More than 100,000 companies and individuals collectively owe 6.6 billion euros in taxes in Croatia.
By Drazen Remikovic for Southeast European Times in Zagreb -- 10/08/12
Croatian Finance Minister Slavko Linic recently told the media that the country's economy is in a state of emergency, provoking a strong public reaction.
"We have a large economic downturn, huge illiquidity, high unemployment and unpaid wages. What else should we call such a situation but an emergency?" Linic said in an interview with the Croatian weekly Globus.
Economists said the state has done very little to improve the situation, while the ruling Social Democrats (SDP) are hoping that IMF assistance can be avoided.
The public reaction was further sparked when a list of delinquent taxpayers was published. More than 100,000 companies and individuals owe 6.6 billion euros in taxes.
The five largest debtors, including the public service broadcaster Croatian Radio Television, are running tax debt of up to 135 million euros.
"From January 2013, Croatia will introduce fiscal cash registers to improve tax collection, that is, receipts for goods and services would be automatically sent to tax authorities. Croatia would not need an IMF deal to help it pursue reforms and fiscal consolidation. However, if the country is downgraded, such a deal could become a serious option," Linic told SETimes.
The government introduced austerity measures on March 1st when the higher VAT rate of 25 percent was applied, a 2 percent increase. Only Hungary and Iceland have a higher VAT in Europe.
The Croatian state budget for 2012 is 14.6 billion euros, and expenditures will amount to 15.5 billion euros, with public sector wage cuts and layoffs.
In March, Fitch Ratings confirmed Croatia's BBB- rating, the lowest investment grade, with a negative outlook due to a budget deficit.
Sandra Svaljek, director of the Economics Institute in Zagreb, said that current analyses do not show signs of recovery.
"Industrial production for the first five months declined by 6 percent compared to the same period last year. All components have a negative economic trend, and this year's economic growth is expected to decline by 1.3 percent. The government should start charging taxes to improve liquidity. The economy must operate easier, reducing the number of permits, work procedures, bureaucracy, to encourage investors," Svaljek told SETimes.
Velimir Sonje, professor at the economy faculty at the University of Zagreb and director of the consulting firm Arhivaanalitika, said that the government decided to call on the IMF if Croatia's credit rating declines by the year's end.
"You don't need to call the IMF when all is lost, but call for help to rescue the economy in time. The situation is exactly as Linic described it. The state was supposed to make an arrangement with the IMF two years ago, to improve the situation and overall rating. The government is only postponing the decision which is the only possible solution for economic problems," Sonje told SETimes.
At the Social Council meeting in February, government representatives announced it will cut public sector expenses by 260 million euros by reducing employee benefits and laying off about 5,000 freelancers. The Union workers said that in the past few years more than 100,000 people lost their jobs in the industry.
The government plans to complete the privatisation of the Croatian Post Bank and a leading insurance company Croatia Osiguranje by the end of the year, in an effort to bolster the budget.
The government will also try to improve the country's business climate by passing new laws and regulations on financial transactions in autumn, and raise investment by a billion euros more in 2013, mostly in the energy sector.
Mladen Novosel, president of the Croatian Workers Union, said that the government has done very little to solve the problem.
"The ruling party knew about all economic problems a year ago when they made campaign promises. Yet, they did nothing. The fact that 15,000 workers don't receive a salary, for years is shocking. Joining the EU will not solve anything. Brussels will not solve our inner problems," Novosel told SETimes.