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Viewing cable 06ZAGREB1459, CROATIA'S 2007 BUDGET

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Reference ID Created Released Classification Origin
06ZAGREB1459 2006-12-08 13:50 2011-08-25 00:00 UNCLASSIFIED Embassy Zagreb
VZCZCXRO0336
RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #1459/01 3421350
ZNR UUUUU ZZH
R 081350Z DEC 06
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 7020
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 02 ZAGREB 001459 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/SCE BALIAN AND RIEHL 
 
E.O. 12958: N/A 
TAGS: ECON EFIN HR
SUBJECT: CROATIA'S 2007 BUDGET 
 
1. Summary: The Croatian parliament passed the Government's 2007 
budget on December 1. The 108 billion kuna (USD 20 billion) budget, 
representing 40 percent of estimated 2007 GDP, departs from previous 
years in the distribution of resources to local governments.  This 
change, which will result in a budget cut for the city of Zagreb, 
was the most controversial aspect of the package and billed by the 
Government as decentralization.  As is customary, the budget passed 
with ruling-party votes and every opposition-proposed amendment 
defeated. End Summary. 
 
Deficit Down 
------------ 
2.  Croatia's 2007 budget of 108 billion kuna (USD 20 billion) was 
passed by the parliament on December 1.  The budget is based on 
projections of continued GDP growth, which the Government expects to 
rise to 5 percent in 2007 from a projected 4.6 percent this year. 
Spending levels will be 8.9 percent higher than in 2006, while 
revenue is projected to grow by 9.1 percent.  The resulting deficit, 
including those incurred by local governments, is projected at 2.8 
percent of GDP, down from 3.0 percent in 2006 and 6.2 percent in 
2003. 
 
3.  Falling budget deficits are part of the Government's strategy to 
align Croatia with the EU Maastricht Criteria, with a view to 
bringing the country's heavily "euroized" economy into the Eurozone 
as soon as possible following EU accession.  The GOC has been able 
to bring its deficits down in large part due to a combination of 
sustained economic growth and a steady squeezing of the still 
substantial gray economy, both of which have led to rising revenue 
from the 22 percent valued added tax (VAT). 
 
More for Regions; Less for Zagreb 
--------------------------------- 
4.  The big news for 2007 was the change in the distribution of 
revenue to local governments.  In an effort to direct more resources 
to municipalities, the Government changed the rules by which 
corporate taxes are shared.  Whereas previously part of corporate 
tax revenue was apportioned on the basis of where companies were 
headquartered (nearly all are based in Zagreb), the state will now 
add these taxes to the general revenue.  As a result, most 
municipalities will see a rise in their budgets, with the exception 
of Zagreb, which will lose nearly USD 100 million as a result, and 
the city of Rovinj, in Istria, which also had a disproportionately 
high share of revenue due to the fact that the national tobacco 
company has its headquarters there. 
 
5.  Although some Zagreb politicians have cried foul over the 
scheme, there is consensus in Croatia that the country is far too 
centralized, with some commentators pointing out that Zagreb simply 
replaced Belgrade after independence in appropriating the resources 
of the regions. 
 
Social Spending 75 Percent of Budget 
------------------------------------ 
6.  Like many countries, Croatia's fixed entitlement spending leaves 
little room for maneuver in the budget.  The healthcare system 
suffers chronic losses and the ratio of 1 pensioner to every 1.4 
persons employed shows no signs of improving substantially in the 
near-term.  Spending for pensions, government salaries, healthcare 
and other social spending together accounts for over 80 billion 
kunas (USD 14.5 billion) or nearly 75 percent of the budget. 
 
Defense Budget Up Slightly 
-------------------------- 
7.  The 2007 defense budget registers a modest increase over 2006, 
both in nominal and real terms.  The Ministry of Defense is set to 
receive 4.5 billion kunas (USD 821 million), or about 1.66 percent 
of projected 2007 GDP.  Note: Anticipated repayment of the Russian 
clearing debt could increase this figure, as well as debt payments 
not accounted for in the MOD budget line. 
 
Subsidies 
--------- 
8.  In keeping with past practice, the budget is also laden with 
subsidies, some being dispensed in anticipation of the impending 
prohibition on such practices once Croatia joins the EU. Croatian 
Railways is set to receive 1.5 billion kunas (USD 272 million), 
agriculture 2.4 billion kunas (USD 436 million), with shipyards, the 
national airline and others also taking their customary share. 
 
Comment 
------- 
9.  Croatia has made solid progress in fiscal consolidation. 
However, with the IMF on the way out and elections next year, the 
Government will get the first real test of its sincerity.  With ever 
more optimistic assumptions about GDP growth, a slowdown could alter 
outcomes dramatically.  Furthermore, large parts of the Government's 
operating revenue still come from privatization receipts.  With 
shares in many of the large and valuable firms already sold, the GOC 
will need to get more control over its entitlement spending if it 
 
ZAGREB 00001459  002 OF 002 
 
 
hopes to eliminate its structural deficit. 
 
BRADTKE