The Croatian government projects budget revenues for 2020 at HRK 141.6 billion and expenditures at HRK 144.3 billion, Finance Minister Zdravko Maric said while presenting the Economic and Fiscal Policy Guidelines 2020-2022 at a Cabinet meeting on Thursday.

Maric said that the projections were a continuation of the policy aimed at ensuring the sustainability of public finance, economic growth and increasing the citizens’ living standards.

Real GDP growth was forecast at 2.8% in 2019, 2.5% in 2020 and 2.4% in 2021 and 2022.

Prime Minister Andrej Plenkovic said that the projected rates were realistic and sound. He said that the focus of the Guidelines was on further strengthening fiscal sustainability and economic growth, adding that reform activities would be aimed at strengthening the long-term potential of the national economy.

He announced effective use of budgetary funds, with strict control of expenditures, and said that the faster absorption of EU funding would help accelerate growth. He also announced further efforts to improve the business climate.

GDP growth driven by personal consumption

Maric said that domestic demand and personal consumption would be the main drivers of growth in the entire three-year projection period, citing a rise in economic sentiment, improved credit terms, positive labour market trends and tax changes that leave the citizens with more disposable income.

He also mentioned a positive contribution from investment, which he said generated one percentage point of total growth on average, and added that further efforts would be made to improve the business climate and encourage private investment.

The finance minister warned that with stable exports growth rates imports were also growing and that therefore he expected a negative net contribution from exports in the projection period.

For 2020, government budget revenues are projected at HRK 141.6 billion. The Guidelines say that revenues are expected to rise by 2.6% to HRK 145.3 billion in 2021 and by 2.4% to HRK 148.7 billion in 2022. These movements are based on the expected economic growth and the fiscal impact of further tax cuts.

Maric noted that budget expenditures were also growing at a slower rate that GDP.

Tax changes

The most important changes with a fiscal impact on government budget revenues relate to changes to Value Added Tax (VAT), notably a reduction of the general VAT rate from 25% to 24% as of 1 January 2020 and a reduction of VAT on food in the hospitality industry to 13%.

The latest round of the tax reform provides for changes to profit tax, under which income subject to a profit tax of 12% will be raised from HRK 3 million to 7.5 million. In that way an additional 10,000 businesses, or a total of 93% of businesses liable to profit tax, will be subject to the 12% rate.

The government also expects a considerable impact on budget revenues from the absorption of EU funding, which is expected to continue to grow.

As for budget expenditures, they are forecast at HRK 144.3 billion for 2020. Expenditures financed from general revenues and receipts, contributions and special-purpose receipts are projected at HRK 113.6 billion, 2 billion higher than for the current budget.

At the same time, expenditures financed from other sources of financing, which do not affect the level of the budget deficit, are projected at HRK 30.7 billion, up by HRK 1.9 billion.

In 2021, total expenditures are planned at HRK 146.1 billion, an increase of HRK 1.8 billion compared with 2020. Expenditures financed from general revenues and receipts, contributions and special-purpose receipts are expected to be 2.2 billion higher, while those financed from EU funds and other sources would be reduced by HRK 369 million. In 2022, expenditures financed from EU funds and other sources are expected to be reduced by HRK 569.1 million.

The reductions follow from the dynamics of implementation of EU-funded projects from the programme period 2014-2020 which will be in final stage. Contracting for projects that will be funded from EU funds in the next programme period 2021-2027 is yet to begin. As a result, total expenditures in 2022 are projected at HRK 147.5 billion.

Public debt to continue to fall

The Guidelines say that the public debt to GDP ratio in 2019 is expected to decrease by a further 3.3 percentage points to 71.3% of GDP. In the medium term, the ratio should continue to fall by 3.1 percentage points annually to 68.3% of GDP in 2020, 65.3% in 2021 and 61.9% of GDP in 2022.

The general government budget is expected to run a deficit of 0.2% in 2020, while surpluses of 0.2% and 0.6% are forecast for 2021 and 2022 respectively.

The inflation rate is projected at between 1% and 1.5%.