VZCZCXRO6569
PP RUEHIK
DE RUEHVB #0710/01 3371453
ZNR UUUUU ZZH
P 031453Z DEC 09
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 9701
INFO RUCNMUC/EU CANDIDATE STATES COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 ZAGREB 000710 
 
SIPDIS 
SENSITIVE 
 
EUR/SCE FOR CATHERINE WESTLEY, TREASURY FOR INTERNATIONAL 
AFFAIRS LARRY NORTON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV HR
SUBJECT: CROATIA'S 2010 BUDGET; FAILS TO ADDRESS NEEDED 
 
REFORMS 
 
REF: ZAGREB 665 
 
ZAGREB 00000710  001.2 OF 002 
 
 
 ¶1. (U) SUMMARY: The Croatian parliament passed PM Kosor's 
proposed $25.3 billion 2010 budget draft December 2, with all 
coalition parties voting in favor.  Increased spending for 
social payments and the public sector comprise the majority 
of the budget with cuts in Defense, Foreign Affairs and other 
line ministries.  The budget assumes low but positive GDP 
growth and rising VAT revenues next year, which, if accurate, 
will result in a budget deficit of 2.5 percent of GDP. 
Political opposition parties and most of Croatia's 
presidential candidates wasted no time in leveling criticism 
against PM Kosor for increased spending without substantive 
fiscal reform.  Despite this criticism, the ruling HDZ party 
and its coalition partners defended the budget draft. The 
response from prominent economists has been skepticism of the 
government's optimistic GDP growth and revenue assumptions 
and exasperation over the lack of serious reform efforts. END 
SUMMARY 
 
THE NUMBERS 
 
¶2. (SBU)  The GoC submitted its 2010 budget proposal to the 
Sabor November 21, with $25.3 billion in expenditures and 
anticipated revenues of $23.5 billion, resulting in a deficit 
of 2.5 percent of GDP.  Social payments, pensions, and public 
sector salaries account for approximately 87 percent of the 
total budget. (Note: Both expenditures for salaries and 
pension payments increased 1.7 percent compared to 2009, and 
the overall 2010 budget is 1.5 percent higher than the 2009 
budget).  The GoC will spend 23 percent less on Defense 
expenditures in 2010 than in 2009, with minor cuts for 
Ministries of Foreign Affairs and Culture. The Croatian Sabor 
passed the budget draft December 2, with coalition parties in 
favor and the opposition against. 
 
¶3. (SBU) The 2010 budget assumes GDP growth in 2010 of 0.5 
percent.  Finance Minister Suker explained that although 
revenues from business profit taxes and income taxes are 
lower overall, there has recently been an 11 percent increase 
in revenue from the value-added tax. The new budget relies 
heavily on the increased VAT for its revenue projections. The 
GoC raised the VAT to 23%, one of the highest in Europe, in 
July 2009, imposing an additional "crisis" income tax 
supplement at the same time.  Additional funds to finance the 
deficit have been raised through a successful bond sale to 
European and U.S. investors this fall.  The government has 
announced that the increased VAT and "crisis" income tax 
levied this summer will remain in place for the foreseeable 
future. 
 
¶4. (SBU) The GoC also forwarded to the Sabor budget 
projections for the next two years and a draft law on the 
execution of the budget, which would authorize the GoC to 
borrow $6 billion in 2010 in order to finance due liabilities 
and the deficit. 
 
POLITICAL OPPONENTS SCORE POINTS 
 
¶5. (SBU) PM Kosor's critics in the opposition wasted no time 
criticizing the proposed budget. Opposition deputies raised 
strong concerns about Croatia's growing indebtedness, rising 
interest rates and also criticized Kosor for unfulfilled 
pledges of fiscal reform.  Social Democratic Party (SDP) 
parliamentarians were the loudest critics, arguing for deeper 
fiscal reforms, including attrition of as much as one-third 
of government employees.  The ruling Croatian Democratic 
Union (HDZ) and its coalition partners, however, closed ranks 
and defended the budget. In the midst of an on going 
presidential election, several of Croatia's presidential 
candidates also took the opportunity to score media points 
and criticized PM Kosor's leadership.  Despite the loud and 
well-publicized criticism, none of the opposition parties, 
nor their presidential candidates, offered any specific 
alternative policy recommendations. 
 
¶6. (SBU) Many prominent economists and financial analysts 
with private banks have expressed frustration with the 2010 
budget.  Unicredit bank's chief economist in Zagreb, Goran 
Saravanja, told us that the budget is no surprise and that 
there is no appetite to announce radical budget cuts in a 
presidential election season.  Other prominent economists 
quoted in the media tend to agree.  The general consensus is 
that Suker's optimistic revenue predictions for 2010 are 
unrealistic because of growing unemployment and weaker 
 
ZAGREB 00000710  002.2 OF 002 
 
 
consumer spending.  Several economists and opposition figures 
noted that, assuming revenue and spending forecasts are 
optimistic, a budget revision was likely to be needed as 
early as the first half of 2010. 
 
COMMENT 
 
¶7. (SBU) The 2010 budget reflects the political reality in 
Croatia, even at the expense of the fiscal one.  The 
government and the ruling HDZ party simply do not have the 
political will at this time to make needed reforms and cuts 
in Croatia's public and social sector.  Although political 
opponents have called the GoC out on this, there are no 
concrete proposals from the SDP or any other political 
parties for a realistic solution. Katarina Ott, the Director 
of the think tank Institute for Public Finance, put the 
necessary budget reforms in succinct terms at a conference 
last week: privileged pensions (such as those for war 
veterans) should end, the retirement-eligibility age should 
be raised from the current 49, younger pensioners should 
return to the labor market, and administration costs must be 
cut severely. Kosor and her new economic team understand that 
endless deficits and increased indebtedness cannot be 
sustained in the long run but there are no indicators to 
suggest that the GoC is going to adopt meaningful fiscal 
reform any time soon.  Any chance that this anti-reform 
calculus could change will only come after the looming 
presidential elections on December 27 and January 10 are 
complete. 
FOLEY