Croatia: Austerity programme to avoid downgrade

New financial law under discussion in Parliament

20 February, 18:46

(ANSAmed) - ZAGREB, FEBRUARY 20 - The most important austerity measures that will be introduced by the new Croatian centre-left government include a VAT increase from 23 to 25%, an adjustment of tax rates that should favour the middle class at the expense of the wealthy, a tax on dividend payments, dismissals in the public sector, new privatisations and less subsidy to agriculture and the economy in general. The new government has been in office for two months. The new measures will be introduced on March 1, aiming to reduce the public deficit form 4.4% in 2011 to 2.8%, stabilising public finances. Another goal is to prevent the downgrade of Croatia's sovereign debt to junk status. It is the first time in ten year that Croatia will try to spend less than in the previous year. In fact, the financial law that is discussed today in the Croatian parliament includes a total expenditure of 15.7 billion euros in 2012, 610 million less than in 2011. Revenues are expected to reach 14.5 billion, making a deficit of 1.2 billion.

''Croatia is no poor country, but we must change our economic policies in order to maintain our standard of living,'' Prime Minister Zoran Milanovic said today in parliament. ''Our goal is to continue our economic sovereignty so that we will not have to ask others for help, because only when you control your own cash you are really independent,'' the Premier explained. His remarks are a reference to the criticism that the austerity measures are dictated by the international rating agencies, which are waiting to assess the impact of the move on the general economy, before revising the status of Croatia's sovereign debt. This debt is currently rated at BBB-, one point above junk status. A downgrade would made foreign loans necessary to cover Croatia's debt extremely expensive, and could lead to much more drastic cuts. The package the government proposes does not include mass layoffs in the public sector, but the termination of temporary contracts. This measure regards around four thousand people on a total of 200 thousand public sector workers. Base salaries will stay on the same level, but some benefits will be cuts like the thirteenth's month salary, night hours and overtime pay. Two or three national holidays may be cancelled. At the moment it is unclear what the government plans to do to revive economic growth, estimated at 0.8% in 2012 after the 0.4% booked in 2011, following three consecutive years of decline. The World Bank on the other hand estimates that the country's GDP will fall by 1% in 2012. The package of fiscal reforms foresees in a 12% tax on dividend payments of 1600 euros and higher, the abolition of any tax on reinvested capital and a 2% decrease of health insurance tax for employees. More public investments in the real economy have been announced, without details, while the sharp decrease of VAT in the tourism sector that was promised in the electoral campaign has been postponed to next year. Moreover, the Croatian wants to privatise the last two state-controlled financial companies this year: insurance company Croatia osiguranje and Postanska banka, together worth around 270 million euros. The government will keep a 25% stake in the two companies, but experts have criticised this decision, saying that the State is giving up all its influence in the national financial system, handing it over to the European banks that are already exposed to the euro crisis risk in this period.


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