Profligacy Before Elections Comes Due, Budget Expenditures Exceed Revenues

Before the elections, the most widespread mantra of the ruling party was that there was money. The budget was well filled due to inflation, so the government was generous during the election campaign. Suddenly, there was money for record increases for public and state employees, for aligning pensions with wage growth and inflation, as well as for inclusive benefits and a larger number of child allowance recipients.

As Velimir Šonje points out in his analysis on the Arhivanalitika portal, the cry ‘There is money!’ particularly stands out during periods of heightened inflation. At that time, the rise in prices and wages nominally fills the budget better. There is indeed more money then, much more than when inflation is low.

Fiscal Crisis?

– Every period in which inflation ‘pushes’ relatively more money towards the state treasury can be divided into three parts. In the first, inflation surprises everyone; public revenues increase faster than public expenditures, and the fiscal balance improves. In the second, there are no more surprises; everyone realizes that ‘There is money!’ and demands begin, and expenditures catch up with revenues. In the third part, the process turns; inflation calms down, public revenues no longer grow at the pace they did before, but the contenders for increased public expenditures live in the past. They think that there is still ‘There is money!’. Expenditures then grow faster than revenues, and the fiscal balance deteriorates. If the third phase lasts too long and is very pronounced, it can lead to a fiscal crisis – wrote economist Šonje back in February.

Inflation increases tax revenues and creates the perception that Croatia is being well managed because we are fiscally doing excellently, thus creating the impression that we have enough resources for increased public spending, which can disrupt the overall management of fiscal policy, which then reacts in the only reasonable way – seeking savings. Plenković’s government entered 2024 with a budget of 32.6 billion euros, which is supposedly to be cut by 1.5 billion euros, as first reported by Jutarnji list, and Finance Minister Marko Primorac tried to explain yesterday why the situation requires ‘patching’.

Well Renewed

– We have increased salaries for the public and state sector, pensions, social benefits, and costs for reconstruction from the earthquake have also increased; it seems we have been renewing well – Primorac repeated several times, convincingly or not, and tried to downplay the problem of the budget hole.

If we are to believe the data on budget revenues and expenditures for the first three months of this year, which are published on the Ministry of Finance’s website, budget expenditures are growing at much higher rates than revenues, especially expenditures for employees. Total budget revenues increased by 12.9 percent compared to the first quarter of last year, while expenditures increased by as much as 21.6 percent. The cost for employees is higher by as much as 37 percent, although this data does not include the salary increases for the public and state sector that officially began disbursement in April.

And if you ask Primorac, all of this is normal and patching holes and deficits, so he calms the public yesterday by stating that Croatia will maintain a deficit of 2.6 percent of GDP, although he does not want to clearly and precisely reveal how much money needs to be redistributed to avoid breaching that limit.

We are not in a banana – yet

– It is not about reducing expenditures by 10 percent per ministry – that is the only thing he confirmed, and when asked by a colleague if we are in a banana, he just smiled and said,’of course we are not’. However, if we continue to be profligate, the situation could spiral out of control. This means that certain expenditures could be reconsidered, and in this context, it is worth recalling that one public service already had to forgo a raise because a financial crisis began. That was also the time when the aforementioned tropical fruit was last mentioned, during Ivo Sanader’s rule. Croatia was not ready for what followed then; today, the situation is somewhat different. The question is only how much.