Budget Rebalancing: The Only Good News is That Croatia Has Proven Itself to Be Good at Borrowing

As recently stated by German Finance Minister Olaf Scholz, and then vividly demonstrated by the Croatian budget rebalancing, state aid has its limits. The government has estimated a GDP decline this year of 9.4 percent, an explosion of the deficit to 25 billion kuna (instead of a surplus, we will now have a deficit of 6.8 percent), and a sharp increase in public debt to over 86 percent of GDP, all achieved in just about 40 days. So far, Finance Minister Zdravko Marić has not reduced expenditures, which remain at 147 billion kuna, but the revenue side has been adjusted to 122 billion kuna due to the lack of economic activity, and thus no revenue in the state budget.

A little over a month of general quarantine has brought domestic finances to their knees, so much so that for the first time a rebalancing had to be done in the first half of the year, and a special phenomenon is the ‘negative VAT’, or the situation in which the state refunded more taxes than it collected during two weeks in April. Besides quantifying how much the closure of life has cost the state, the rebalancing reveals some other things. For instance, that salary increases for state and public servants have been removed from the new budget, as well as that there is simply no money left for the economy; moreover, there was not enough even for this round of aid, which is why the state will borrow at home and abroad. It is therefore expected that more or less all formal obstacles to the functioning of the economy will be removed by June 1, and with that any relevant further assistance to the economy without new rebalancing, although its necessity is certain as the return to ‘normal’ will be extremely slow, despite the best hopes at the beginning of the whole story in March.

Despite a strong public campaign for cutting expenditures through salary reductions in the public sector, the government has assessed that this would not be wise at this moment, but some reallocations have been made to partially compensate for lost revenues. No one disputes that the assistance provided to the economy so far has been generous given the possibilities of the Croatian budget, but the uncertainty related to the rest of the year makes it difficult to give a final judgment, as well as to adjust the expectations of the economy.

However, it is now very difficult to assess in which direction these new budget rearrangements during the year will go, especially whether and to what extent the state will be able to continue helping the economy recover from this severe shock. From what has been seen so far, it is clear that the state has no ‘creative’ or strategic approach to the budget, but rather a purely accounting one, so it will simply record the deficit caused by the quarantine and try to compensate for it with additional borrowing.

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The only good news is that Croatia has proven itself to be good at borrowing, so finding money should not be a problem, which Minister Marić also stated during the presentation of the rebalancing (most of the required 63 billion kuna has already been secured). If everything remains as it is in this budget, it means that the economy will actually be left to fend for itself from June onwards and will hardly be able to count on tangible state assistance. On the other hand, it is necessary to be realistic and acknowledge that there is simply no money and that the current state of Croatian finances is a true reflection of the cost of quarantine from which it is impossible to escape. Therefore, we can only hope that the worst is truly over and that some form of recovery follows.

You can read the entire analysis of the budget rebalancing in the digital and printed editions of Lider. 

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