VZCZCXRO2307
OO RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK
RUEHYG
DE RUEHVB #0448 2021058
ZNR UUUUU ZZH
O 211058Z JUL 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9411
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS ZAGREB 000448 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/SCE, TREASURY FOR INTERNATIONAL AFFAIRS LARRY 
NORTON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV HR
SUBJECT: CROATIAN GOVERNMENT ON SECOND BUDGET REVISION THIS 
YEAR: WE'RE REALLY SERIOUS NOW 
 
¶1.  (SBU) Summary: Prime Minister Kosor has made revising the 
deteriorating budget one of her top priorities.  The Croatian 
Sabor passed the government's second budget revision this 
year on Friday July 17, then immediately went into 
negotiations for its third.  The bill passed last week 
includes cuts amounting to roughly $150 million, far short of 
the estimated $2 billion the government needs to close the 
deficit.  The new government has promised a stern and serious 
approach to the budget mess, while continuing to protect 
vulnerable groups.  Public sector labor unions, which 
arguably won their battle with the government over wage cuts 
earlier this year, now find themselves on the defensive. End 
Summary. 
 
¶2.  (SBU)  In a vote of 82 to 41, the new budget passed the 
Sabor last Friday.  Dubbed "revision light" by the press, it 
shaves only $150 million off a more than $2 billion budget 
deficit.  The law cuts the "privileged pensions" held by 
retired MPs, cabinet ministers, and other senior government 
officials by 10 percent.  It also takes aim at certain 
education expenses such as free school textbooks and student 
transportation.  The budget passed with little fanfare or 
argument, compared to the loud and public fights in the 
spring, when the government proposed to cancel the generous 
annual raises promised to public sector employees. 
 
¶3.  (SBU)  The government hopes to hammer out yet another 
revised budget this week, hoping to trim the deficit by an 
additional $500 million.  With GDP projections continuing to 
slide - some forecasts now show the economy contracting 5 
percent this year - budget revenue continues to collapse 
faster than the government can negotiate new revisions.  The 
latest plan calls for 10 percent cuts in public sector 
salaries, including those in state-owned companies (notable 
examples include Croatia Airlines and the public utility 
HEP).  The new bill also would cut pensions across the board 
from 3 to 10 percent.  The government says (for now) it will 
leave the VAT rate at 22 percent. 
 
¶3.  (SBU)  The new negotiations have quickly put public 
sector unions on the defensive.  Much as they did in the 
spring budget battles, the unions have rejected the 
government's calls for cuts.  Surprisingly perhaps, Croatian 
war veterans, who are paid high pensions and who have long 
been a sacred cow in Croatian society, have already agreed to 
cuts in payments.  The Finance Minister has taken a more 
aggressive tone in this round, threatening that state coffers 
will be completely empty for salaries and pensions by 
September unless cuts are agreed.  Teachers unions have 
rejected what they call this "blackmail" and have threatened 
to go on strike in September when school starts.  The single 
member of the government's coalition representing the 
pensioners party (HSU) has threatened to leave the government 
if the budget passes with the cuts. 
 
¶4.  (SBU) Comment: The unions could claim to have won 
important concessions from the government in the spring 
budget - reinstatement of generous raises after GDP registers 
positive growth.  They may find it much more difficult to win 
their battles this time around.  The Director of the economic 
think tank Institute for Public Finance told us the 
government is reaping what it sowed, since it failed to enact 
many significant reforms during good economic times that 
would have reduced the size of the government and its 
expenditures.  The new Prime Minister is trying to present 
her government as tough and realistic about the budget, but 
many question whether it isn't already too late.  One of our 
other contacts put the situation more cynically by invoking 
an old Dalmatian expression, "The donkey only starts to swim 
when the water gets over its ears." 
WALKER