The Croatian government has created another budget revision. The projected deficit is now 4.2% – up from 2.6pc. According to this report from Agence France Presse, Prime Minister Kosor says that Croatia is facing a revenue shortfall of 620 million euros. The government is to increase taxes in order to cover this.
In a country that has high social cohesion, it is understandable that the government does not wish to cut in areas that would hit the most vulnerable. It has sought to deal with the deficit in other ways, such as the aforementioned tax cut increases.
The government is showing a degree of responsibility by clearly trying to deal with the deficit as opposed to spending its way out of trouble – the wisdom of this is seen by the failed policy of the former British government of Gordon Brown, leaving the new coalition government the task of making huge cuts. This is a path that Zagreb has been wise to avoid.
It is unclear as yet whether Kosor’s measures will be enough. She is certainly right in avoiding calling in the IMF. The IMF would be ruthless in its prescription, and the vulnerable would certainly be affected adversely. The simple act of calling in the IMF would damage Croatia’s creditworthiness, leading to increased borrowing costs.
Zagreb is right to try to resolve matters itself. Clear moves towards restoring financial health is vital, not only for the good of Croatia, but for the continuation of Kosor’s government.