2013 (an increase of 882 million kuna or 8.8%). The deficit of the consolidated general government in such conditions is expected to rise from 3.4% in 2012 to 3.8% of GDP in 2013.

The lack of expenditure adjustment surprises analysts considering the need to meet the provisions of the Fiscal Responsibility Act, but also the fact that fiscal consolidation in conditions of prolonged recession is crucial for reducing external macroeconomic risks, improving financing conditions for the entire economy, and creating prerequisites for a faster recovery.

According to the latest financing account for 2013, the Government plans to issue securities (bonds) in the amount of 21.2 billion kuna, of which the largest amount will go to borrowing on foreign capital markets through the issuance of eurobonds in the amount of 14.2 billion kuna. Loans (domestic and foreign) are planned to raise 5.5 billion kuna, while the expected revenue from privatization (primarily Croatia osiguranje and HPB) is expected to be at the level of 3 billion kuna.