Government raises VAT in hospitality and tourism from 10 to 13 percent?

The government is raising VAT rates in hospitality and tourism from 10 to 13 percent, which is one of the short-term measures to reduce the deficit.

According to the portal Dnevnik.hr, measures to reduce the deficit include an increase in excise duties, lower parafiscal levies, alignment of VAT rates, further privatizations, savings in public procurement…

According to the latest estimates, the Croatian deficit could reach 17 billion kuna this year.

The increase in interest expenses and costs of Croatia’s membership in the European Union next year will cause an increase in the budget deficit by about 8 billion kuna, and expenses will reach 131.7 billion kuna, while the budget deficit will amount to 17.4 billion kuna or 5.5 percent of GDP, announced Finance Minister Slavko Linić at today’s government session, emphasizing that the policy of austerity will not be abandoned.

Presenting the Guidelines for Economic and Fiscal Policy for the period from 2014 to 2016, Linić stated that in 2014, interest expenses for existing public debt will increase by about 2.5 billion kuna, and costs of EU membership by 4.7 billion kuna. There will also be about 700 million kuna in higher expenses for subsidies and salaries, which will all lead to an 8 billion kuna higher budget deficit compared to this year. This would increase the budget deficit from this year’s planned 3.5 percent of GDP to 5.5 percent of GDP next year.

The level of deficit of 5.5 percent of GDP should decrease in 2015 and 2016, primarily due to expected economic growth, said Linić.

The guidelines foresee that after a 0.2 percent growth this year, the growth of Croatian GDP in 2014 will be 1.3 percent, in 2015 it will be 2.2 percent, and in 2016 a growth of 2.5 percent is planned.

Other budget items for 2014 should not change significantly, meaning that the expenses of other budget users, although needs were higher, will remain at the level of the 2013 budget.

The revenue side of the budget will not change significantly either, which is projected at 114.3 billion kuna or about 0.8 percent higher than this year.

There was no room for significant reductions on the expenditure side, said Linić, due to the negative impact of Croatia’s entry into the EU and due to high public debt, which has increased also because of reforms carried out over the past two years, such as restructuring shipbuilding, railways, air transport, and healthcare.

Public debt at the end of this year will amount to about 190 billion kuna, said Linić, emphasizing that it includes high deficits from 2011 and 2012, as well as ‘hidden’ debts of previous governments.

However, the government today accepted both reform and other measures of fiscal consolidation from 2014 to 2016, and Linić stated that the parameters from the guidelines will be adjusted during the preparation of the 2014 budget for the expected effects of these reform measures, which should help reduce the budget deficit in the coming years, along with the continuation of the systematic austerity policy.

The most important reforms are planned in the systems of healthcare, social welfare, pension insurance, education, and the salary system in state and public services.

Deputy Prime Minister Branko Grčić also reminded that Croatia will enter the Excessive Deficit Procedure, as the deficit will exceed the ‘golden rule’ of 3 percent of GDP.

In order to reduce the budget deficit below 3 percent of GDP and keep public debt below 60 percent of GDP, the European Commission will provide clear recommendations to the government on how to exit high deficits and public debt, but it should be expected that this process will take time, and it is not possible to implement it in a period shorter than three years, said Grčić, emphasizing that agreement with the EC on this should be reached in the spring.