CROATIAN GOVERNMENT ON SECOND BUDGET REVISION THIS

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