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Cablegate: Goc Misses Goal of Balanced Budget with Projected

VZCZCXRO0953
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHVB #0874 3541523
ZNR UUUUU ZZH
P 191523Z DEC 08
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC PRIORITY 8872
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS ZAGREB 000874

SIPDIS

DEPT FOR EUR/ERA, TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON EFIN PGOV HR
SUBJECT: GOC MISSES GOAL OF BALANCED BUDGET WITH PROJECTED
2009 DEFICIT OF 0.88 PERCENT OF GDP

REF: ZAGREB 826

1. SUMMARY: The 2009 budget approved by the Croatian
parliament includes an approximate 4 percent increase in
spending to 127 billion HRK ($24 billion) and an approximate
5 percent increase in revenues to 124.6 billion HRK ($23.5
billion). The resulting deficit is projected to equal 0.88
percent of GDP. Although the government reduced the deficit
from its original proposal, adding any amount to the national
debt could prove problematic as the GOC faces more
difficulties accessing finance in the current economic
conditions. END SUMMARY.

2. On December 15, the Croatian parliament approved a 2009
budget of 127 billion HRK ($24 billion) in expenditures and
124.6 billion HRK ($23.5 billion) in revenues. These amounts
represent increases of just over 4 percent in spending and
about 5 percent in revenues from 2008 amounts. The budget
assumes 2 percent growth in GDP and a drop in inflation to
3.5 percent for 2009. The deficit is projected to equal 0.88
percent of GDP.

3. The draft budget the government submitted to parliament on
December 5 had a projected deficit of 1.6 percent of GDP,
despite PM Sanader's repeated earlier pronouncements that he
would propose a balanced budget for 2009 as a key measure to
help Croatia deal with the global economic crisis. He was
unable to do so, however, partially due to a failure to
convince government and state-enterprise employees to delay a
previously promised 6 percent pay increase in 2009 (reftel).
The president of the leading opposition party, the Social
Democrats (SDP), criticized the GoC's budget proposal as
"deeply inadequate" to address the financial crisis and said
the SDP would not "waste time" proposing amendments. The
World Bank publicly urged the GOC to reduce the proposed
deficit and some members of Sanader's advisory Economic
Council also raised concerns.

4. In an indirect response to the criticism, Sanader said his
ministers would propose amendments to further cut
expenditures and bring the deficit below 1 percent of GDP.
Most of this reduction was then taken from the Ministry of
Health, which was due to receive the largest increase in
spending (24 percent over 2008 expenditures) in the December
5 draft to implement a major healthcare reform. Nearly 90
percent of the additional cuts of 1.9 billion kuna came from
delaying expenditures under the healthcare reform program.

5. Despite the smaller projected deficit, concerns about the
approved budget remain. The chief economists from three
leading banks in Croatia told the press the government's
assumption of 2 percent growth in GDP is too optimistic.
Their forecasts range from 1.6 percent to below 1 percent.
The senior economist at the World Bank Croatia office also
told us the projected deficit is still too high given the
expected economic conditions for 2009 and negative credit
rating forecasts for Croatia.

6. COMMENT: Absent the global economic crisis, the 2009
budget deficit might have been considered a success for
bringing the deficit below 1 percent a year ahead of the
government's proposed deficit reduction schedule. As the
effects of the economic crisis make it difficult for the GOC
to finance its current debt, however, the prospect of adding
anything more to that debt in 2009 raises legitimate
concerns. Given the concerns that the 2 percent GDP growth
estimate may prove overly optimistic, however, the GOC will
struggle just to keep the deficit at the projected 0.88
percent of GDP, much less shrink it any further.
WALKER

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