Croatia eyes second 2014 budget revision as EU seeks additional deficit cut of EUR 170mn, or 0.4%/GDP

By bne IntelliNews April 4, 2014

The European Commission is not happy with the savings Croatia has made in the recent budget revision and is demanding the deficit to be cut further by HRK 1.3bn (EUR 170mn), or by an additional 0.4% of GDP, daily Vecernji List reported on April 4, quoting unnamed sources from the finance ministry.

Croatia already revised this year’s budget in March, cutting the deficit target to HRK 13.6bn (EUR 1.8bn), or 4.1% of GDP, from HRK 17.5bn, or 5.2% of GDP with a planned consolidated budget gap of 4.5% of GDP. Still, the revision meant the planned deficit was cut by only HRK 4bn and not by HRK 7.5bn as required under the EC’s excessive deficit procedure, which the country entered in January.

The report claims that even though the IMF approved the government’s policy of somewhat more moderate fiscal adjustment this year (that would accelerate next year), having in mind the already suffocated domestic demand, the EC remained at its previous stance that the structural deficit should be reduced by 2.3%/GDP this year and not just by 1.9%/GDP.

The source from the ministry says that the government will listen to Brussels’ demand for a 2.3%/GDP cut but will implement it within the existing institutional frameworks. It will not go for the new rebalance immediately but will design measures to limit the budget spending within the needed level. Zagreb should present its planned measures to the local public and the EU by April 30.

The report suggests that the second budget revision could take place already in June. The EC is about to review in May and June the adopted measures and plans of all member states, which are in excessive deficit procedures – and publish its opinion on each of the countries.

As part of Croatia’s excessive deficit procedure, the EC has recommended the country should gradually reduce the deficit to 2.7% of GDP in 2016.

In March, Croatia's Hypo Alpe-Adria-Bank's chief economist, Hrvoje Stojic, said that Croatia might have to revise again this year's budget by the end of June as the deficit could again reach almost 6% of GDP by mid-2014 due to a poor domestic demand and unplanned budgetary expenditures.

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