Deficit to fall below 3 pct of GDP, public debt to stop rising by 2017

The government on Thursday endorsed Croatia's convergence programme for the 2015-18 period which will be sent to the European Commission and which envisages reducing the budget deficit to below three percent of gross domestic product in 2017, but also an increase of the public debt by that year.

Deputy Prime Minister and Regional Development and EU Funds Minister Branko Grcic said at a government session that the programmes envisaged a 0.4% GDP growth this year, 1% in 2016, 1.2% in 2017 and 1.5% in 2018.

The programme envisages reducing the budget deficit from 5.7% in 2014 to 5% in 2015, 4% in 2016 and 2.7% in 2017, he said.

Grcic recalled that the public debt for 2014 was estimated at 85% of GDP and that Croatia had to stop its growth through fiscal consolidation and then ensure its fall. "The public debt is expected to grow until 2017, when it is expected to reach a maximum of 92.6% of GDP and is then expected to start falling."

According to the government's projections, after increasing to 89.8% of GDP this year, fiscal consolidation measures as part of the Excessive Deficit Procedure are expected to stabilise public debt growth at 92.5% of GDP in 2017 and reduce it to 92.4% in 2018.

According to the convergence programme, the government predicts the economy will this year come out of a six-year recession during which real GDP dropped more than 12%. Economic recovery will be based on import growth and the related investments in production. Whereas state spending will have a negative impact on growth in the short term because of fiscal consolidation, personal spending is expected to continue to grow.

The government predicts that household spending will grow 0.5% this year, 0.3% in 2016, 0.5% in 2018 and 1.1% in 2018. State spending is forecast to fall 1.2% this year, 1.4% in 2016, 1% in 2017 and 0.6% in 2018.

Gross investments in fixed capital is expected to drop 1.3% this year, as against last year's 4%, but increase up to 3.6% in 2018.

The export of goods and services is expected to record positive increases in the 2015-18 period and will be the main economic growth generator. Exports could increase 3.7% this year and 4.8% in 2017 and 2018.

According to the programme, employment is expected to fall 0.2% this year and gradually start increasing as of 2016, including by 1.3% in 2018, while unemployment is expected to continue to decrease from 17.1% this year to 14.3% in 2018.

The programme states that deflation is a big problem for the economic policy and fiscal consolidation.

Despite higher excise taxes on tobacco and fuels, inflation is expected to remain relatively low because of a weaker rise in prices in the region and weaker domestic aggregate demand. The government predicts that consumer prices could grow 0.1% on the year in 2015, 1.1% in 2016 and 1.4% in 2018.

In line with Council of the EU recommendations on dealing with the excessive deficit, the programme contains structural measures to reduce it which should be carried out this and next year.

Measures on the revenues side include the already passed amendments on the taxation of earnings from games of chance, amendments to pension insurance contributions, taking profits from state-owned companies, the annual fiscal impact of health insurance contributions, imposing interest on savings, increasing excises on fuels and tobacco, and stricter criteria for tax relief on reinvested profits.

Measures on the expenditures side include refer to benefits for the employed, intermediary spending, subventions, social benefits and transfers, expenditure for gross investments in capital, including extra-budgetary beneficiaries, public companies, agencies, institutes, funds and other legal entities with public powers.

A wage reform in public administration and public services is envisaged in 2016.

The programme also envisages reducing parafiscal levies, material costs and the number of agencies, institutes, and funds.

Presenting the convergence programmes, Grcic said Croatia met three of the five key criteria for entering the euro area and that it would take time to meet the other two, the share of the budget deficit and the public debt in GDP.

The introduction of the euro was mentioned yesterday by President Kolinda Grabar-Kitarovic, telling Bloomberg that she was confident that Croatia would introduce the euro by 2020.

Prime Minister Zoran Milanovic said at the government session that "some occasional announcements when Croatia will introduce the euro shouldn't be taken seriously. We'll try to make it as soon as possible, but I distance myself from any dates and ask that you don't comment on it. When the country is ready, it will enter the euro area. The criteria are very clear."

"We can't promise that we will enter the euro area in 2020, while at the same time increasing expenditures for the defence, for example," he said, adding that the government was responsible and doing its job without showing off and easy promises.

(Hina) ha