GOVERNMENT MOVES TO CUT SALARIES, UNIONS CRY FOUL

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