It is increasingly heard that an economic turnaround is coming in Croatia. In the media, the same driver promises a change in direction and a different drive than before.
But the question is whether the turnaround can save an unprepared economy. About half of the deficit arises from our new relationship with the EU. The main reason is that the driver has not adapted to the new drive, although he should have. I believe that due to the previous coalition practice, months of turnaround will not follow, but rather a harsh sobering up.
Savings After the Elections The much-anticipated turnaround towards fiscal consolidation will not happen if we judge by the government guidelines published last week. Namely, this conclusion can be easily read from the increase in targeted deficits of 5.5 percent of GDP in 2014, 5.1 percent in 2015, and 4.5 percent in 2016.
In the guidelines, they justify the increase in the deficit due to increased costs from EU membership, as well as higher debt servicing costs. Additionally, public sector costs are on the same path as before – wage expenditures continue to rise, while a certain savings policy is seen in healthcare.
Regarding the macroeconomic framework, it remains overly optimistic – growth this year of 0.2 percent, followed by an increase of 1.3 percent in 2014 and over 2 percent in the following years. With all the risks of achieving revenue!
The government also presents a reform package that foresees rationalizations and savings in many areas. The approximation of savings amounts to up to 0.6 percent of GDP in 2014, 1.2 percent in 2015, and 1.7 percent in 2016. The government has not included any of these savings in the budget projections from 2014 to 2016, where then adjusted deficits would present a much more favorable picture: 4.9 percent of GDP in 2014, 3.9 percent in 2015, and 2.8 percent in 2016. Clearly, all savings measures have been left for the period after the next parliamentary elections, or the writers themselves doubt their implementation.
Thus, the government will need almost 20 billion kuna of new financing in 2014. The message to investors is unfavorable, due to the planned deficit and the exclusion of planned savings from the budget. All this reduces the credibility of implementing savings. The prospects for financing in 2014 are demanding, and the government indicates that we remain dependent on the stability of global debt markets, which is always uncertain.
Based on the guidelines for economic and fiscal policy 2014 – 2016, it is easy to see that the coalition is counting on EU assistance through the initiation of the Excessive Deficit Procedure (EDP). Given the recent accession to the Union, the targeted deficit pushes Croatia under the supervision of the European Commission.
