In the latest issue of Lider, in an interview yet to be published, analyst Neven Vidaković warns that the debts of countries (including EU members) are a key problem that states, and even the European central authority, do not pay enough attention to. However, to signal an alarm, the European Commission recently reactivated the validity of the Maastricht criteria, which were first suspended due to the pandemic and further extended due to the Russia-Ukraine war.
Thus, considering that from the beginning of 2024 the Maastricht criteria will again apply (budget deficit up to three percent of GDP and public debt up to 60 percent of GDP), the Commission announced in its guidelines to member states within the spring package of the European semester 2024 the opening of excessive budget deficit procedures for seven members, namely Belgium, France, Italy, Hungary, Malta, Poland, and Slovakia. Although the renewed rules are somewhat relaxed, the EU is constantly teetering between recession and stagnation, so the new pact on stability and growth is somewhat more flexible and less demanding, as a sudden reduction in the deficit and public debt (if and when feasible) could jeopardize the already meager economic growth (the estimate for this year is one percent in the EU and 0.8 percent in the eurozone).
According to the relaxed rules, member states with high public debt (above 90 percent of GDP) will reduce it by a tolerable one percentage point per year, while those with moderate debt (between 60 and 90 percent of GDP) will reduce it by half a percentage point. Croatia’s budget performance has been solid for some time, so there has been no need for that. Therefore, the meeting of Deputy Prime Minister and Minister of Finance Marko Primorac with representatives of all ministries, from which he is requesting a linear cut in expenditures of ten percent, is indeed a surprise.
Or not, depending on how we look at the whole thing. Because, although we are growing faster than the rest of the EU, we are (too) quickly expanding the budget deficit and public debt, and this after we had record speed in pushing them almost into the prescribed criteria (in 2020, public debt was 86.1 percent, in 2021 it was 77.5 percent, in 2022 it was 67.8 percent, and last year it was 63 percent, while the budget deficit shrank from 2.5 percent of GDP in 2020 to 0.7 percent last year, but that was also an increase after we had a surplus of 0.1 percent of GDP in 2022). The minister clearly sees the trend. Namely, this year’s budget is tailored with expectations of revenue growth of 800 million euros, but also an increase in expenditures of 3.3 billion euros (even 11.3 percent more), which has pushed the planned deficit in the central budget over the threshold of 4 billion euros or – it has jumped two and a half times more than last year. The government expected economic growth (albeit lower than current performance, it expected 2.8 percent, then revised it to 3.5 percent), along with a decrease in inflation and yet another record season.
However, it seems that the effect of wage growth for more than 240,000 public employees, who become the main scissors of the gap, was poorly accounted for. That it really needs to be braked and that the minister is indeed well aware of the trend is shown by the discrepancy between the growth of consumption and the decline in exports, which, along with rising wages, is not entirely sustainable in the long run (although modern trends show that classical economic postulates are becoming less and less valid in a globalized society).
Interplay of Wages, Consumption, and Growth
Namely, growth is driven by two components of domestic demand – personal consumption (8.4 percent) and investments (driven by inflows from EU funds at a net level of 3.5 percent of GDP annually). The growth of personal consumption is five times higher than the Union average, as it soars on the wings of simultaneous wage growth and easing inflation. However, the largest wage increase in history, 1.63 billion euros, stands out against the fact that our total exports are falling. The growth of wages, consumption, and investments shows that the state is again playing the main role as a generator of growth, but stable medium-term growth depends primarily on the recovery of total exports (primarily goods), which has little to do with EU funds but primarily with the private sector and the recovery of major export markets, Germany and Austria (and Italy, but it has its own, not just budgetary problems). Data shows how much weaker exports are – revenues from private sector sales (consumption) grew by 14.5 percent last year while export revenues increased by only 4.5 percent (in addition, the net margin of non-exporters is 6.1 percent while that of exporters is at 5.1 percent).
Minister Primorac, in his forecasts, which he had to submit to the Commission, committed to a consolidated general government deficit of 2.6 percent and public debt at the level of 59.2 percent, thus within the Maastricht limits, and with rising wages and reading data on industrial production trends (the manufacturing industry recorded a real decline in gross added value of 1.5 percent), it was not difficult for him to conclude that the promised figures are threatened. After all, although it is falling, inflation will not drop to desired levels as long as wages and personal consumption are rising rapidly (along with a simultaneous decline in exports).
Although some economists do not see a problem in growth driven by consumption, others are somewhat concerned about it, and overall, few are grasping their heads over the structure of growth. We have caught a good wave and are quickly catching up to the EU average (in two mandates from 62 to 76 percent), which could once perhaps slow down the wave of emigration. A decline in wages certainly will not, so a reduction in the wage growth rate does not seem likely (a milder growth rate already is), so the minister is forced to seek savings in some other items. Since those other items are minor compared to wages, and a 10 percent cut is not insignificant, the interplay of wages, consumption, and growth will have to be stopped at some point. At the beginning of the mandate, that may not be entirely impossible.
