How to Finance the Budget?

AIM Zagreb, June 14, 2001

State TV covered the entire incident in its prime time news. Premier Ivica Racan, at a cabinet session, at first tried to interrupt Finance Minister Mate Crkvenac, but when the latter went on speaking, Racan sternly yelled at him, as if dealing with an unruly child. That's enough! There should be some order here! Only then did Crkvenac realize that he had gone too far, and kept his mouth shut until the session was closed. This put an end not only to his speech but to a debate on the status of the state treasury as well.

What exactly frightened the premier? When he was crudely silenced, the finance minister was speaking of possibilities for stabilizing the state budget which in the first five months of 2001 alone was over DM5 billion short. Crkvenac would have certainly begun by announcing cuts in spending on the army and police. The government, however, is already deeply at odds with state and public servants' trade unions, having decided to reduce their salaries by 10 percent. Since it is rumored that some 20,000 defense and interior ministry employees will be fired, many veterans associations began protesting saying it was a stab in the back to their members. Promises that no one will be left without government assistance failed to alleviate the situation. Certain political analysts, therefore, believe that Ivica Racan silenced his minister to avoid provoking yet another serious confrontation with a structure that is strong, influential, and armed.

Others, however, warn that Racan himself is increasingly relying on the rightist forces in Croatia's political life; that he, much like Tudjman before him, is calling for unity of the nation, announcing that memorials to the War for the Fatherland will be built, and that he even attended the service held by Zagreb Archbishop Josip Bozanic on Croatia's national holiday. If that was indeed so, a straining of relations with the rightist forces -- firmly entrenched in the army and the Defense Ministry -- is the last thing he needs. The government has even announced that compulsory military service would be abolished in favor of a professional army, which should have served as a message that despite the need to adjust to NATO standards, professionals currently serving in the army will not be let go en masse.

Before coming to power in elections on Jan. 3, all the parties of the ruling coalition promised budget cuts in excess of DM2 billion. The ministries of defense and the interior were first on the list. The plan became a part of the coalition government program. Later, however, it turned out that the new government was talking a lot without actually doing anything. Political analysts interpret this as due to the coalition's disunity, but also to the overly cautious policy of the Racan Social Democratic Party (SDP), which mostly absolved the sins of its predecessors and continued to finance the numerous clients created by the Croatian Democratic Union (HDZ) over the years. This persisted despite the fact that huge spending was one of the biggest reasons for the collapse of the conomic policies of the Tudjman party and its defeat at the polls.

During the Croatian Democratic Union era, the budget persistently grew by one-fifth each successive year. Thus from DM6.25 billion in 1994, the first year after the huge inflation was curbed, it reached DM13.3 billion in 1999. The GDP grew much slower, and is still 20 percent below the 1990 level. Industrial output is 37 percent less than in 1990, and exports are less than in 1993, when the war was still in progress. Budget revenues, therefore, did not come from taxpayers' pockets. This is why the Croatian Democratic Union increasingly borrowed abroad, leaving, after its defeat, a per capita debt of over US$2,000. At the time of the greatest debt crisis in the former Yugoslav federation at the beginning of the 1980s, each citizen owed on average about half of that.

During its last year in power when foreign loans dried up because of undeclared, so-called silent sanctions introduced by the international community against the Tudjman regime, Tudjman attempted to obtain money by selling banks and former state-owned companies. He sold Telekom as well, but that did not suffice. The new government inherited an empty treasury and enormous debts. Still, it did not truly attempt to radically deal with its predecessor's spending. Since the budget is not only money, but primarily the policies its serves to finance, this means that the former ruling party's policies are mostly alive and well. Pensions and social benefits were increased and aid sent to Bosnia and Herzegovina was reduced. But the channels through which the militarization of Croatia and the squandrous state established by the Croatian Democratic Union is funded are still operating. In the end, this year's budget will again reach DM13.3 billion.

Yet money is severely lacking, much as was the case in the Croatian Democratic Union era. The ruling coalition recently realized this cruel fact. Its bosses, at a meeting behind closed doors, were informed of these extremely disturbing figures. For three months in a row the budget deficit has been going up as well as the deficit in the pension and health insurance fund, the foreign debt increased by another one billion dollars, and the state borrowed DM1.5 billion from local banks. This, however, was not enough to cover all expenditure.

It is interesting to note that the budget gave in at the same point where it collapsed in the last year of the Croatian Democratic Union's rule: there is no money in selling national property to foreigners. DM2.2 billion was expected to arrive, but less than 40 percent was actually obtained. The government wants to sell a part of Telekom, three banks that have not yet been sold to foreigners (Dubrovacka, Postanska and Croatia), the Croatia Insurance Company founded 120 years ago, a number of travel agencies, the INA oil industry and the Elektroprivreda power company. But things are not going as planned.

In the past year the Racan government has tried to work a miracle -- to ease the pressure on the economy without reducing the budget. To attain this, it resorted to a tax system reform and announced decentralization, meaning that units of local self-government were expected to foot most of the health care and education bills. Both measures aimed, in fact, at taking from the people what the budget was expected to lose in corporate tax revenues. Now it is believed that the reform has failed and that the hasty decentralization will have to be postponed. All this resulted in a budget deficit equaling the taxes companies were relieved of.

The government is under pressure from the International Monetary Fund to make good on its obligation to reduce the budget deficit to only 3 percent by the end of the year 2002. Last year the deficit was 6.5 percent, compared to 7.3 percent in 1999, when the Croatian Democratic Union was still in power. Now it is once more growing, instead of going down, and an IMF mission is due to arrive in Croatia soon. If Croatia fails to pass its test, that will affect the country's credit rating, determined by specialized international institutions. This is to say that new loans will be harder to obtain and costlier. Loans, however, are a temporary way out of the budget crisis. In the long run, only a change in economic policies, ensuring speedier economic growth and higher income can help.

It is almost certain that the government will introduce new taxes and that the common people will feel them the most, and not companies, which are expected to increase production and attract investment. The law prohibits the state from borrowing from the central bank; therefore, money printing is out of the question. Spending will continue to drop, accompanied by all sorts of opposition. Thus the ministries of defense and the interior, probably anticipating restrictions, have increased salaries, using up in only four months what was supposed to last half of the year.

Milan Gavrovic

(AIM)