Government in 2012: An Unsuccessful Struggle for Growth

The work of the government during 2012 was primarily marked by the struggle to initiate economic growth, which, however, was unsuccessful as instead of the projected GDP growth of 0.8 percent, a decline was achieved, which experts estimate to be between 1.5 and 2 percent of GDP.

In February, the government proposed, and the Parliament accepted, the state budget which planned expenditures of 118.8 billion kuna, which is 3.4 billion less than in 2011, while the planned revenues of 108.9 billion kuna are 1.4 percent higher than the previous year. The budget deficit was reduced by more than 5 billion kuna and amounted to 9.9 billion kuna or 2.8 percent of GDP. However, at the end of November, a rebalancing of the state budget was accepted, which increased revenues by 1.4 billion kuna, to 110.3 billion kuna, while expenditures increased by 1.5 billion kuna, to 120.3 billion kuna. Thus, the budget deficit increased by 100 million kuna, but was still maintained at the level of 10 billion kuna.

The budget for the next year was accepted in December, planning revenues of 113.7 billion kuna, expenditures of 124.5 billion kuna, with a budget deficit of 10.9 billion kuna. According to government projections, GDP growth of 1.8 percent is planned for 2013. At the beginning of March, Fitch Ratings confirmed Croatia’s current rating for long-term borrowing in foreign currency and for borrowing in domestic currency, with a negative outlook, followed by Standard & Poor’s and Moody’s. In September, Fitch even revised its rating outlook from negative to stable, but a cold shower came first in November when Fitch changed the rating outlook from stable to negative, and then in December, Standard & Poor’s downgraded the credit rating to non-investment grade, or so-called junk status. The main reasons cited were the increase in the deficit and insufficient structural reforms, and the government announced at that time that the budget for the next year would undergo changes.

In the second half of February, milk producers protested to force processors to increase the purchase price of raw milk. The protesters demanded an average purchase price similar to that of EU countries, and for the government to compensate the difference between the offered and requested milk price. During the two-week protest, they blocked roads several times and spilled milk, but they were unable to achieve anything, so they ended the protest at the end of the month.

From the beginning of March, the general VAT rate was increased from 23 to 25 percent, and a rate of 10 percent was introduced for edible oils and fats, baby food, and processed food based on cereals for infants and young children, for white sugar, and for water supply. It was also established that from the beginning of 2013, the 10 percent VAT applies to food, non-alcoholic beverages, wine, and beer in hospitality establishments. Amendments to the Income Tax Act increased the personal deduction for employees to 2200 kuna, and for pensioners to 3400 kuna. Tax brackets were changed, while the tax rates (12, 25, and 40 percent) remained the same, and income from dividends exceeding 12,000 kuna annually is taxed.

Also, from May 1, the general contribution rate for health insurance was reduced from 15 to 13 percent. Dividends and shares in profits are taxed at a rate of 12 percent, and from the beginning of 2013, all reinvested profits are exempt from corporate income tax. In March, the government accepted the offer from the Samobor DIV for the purchase of the Shipbuilding Industry Split, rejected offers from Danko Končar for the purchase of shipyards in Trogir and Kraljevica, and decided that the Kraljevica shipyard would go into bankruptcy. Later, it decided to sell the Trogir shipyard to Končar’s company Kermas Energija. The Pula Uljanik went into privatization under the model of organized employee shareholding and recapitalization, while a solution was found for the Rijeka 3. maj, which should be purchased by Uljanik after it undergoes privatization.

At the beginning of April, Zlatko Komadina resigned from the position of Minister of Maritime Affairs, Transport and Infrastructure due to health issues, and was succeeded by Siniša Hajdaš Dončić. In June, the Minister of Environmental Protection and Nature, Mirela Holy, also resigned after an email scandal in which she requested protection for the wife of a party colleague from the CEO of HŽ Holding, and Mihael Zmajlović became the new minister.

In November, the Deputy Prime Minister and Minister of Economy Radimir Čačić also resigned after being sentenced to one year and ten months in prison by a court in Hungary for a traffic accident in which two people died. The position of Minister of Economy was taken by the former Minister of Construction Ivan Vrdoljak, and Anka Mrak Taritaš took his place. From May 1, electricity for households increased by an average of 20 percent, and gas by an average of 22 percent. Electricity for entrepreneurs increased by 9.5 to 12 percent, gas for part of the industry remained at the same price, and the price of gas for schools, hospitals, and part of the industry was reduced by 6.75 percent.

Later, with the new Energy Act, the government transferred the determination of heating prices to the regulator HERA, so that at the end of the year, heating in six cities increased by between 19 and 38.5 percent. From May 1, a government regulation came into force that prevents employers from paying salaries without paid contributions, and due to the financial situation, the government also terminated the contract for the construction of the Pelješac Bridge in May, recognizing the actual costs to the contractors, but without the right to compensation for lost profits.

The General Tax Act was also amended to allow the publication of a list of tax debtors. The list included individuals with total debts exceeding 100,000 kuna, legal entities with debts exceeding 300,000 kuna, and other taxpayers whose debts exceed 15,000 kuna. The Ministry of Finance, through the Financial Operations and Pre-Bankruptcy Settlement Act, attempted to find a solution to the problem of high illiquidity, which reached around 44 billion kuna by the end of the year.

At the end of November, Finance Minister Slavko Linić presented a proposal for a property tax, under which a tax at a rate of 1.5 percent on a tax base of 70 percent of the fiscal value of the property, reduced by prescribed allowances, should be paid on all properties from April 1 of the following year. The largest allowances are for permanent residence – between 88 and 95 percent, and there are no allowances for properties that are not used.

At the end of the year, the government’s proposal for the Law on Fiscalization in Cash Transactions was adopted, which introduces fiscal cash registers from the beginning of the next year, presented as a reliable mechanism to combat the gray economy as they should ensure that the Tax Administration actually records every cash transaction made. During the summer, the government signed a new collective agreement with the unions of state employees, which cut material salaries such as Christmas bonuses and severance pay, while preserving salaries and jobs in return. With the public service unions, this was not successful as four unions (primary schools, secondary schools, science and education, and nurses) did not agree to changes to the Basic Collective Agreement, and due to disputes over the necessity of budget savings on employee expenditures and the payment of guaranteed rights, teachers and educators were left without salary supplements of 3, 5, 7, and 9 percent.

In 2012, the government held 68 sessions with 1382 agenda items, adopted 3005 acts, of which 255 were legislative proposals sent to parliamentary procedure, including 45 that align Croatian legislation with that of the European Union. The government also adopted 190 regulations, 684 decisions, 675 conclusions, and 1100 resolutions, and responded to 93 questions from parliamentary representatives, with the total duration of the sessions being 79 hours and 35 minutes.