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