VZCZCXRO2455
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHVB #0173/01 0861553
ZNR UUUUU ZZH
P 271553Z MAR 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 9113
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 ZAGREB 000173 
 
SIPDIS 
 
DEPARTMENT FOR EUR/SCE, TREASURY FOR INTERNATIONAL AFFAIRS 
ERIC MEYER AND LARRY NORTON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB PGOV HR
SUBJECT: GOVERNMENT MOVES TO CUT SALARIES, UNIONS CRY FOUL 
 
¶1. SUMMARY: The GOC has proposed a budget revision showing a 
revenue drop of HRK 8 billion ($1.5 billion) and expenditure 
cuts of HRK 5.4 billion ($1 billion). The revision assumes a 
2 percent fall in GDP for 2009 and estimates a deficit of 1.6 
percent of GDP. The revision includes a 6 percent cut in 
civil service and other public sector wages, over which some 
unions are threatening to strike or sue. Most analysts, and 
even Ministry of Finance officials, believe further spending 
cuts will be needed. The GOC hopes, however, that this round 
of revisions will at least signal to global markets that 
Croatia can adequately manage its financial affairs prior to 
a bond issue expected in the next couple months. End summary. 
 
A Budget for Hard Times 
------------------------ 
 
¶2. On March 25, the GOC proposed to Parliament a budget 
revision cutting revenues by HRK 8 billion ($1.5 billion) and 
expenditures by HRK 5.4 billion ($1 billion). The revision 
assumes a 2 percent fall in GDP for 2009 and inflation of 2.6 
percent. The original budget, based on 2 percent GDP growth, 
estimated a general government deficit of 0.8 percent of GDP. 
The revised budget estimates a deficit of 1.6 percent of GDP. 
Falling receipts from the value-added tax are expected to 
account for about half of the drop in revenues. The proposed 
expenditure cuts fall across multiple areas, including 
material expenses, subsidies, and assistance abroad. The most 
controversial item is a 6 percent cut in civil service and 
other public sector wages, which would save an estimated HRK 
1.4 billion ($255 million). The Parliament expects to vote on 
the revised budget April 3. 
 
Unions Consulting on Strikes Versus Lawsuits 
-------------------------------------------- 
 
¶3. To avoid the controversy of a unilateral decision on wage 
cuts, the GOC tried, through several rounds of negotiations 
from March 13 to 23, to persuade the public sector unions to 
accept cancellation of the 6 percent raise given in January. 
The unions representing civil servants and police agreed to 
accept the 6 percent cut, with the condition that pay levels 
would be restored after two consecutive quarters of 2 percent 
GDP growth. Other unions representing different categories of 
public sector employees such as teachers and health care 
workers, refused to accept. According to the economic advisor 
for the Union of Autonomous Trade Unions of Croatia (SSSH), 
public sector wages have stagnated in 'recent years, even as 
the budget has grown faster than GDP. Thus, cuts should be 
made from other "plumper" areas of the budget. The advisor 
also told us, however, that these unions generally feel they 
can wield more power by striking than the civil service 
unions can, since they represent the critical sectors of 
healthcare and education. The press has reported several 
threats of strikes since the negotiations began. Now that the 
GOC has officially proposed the pay cut, our union contacts 
tell us they are consulting their members and considering the 
options for next steps, whether strikes, lawsuits or further 
negotiations. 
 
Legal Hocus Pocus to Enable Salary Cuts 
--------------------------------------- 
 
¶4. The government has found a legislative end-around to avoid 
canceling the collective bargaining agreement. The GOC has 
introduced a bill to allow it to regulate public salaries by 
special decree for two years, thus allowing them to 
unilaterally cut salaries without canceling the contract with 
unions. Supporters say this plan offers unions no recourse in 
the courts to challenge the cuts. According to press reports, 
the Parliament's Committee on the Constitution and Rules of 
Procedures supports the bill. Some opposition MPs, however, 
do not. Some, like the unions, argue the government has not 
yet done enough to save money in other areas, such as 
postponing construction of the Peljesac Bridge or cutting 
dividends and managers' high bonuses from state-run 
companies. The opposition also criticizes the GOC for trying 
to shift the political responsibility for the pay cuts to the 
Parliament. Some unions argue the bill violates the 
International Labor Organization convention on the right to 
organize and collective bargaining. 
 
Stay Tuned, More Budgets to Come 
-------------------------------- 
 
¶5. Regardless of the final outcome on salary cuts, most 
everyone believes the GOC will need to revise the budget 
again before the end of the year. Indeed, the minister of 
finance left that possibility open when he presented this set 
of revisions this week. According to the finance minister, 
 
ZAGREB 00000173  002 OF 002 
 
 
one key factor prompting the government to move ahead with 
revisions now, even if inadequate, is to signal to 
international markets that Croatia can adequately manage its 
own financial affairs. The government plans a 1-billion-euro 
bond issue in April or May to cover the deficit and service 
state debt.  Though many analysts think the government should 
have cut spending even further this time around, most say the 
proposed revisions do send a positive message to the 
financial markets. 
 
¶6. COMMENT: The Croatian budget is bloated, approaching 50 
percent of GDP. With this in mind, many feel the unions have 
a point in asking why the brunt of the pain should be borne 
by workers. There is probably much more legal maneuvering to 
be done, but the possibility of strikes is real. The 
government is trying to send international markets a message 
about their fiscal responsibility. Regardless of whether 
workers hit the streets, the government's inability to 
effectively convince the unions to pull in the same direction 
will send a mixed message to markets, at best. The government 
desperately needs to have a successful bond issue to cover 
its many obligations and avoid an IMF bailout. With revenue 
forecasts changing all the time, and the tourist season in 
doubt, the latest drama is likely only Act II in a much 
longer budget crisis. 
BRADTKE