Croatia 2013 Budget Draft Sees Wider Deficit on Debt Repayments

Croatia’s budget deficit will widen next year to 3.1 percent of economic output as the government repays debt and begins contributing to the European Union’s coffers upon entry in July.

“Our economic program for the next year is ambitious, relying on boosting the economy by reducing the value-added tax in tourism and some other branches, by continued fiscal discipline and by becoming part of the EU market,” Finance Minister Slavko Linic said as he submitted the 2013 budget draft to Parliament today.

The 10-month-old government of Premier Zoran Milanovic has vowed to reduce public-sector spending and remove obstacles to investment to speed up the sale of state companies and bring the economy out of a recession.

The budget draft forecasts economic growth at 1.8 percent next year, compared with an expected contraction of 1.1 percent in 2012, Linic said. Spending will increase to 124.5 billion kuna ($21.1 billion) from a revised 120 billion this year, with revenue seen at 113.7 billion kuna. The deficit this year is seen at around 3 percent of gross domestic product.

While the government will cut spending on health care and public wages, expenditures will rise because of 2 billion kuna in interest payments on debt, including guarantees for shipyards, and Croatia’s 1.7 billion kuna in contributions to the EU.

Fiscal Consolidation

Though public debt will increase to 55 percent of GDP next year and to 56 percent in 2013, the government “will continue to strengthen capital investments, to stick with fiscal consolidation and to coordinate policies with EU regulations,” Linic said, adding state borrowing will total 26.7 billion kuna in 2013.

The International Monetary Fund on Nov. 13 said Croatia’s economy will shrink 1.5 percent this year, urging the government to remove barriers to investment and employment growth in order to return to growth in 2013. The European Commission said on Nov. 7 the economy will contract 1.9 percent in 2012.

Fitch Ratings raised Croatia’s outlook Sept. 5 to stable from negative, citing the government’s progress in meeting spending-cut demands and reducing the budget deficit during a recession. It affirmed the long-term foreign currency rating at BBB-, on par with EU members Latvia and Bulgaria.

Croatia is rated an equivalent Baa3 at Moody’s, the lowest investment grade, and BBB- by Standard & Poor’s.

To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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