Croatian parliament approved the government’s 2016 budget on March 21, with 80 votes in favor versus 51 against.

Croatia’s new centre-right coalition government, which came into power in January following the November 2015 elections, managed to turn the first corner by receiving parliamentary approval for its draft budget. The coalition between the Patriotic Coalition (led by the Croatian Democratic Union, HDZ) and the newly-formed Most party holds only a slim majority, especially following the latter's loss of four MPs, and it is expected to face significant challenges in implementing a demanding reform agenda.

Croatia, which entered the European Commission (EC) excessive deficit procedure (EDP) in January 2014, has been trying to reduce the deficit for the last two years. The EC has recently said that it expects the Adriatic country to narrow its general government deficit to 3.9% of GDP in 2016 from 4.2% in 2015. The gap should further narrow to 3.2% of GDP in 2017.

Croatia is targeting this year a budget deficit of HRK7.5bn equivalent to 2.2% of GDP and a general budget deficit of HRK9.2bn equivalent to 2.7% of GDP when state agencies and municipal authorities are taken into account, according to the 2016 budget framework adopted by the government on February 25. The finance ministry expects the economy to expand by 2% this year. Consumer prices inflation is seen at 0.1% and the government also plans to reduce the jobless rate below 16% this year.

A Reuters poll of 11 analysts published on March 18 revealed a median GDP growth forecast of 1.5% for Croatia this year and 1.8% in 2017. Analysts’ median budget deficit to GDP forecast stood at 3.7% for 2016 and 3.1% for 2017, still above the EU’s ceiling of 3%. Data on the 2015 budget deficit has not yet been published, but it is expected to be around 4% of GDP, down from 5.6% of GDP in 2014, according to the International Monetary Fund (IMF). 

Budget revenues are planned at HRK114.9bn, representing 4.7% y/y increase compared to 2015, and expenditure at HRK122.4bn in 2016.

Croatian finance minister Zdravko Maric said on March 9 that the government plans to borrow from both domestic and international markets in April in order to cover the planned budget deficit. The government also expects privatisation revenues from the sale of 4,000 state-owned properties to cover the budget deficit this year, Maric said. The budget does not include a wage or pension cut and salaries will be increased by 0.5% per year of service, according to Maric.