Identifier
Created
Classification
Origin
06ZAGREB1459
2006-12-08 13:50:00
UNCLASSIFIED
Embassy Zagreb
how-toVZCZCXRO0336 RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ RUEHROV RUEHSR RUEHVK RUEHYG DE RUEHVB #1459/01 3421350 ZNR UUUUU ZZH R 081350Z DEC 06 FM AMEMBASSY ZAGREB TO RUEHC/SECSTATE WASHDC 7020 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 02 ZAGREB 001459
SIPDIS
SIPDIS
STATE FOR EUR/SCE BALIAN AND RIEHL
E.O. 12958: N/A
TAGS: ECON EFIN HR
SUBJECT: CROATIA'S 2007 BUDGET
UNCLAS SECTION 01 OF 02 ZAGREB 001459
SIPDIS
SIPDIS
STATE FOR EUR/SCE BALIAN AND RIEHL
E.O. 12958: N/A
TAGS: ECON EFIN HR
SUBJECT: CROATIA'S 2007 BUDGET
1. Summary: The Croatian parliament passed the Government's 2007
budget on December 1. The 108 billion kuna (USD 20 billion) budget,
representing 40 percent of estimated 2007 GDP, departs from previous
years in the distribution of resources to local governments. This
change, which will result in a budget cut for the city of Zagreb,
was the most controversial aspect of the package and billed by the
Government as decentralization. As is customary, the budget passed
with ruling-party votes and every opposition-proposed amendment
defeated. End Summary.
Deficit Down
--------------
2. Croatia's 2007 budget of 108 billion kuna (USD 20 billion) was
passed by the parliament on December 1. The budget is based on
projections of continued GDP growth, which the Government expects to
rise to 5 percent in 2007 from a projected 4.6 percent this year.
Spending levels will be 8.9 percent higher than in 2006, while
revenue is projected to grow by 9.1 percent. The resulting deficit,
including those incurred by local governments, is projected at 2.8
percent of GDP, down from 3.0 percent in 2006 and 6.2 percent in
2003.
3. Falling budget deficits are part of the Government's strategy to
align Croatia with the EU Maastricht Criteria, with a view to
bringing the country's heavily "euroized" economy into the Eurozone
as soon as possible following EU accession. The GOC has been able
to bring its deficits down in large part due to a combination of
sustained economic growth and a steady squeezing of the still
substantial gray economy, both of which have led to rising revenue
from the 22 percent valued added tax (VAT).
More for Regions; Less for Zagreb
--------------
4. The big news for 2007 was the change in the distribution of
revenue to local governments. In an effort to direct more resources
to municipalities, the Government changed the rules by which
corporate taxes are shared. Whereas previously part of corporate
tax revenue was apportioned on the basis of where companies were
headquartered (nearly all are based in Zagreb),the state will now
add these taxes to the general revenue. As a result, most
municipalities will see a rise in their budgets, with the exception
of Zagreb, which will lose nearly USD 100 million as a result, and
the city of Rovinj, in Istria, which also had a disproportionately
high share of revenue due to the fact that the national tobacco
company has its headquarters there.
5. Although some Zagreb politicians have cried foul over the
scheme, there is consensus in Croatia that the country is far too
centralized, with some commentators pointing out that Zagreb simply
replaced Belgrade after independence in appropriating the resources
of the regions.
Social Spending 75 Percent of Budget
--------------
6. Like many countries, Croatia's fixed entitlement spending leaves
little room for maneuver in the budget. The healthcare system
suffers chronic losses and the ratio of 1 pensioner to every 1.4
persons employed shows no signs of improving substantially in the
near-term. Spending for pensions, government salaries, healthcare
and other social spending together accounts for over 80 billion
kunas (USD 14.5 billion) or nearly 75 percent of the budget.
Defense Budget Up Slightly
--------------
7. The 2007 defense budget registers a modest increase over 2006,
both in nominal and real terms. The Ministry of Defense is set to
receive 4.5 billion kunas (USD 821 million),or about 1.66 percent
of projected 2007 GDP. Note: Anticipated repayment of the Russian
clearing debt could increase this figure, as well as debt payments
not accounted for in the MOD budget line.
Subsidies
--------------
8. In keeping with past practice, the budget is also laden with
subsidies, some being dispensed in anticipation of the impending
prohibition on such practices once Croatia joins the EU. Croatian
Railways is set to receive 1.5 billion kunas (USD 272 million),
agriculture 2.4 billion kunas (USD 436 million),with shipyards, the
national airline and others also taking their customary share.
Comment
--------------
9. Croatia has made solid progress in fiscal consolidation.
However, with the IMF on the way out and elections next year, the
Government will get the first real test of its sincerity. With ever
more optimistic assumptions about GDP growth, a slowdown could alter
outcomes dramatically. Furthermore, large parts of the Government's
operating revenue still come from privatization receipts. With
shares in many of the large and valuable firms already sold, the GOC
will need to get more control over its entitlement spending if it
ZAGREB 00001459 002 OF 002
hopes to eliminate its structural deficit.
BRADTKE
SIPDIS
SIPDIS
STATE FOR EUR/SCE BALIAN AND RIEHL
E.O. 12958: N/A
TAGS: ECON EFIN HR
SUBJECT: CROATIA'S 2007 BUDGET
1. Summary: The Croatian parliament passed the Government's 2007
budget on December 1. The 108 billion kuna (USD 20 billion) budget,
representing 40 percent of estimated 2007 GDP, departs from previous
years in the distribution of resources to local governments. This
change, which will result in a budget cut for the city of Zagreb,
was the most controversial aspect of the package and billed by the
Government as decentralization. As is customary, the budget passed
with ruling-party votes and every opposition-proposed amendment
defeated. End Summary.
Deficit Down
--------------
2. Croatia's 2007 budget of 108 billion kuna (USD 20 billion) was
passed by the parliament on December 1. The budget is based on
projections of continued GDP growth, which the Government expects to
rise to 5 percent in 2007 from a projected 4.6 percent this year.
Spending levels will be 8.9 percent higher than in 2006, while
revenue is projected to grow by 9.1 percent. The resulting deficit,
including those incurred by local governments, is projected at 2.8
percent of GDP, down from 3.0 percent in 2006 and 6.2 percent in
2003.
3. Falling budget deficits are part of the Government's strategy to
align Croatia with the EU Maastricht Criteria, with a view to
bringing the country's heavily "euroized" economy into the Eurozone
as soon as possible following EU accession. The GOC has been able
to bring its deficits down in large part due to a combination of
sustained economic growth and a steady squeezing of the still
substantial gray economy, both of which have led to rising revenue
from the 22 percent valued added tax (VAT).
More for Regions; Less for Zagreb
--------------
4. The big news for 2007 was the change in the distribution of
revenue to local governments. In an effort to direct more resources
to municipalities, the Government changed the rules by which
corporate taxes are shared. Whereas previously part of corporate
tax revenue was apportioned on the basis of where companies were
headquartered (nearly all are based in Zagreb),the state will now
add these taxes to the general revenue. As a result, most
municipalities will see a rise in their budgets, with the exception
of Zagreb, which will lose nearly USD 100 million as a result, and
the city of Rovinj, in Istria, which also had a disproportionately
high share of revenue due to the fact that the national tobacco
company has its headquarters there.
5. Although some Zagreb politicians have cried foul over the
scheme, there is consensus in Croatia that the country is far too
centralized, with some commentators pointing out that Zagreb simply
replaced Belgrade after independence in appropriating the resources
of the regions.
Social Spending 75 Percent of Budget
--------------
6. Like many countries, Croatia's fixed entitlement spending leaves
little room for maneuver in the budget. The healthcare system
suffers chronic losses and the ratio of 1 pensioner to every 1.4
persons employed shows no signs of improving substantially in the
near-term. Spending for pensions, government salaries, healthcare
and other social spending together accounts for over 80 billion
kunas (USD 14.5 billion) or nearly 75 percent of the budget.
Defense Budget Up Slightly
--------------
7. The 2007 defense budget registers a modest increase over 2006,
both in nominal and real terms. The Ministry of Defense is set to
receive 4.5 billion kunas (USD 821 million),or about 1.66 percent
of projected 2007 GDP. Note: Anticipated repayment of the Russian
clearing debt could increase this figure, as well as debt payments
not accounted for in the MOD budget line.
Subsidies
--------------
8. In keeping with past practice, the budget is also laden with
subsidies, some being dispensed in anticipation of the impending
prohibition on such practices once Croatia joins the EU. Croatian
Railways is set to receive 1.5 billion kunas (USD 272 million),
agriculture 2.4 billion kunas (USD 436 million),with shipyards, the
national airline and others also taking their customary share.
Comment
--------------
9. Croatia has made solid progress in fiscal consolidation.
However, with the IMF on the way out and elections next year, the
Government will get the first real test of its sincerity. With ever
more optimistic assumptions about GDP growth, a slowdown could alter
outcomes dramatically. Furthermore, large parts of the Government's
operating revenue still come from privatization receipts. With
shares in many of the large and valuable firms already sold, the GOC
will need to get more control over its entitlement spending if it
ZAGREB 00001459 002 OF 002
hopes to eliminate its structural deficit.
BRADTKE