The dramatic revelation, which appeared coincidentally or not only after the internal party elections in HDZ, that the government is working on reducing budget expenditures this year by a significant €1.56 billion, caused me both concern and relief. Concern because such a revision carries the danger of a domino effect on the real sector of the economy. And relief because the thought that I should go back to my economics faculty and return my diploma will no longer arise.
First, about returning the diploma. Although it was obtained in the last decade of socialism, at least 80 percent of the material was based on fundamental market economic laws. These are still taught today in economics faculties. From economics to market theory and pricing.
In recent years, both globally and locally, it seems that these fundamental laws, starting with those about economic cycles, no longer apply. The world should have long ago gone through a phase recession. However, global money printing and record levels of public debt are not punished. As if anything is possible. Looking at the situation in Croatia, imbalances have accumulated again that should have been corrected by a recession. But the influx of money from EU funds, the plundering of tourism, and raising salaries in the public sector, along with unresolved issues in the pension and health systems, have created the illusion that an economic perpetuum mobile has been invented.
The warning from the Ministry of Finance and the announcement of budget cuts are, however, proof that old economic laws still apply. So, there is no need to return the diploma (it seems it cannot even be revoked if ten years have passed since its issuance). Bills are coming due. The wind stops blowing, and turkeys are finding it harder to fly.
Suicidal Salary Increases
Now about the announcement of the revision. It is evident that the impetus for it was the financially suicidal increase in salaries in the public and state sectors before the parliamentary elections. This decision was consciously made by Andrej Plenković, without a doubt. Politicians in power are on the market once every four years (parliamentary elections). Maximizing votes at those moments has no price. Today, when the Prime Minister has routinely pacified the team from the Homeland Movement, it may seem that he was irrationally panicking and that he should not have bought votes with such salary increases. But let’s be honest, before the elections, it seemed that the far-right would receive many more votes and that the part of HDZ aligned with it would take the scepter from Plenković. At that time, even many who are not voters of the far-right might have found the price of €1.63 billion in increased budget expenditures acceptable, just to avoid worse outcomes.
—
—
The bills for HDZ’s electoral victory are now coming due. Primarily to the real sector of the national economy. The business community, at least its unprotected party part, will pay for playing with the state budget twice. The first payment is already underway. Unfair salary increases in the public sector have forced the private sector to raise salaries as much as it can. This was not only at the expense of profits that owners might otherwise have distributed. They had to reduce investments in research, development, and investments.
The second payment for the business community will come in the form of reduced state orders. It should be acknowledged that the consequences here are not black and white. Demand for some construction work in infrastructure will decrease. But given that the construction sector is already overloaded with orders, this reduction should not bring it to its knees. And opponents of importing foreign workers might get their way, as demand for Nepalese workers will subside. Meanwhile, since a large part of the work on state-funded infrastructure projects is reserved for entrepreneurs with party backing, it will be interesting to see whom responsible ministers will have to tell to be patient, and which party entrepreneurs will remain in greater favor.
‘Shooting in the Foot’
One can only hope that this stumble of the state budget will not coincide with the outbreak of a global financial pandemic. In recent years, strengthening resilience has been a mandatory part of communication from the Ban’s Court. It is true that state finances looked sustainable and that it was nice to follow the rise in credit ratings. However, the foundations have not been solidified. Once again, we have easily come close to the dangerous limit of a budget deficit of three percent. The neglect of the export industrial sector, which has struggled without assistance, will also come due. Now, exhausted commodity exporters will again be asked to pull chestnuts out of the fire.
It should be noted that the announcement by Finance Minister Marko Primorac about reducing state expenditures came at the beginning of the new government’s mandate. According to crisis management rules, tough measures are taken at the beginning. However, even if this year’s operation succeeds, Plenković risks being remembered at the end of his three mandates not for the transition to the euro and entry into the Schengen area, but for ‘shooting in the foot’ with drastic and difficult-to-correct salary increases of €1.63 billion for the public and state sectors.
