VZCZCXRO1080
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVB #0290/01 0931054
ZNR UUUUU ZZH
P 021054Z APR 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8798
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 ZAGREB 000290
SIPDIS
SIPDIS
SENSITIVE
DEPT FOR EUR/SCE AND EB; OSD FOR WINTERNITZ; NSC FOR BRAUN
E.O. 12958: N/A
TAGS: ECON EFIN PGOV HR
SUBJECT: CROATIA'S 2008 BUDGET: IN LINE, IF NOT INNOVATIVE
1. (U) SUMMARY: Croatia's 2008 budget represents a relatively
conservative and fiscally responsible approach, with
projected revenues set at 115.9 billion HRK ($24.7 billion)
and expenditures at 118.4 billion HRK ($25.2 billion). The
general government deficit is projected to be 2.3% of GDP.
The GoC prepared the budget with a stated focus on improving
the competitiveness of Croatia's economy, increasing
expenditures for rural and regional development and
stimulating entrepreneurship. The budget includes a 19.5%
increase in defense expenditures for a total of 5.4 billion
HRK ($1.1 billion), and is projected to be 1.8% of GDP for
2008 -- which is above the GoC's commitment to NATO in
January 2008 of 1.77% of GDP (and using NATO formula would be
2.2% of GDP). END SUMMARY.
2. (U) The Croatian parliament passed the 2008 budget on
March 5, with revenues planned at 115.9 billion HRK ($24.7
billion) and expenditures at 118.4 billion HRK ($25.2
billion). The government drafted the budget based on
projections of 4.5% GDP growth and an inflation rate of 5.2%
for 2008. With these assumptions, the Croatian Ministry of
Finance estimates the government deficit, including the state
budget, extra-budgetary funds and agencies, and local
government, will be 2.3% of GDP, down from 2.6% in 2007.
Expenditures are to increase by 6.4 billion HRK ($1.4
billion), with planned revenues up 7 billion HRK ($1.5
billion) from the 2007 budget. According to analysis by the
Institute of Public Finance in Zagreb, the revenue plan is
realistic, as it is in line with real GDP growth rates,
though it may underestimate revenues from excise taxes and
health care contributions.
3. (U) The budget maintains or increases funding for almost
all beneficiaries. Similar to previous years, about 50% of
the budget will go to social expenditures, 18% to wages, and
8% to material expenses. PM Sanader presented the budget to
parliament in February as a "development-oriented" budget,
saying it focused on improving the competitiveness of
Croatia's economy. Relative to 2007, expenditures aimed at
stimulating enterprise rise 26%, those for agriculture and
rural development increase 32%, and those for regional
development and capital investments rise 67% higher; although
none of the absolute sums are very impressive: spending for
all three categories combined is only around $1.5 million.
4. (U) The budget includes 5.4 billion HRK ($1.1 billion) in
defense expenditures, a 19.5% increase over 2007. Defense
expenditures constitute 4.3% of the budget and are expected
to constitute 1.8% of GDP. (NOTE: Using NATO formula, i.e.,
deducting unallowed expenses for fire-fighting and coast
guard, but adding allowed expenses for pension costs, the
Croatian defense budget for 2008 is actually 2.2% of GDP.
END NOTE.) About 70% of the increased funding in 2008 will
go toward operations and maintenance and modernization
projects. The other 30% will go toward salary increases.
According to the Ministry of Defense Budget Department, the
ministry will spend 472.2 million HRK ($100.5 million) on
procurement and modernization programs in 2008. The state
budget also provides the Ministry of Foreign Affairs 4.5
million HRK ($957,000) for NATO-related activities.
5. (U) The GoC will continue to provide substantial subsidies
to public and private entities in 2008. Subsidies to farmers,
craftsman, small and medium enterprises, and other companies,
will rise by over 10% and total more than $1 billion. The
budget also includes continued support for shipyards and
other entities through government guarantees planned at 7.4
billion HRK ($1.6 billion). For comparison, the GoC planned
for 4.9 billion HRK ($1.0 billion) in guarantees in the 2007
budget, but instead issued guarantees worth 13.6 billion HRK
($2.9 billion). (NOTE: Reducing subsidies to shipyards
represents a major political challenge, but is a key issues
the GoC must grapple with as it seeks to meet EU accession
criteria. END NOTE.)
6. (SBU) COMMENT: Prior to Croatia's November 2007 elections,
some politicians talked of 7% GDP growth for 2008. The
projection of 4.5% growth used to prepare the budget is
notably less optimistic, but also more realistic given
current economic conditions. To its credit, the GoC has
prepared a budget that anticipates the worsening economic
situation but stays within the deficit band it promised and
below the 3% of GDP limit required by the European Monetary
Union. Although the budget plans for increases in both
revenues and expenditures, it notably includes no significant
changes in the tax or fee systems and no major new programs,
despite the fact the government is at the start of a new
mandate. The budget drew little criticism for its dearth of
innovation, however, likely because it also includes few cuts
to programs and because it keeps the country on course to
ZAGREB 00000290 002 OF 002
achieving its primary goal: EU accession.
Bradtke