Croatian government severely tightens budget belt

06/03/2012

Sharp budget cuts, salary reductions and mass layoffs demonstrate tough times for Croatians.

By Drazen Remikovic for Southeast European Times in Zagreb -- 06/03/12

Croatians face tough times ahead as food cost and VAT rate reach all-time highs. [Reuters]

The first effects of austerity measures in Croatia hit on March 1st when the government applied the higher VAT rate of 25%, an increase of 2%. Only Hungary and Iceland have a higher VAT in Europe.

Food prices also increased, and the price of oil and gas is going up 3% on Tuesday (March 6th), reaching record highs.

Minister of Finance Slavko Linic said the VAT increase may be painful, but necessary.

"It is important that citizens understand that the VAT increase will not be wasted on government and its administration, but to create jobs," Linic told reporters in Zagreb earlier this month.

A higher VAT rate is just one of the government-proposed saving measures for the 2012 state budget, adopted in February as "rational and realistic", but it caused countrywide discontent.

The Croatian state budget for 2012 is 14.6 billion euros, while the expenditures will amount to 15.5 billion euros, even with public sector wage cuts and layoffs. Fitch Ratings this week affirmed Croatia's credit rating at BBB-, the lowest investment grade, and gave it a negative outlook because of its budget deficit.

Darko Solic, 28, from Zagreb, said that the government's decision to save on wages and workers was expected.

"People certainly can't expect that politicians will cut their own salaries. We just need to accept that every saving measure will be directed against the citizens and the workers," Solic told SETimes.

Although the government announced savings of more than 660m euros, the amount was reduced to 440m euros. Economic analysts are not happy with the decision, saying that the government should commit to the savings all the way.

Sandra Svaljek, the director of the Zagreb Institute of Economics, said that the government's announcement of major investment in public enterprises is unrealistic.

"You cannot save from something that you do not have. The government also predicted a GDP growth rate to 0.8% for this year, but our analyses show that Croatia will have a negative GDP growth between 0.5 and 1.5%. Even when the savings are implemented, Croatia will continue with a high budget deficit," Svaljek told SETimes.

Many ministries received less money than last year. The Ministry of Agriculture received nearly 60m euros less, and the same amount is cut off from the state railways company budget.

The government announced layoffs from the railway company, and 180 workers received dismissals at the daily state-funded newspaper Vjesnik as the government decided to halt funding.

At the Social Council meeting in late February, Mladen Novosel, the president of the Croatian Workers Union, challenged the government representatives who announced savings of around 260m euros with public sector cuts, by reducing employee benefits, and layoffs of about 5,000 freelance workers.

"I asked the government representatives at the meeting if the 5,000 people in the public sector are a surplus, why were these people hired to work. I did not get a direct answer. In the last few years in Croatia, more than 100,000 lost their jobs in the industry," Novosel told SETimes.

The Croatian Employers' Association said the reduction in government state spending by 440m euros is surprising, and recalls the original plan of more than 700m euros in savings.

"We are definitely dissatisfied with the deadline for harmonisation of the new VAT rate. The period in which the government announced the raise in GDP till March 1st, the date when it's put to effect, is simply too short, and sends a negative message to potential investors in Croatia," the Association's spokesperson Ljiljana Hecimovic told SETimes.

Zlatko Tusak, Labour Party MP, said that the reactions to the new budget cuts are justified.

"The proposed budget caused many negative reactions, but if the savings are done in the right places, improvements will be visible in a few months. The rights of workers in Croatia, however, are right now far from the European average," Tusak told SETimes.

This content was commissioned for SETimes.com.