‘European’ VAT collection reduced budget revenues by 10 percent

Budget revenues in July are approximately ten percent lower compared to the same period last year. This will further reduce Minister Linić’s forecasts of a planned deficit of 10.2 billion kuna by the end of the year, or three percent of GDP.

Analyst Željko Lovrinčević commented for Večernji list that after the budget ended in a deficit of 11.4 billion kuna at the end of June, it could rise to 13 billion kuna by the end of July.

After that, analysts believe that by the end of the year, the deficit could rise to 15 billion kuna, which would already represent a shortfall of approximately 4.5 percent of GDP. The biggest shock for the budget in July was the different calculation of VAT and halved customs revenues due to EU accession.

VAT was previously calculated upon import, and with EU accession, starting from July 1, it is calculated only when the goods are sold. The ministry estimated that this would have a negative effect on the budget, but that it would amount to 500 million kuna throughout the entire second half of the year. However, it seems that this amount was already realized in July, as many products, such as cars, do not sell quickly.

In August, when most imported products will be sold, this negative effect of VAT could be offset, so it is also possible that by the end of the year, the planned VAT revenue of approximately 43 billion kuna will be achieved in the budget.
It is already clear that greater budgetary problems are caused by revenues from profit and income taxes. On one hand, unemployment is rising, while on the other, more and more entrepreneurs are taking advantage of the possibility of tax exemption on reinvested profits. But even the taxable profit is significantly lower compared to last year. The new VAT calculation applies only to trade with EU countries, but not with third countries from which approximately 30 to 35 percent of imports come.

However, with the loss of the CEFTA market, instead of imports from those countries, we are increasingly turning to importing the same products from the EU, which then increases the quantity of products for which VAT is calculated under the new rules. Another minus for the budget is the lack of customs revenue. Previously, approximately 150 million kuna flowed into the budget monthly from customs, and now that amount has been halved because trade with EU member states is no longer subject to customs duties. Additionally, in July we had to pay the first tranche into the EU budget of 500 million kuna.

An additional blow could be the subsidies, which Linić stated would not be paid in the second half of the year. The EU mandates that they can be paid, but do not have to be. However, if farmers start protesting, which has already been announced, an agreement will have to be reached, and it is very likely that they will have to be paid.