Croatia: Budget Crisis Threatens Sanader

Monday, 21 February, 2005

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Drago Hedl

Croatia’s right-wing minority government faces a serious challenge to its survival next week over the budget, which is too small to satisfy Ivo Sanader’s election commitments.

With an expected budget for 2004 of 85 billion kunas, or 11.2 billion euro, the premier cannot honour all the pledges he has offered to several smaller parties for their support.

If the small parties decide they have been betrayed, they may not vote for the budget and so bring down the government.

While Sanader has shifted the blame on to the former left-of-centre government for running up huge debts in the first place, economists have blamed lack of strategic vision in both this and the former government.

Sanader’s Croatian Democratic Union, HDZ, holds only 66 seats in the 152-member parliament and depends on 14 other votes for a working majority.

Eight come from ethnic minority deputies, three from a pensioners’ party and three from the Democratic Centre, DC, and Croatian Social Liberal Party, HSLS. The draft budget needs the support of half the chamber to pass.

Sanader’s troubles began immediately after the election, when he was forced to offer financial commitments to these small parties to ensure a viable minority government.

The cost was high. The pensioners’ party, for example, not only demanded rises in current pensions but backdated payments covering the period of HDZ rule from 1991 to 2000.

This pledge alone has added several hundred billion kuna to the government’s commitments, in return for the support of only three deputies (though only part of the bill needs to be paid this year). Although the pensioners are not yet threatening to withdraw support, they could do so at any time.

The Serbs are a more immediate threat. To secure the support of three their deputies, Sanader pledged to renovate 7,000 Serbian homes that were mined or demolished during the conflicts of the 1990s. The promise will cost a large sum and the Serb deputies have made it clear they insist on Sanader honouring the bargain.

Neither of these promises is easily reconciled with the existing budget plans, incurring a distinct risk that the deputies in question will withdraw support and trigger a political crisis.

Even if they vote for the budget, the danger will only have been postponed, as the number of broken promises, or pledges that cannot be honoured, keeps on growing.

To head off a revolt by war veterans’ associations, angered over the promised pay-outs to Serbs and pensioners, Sanader offered to halt the revision of the benefit payments made to the veterans.

The former government had ordered the review to sort out genuine claimants from what it claimed was a large number of people falsely claiming high monthly disability benefits.

By discontinuing this revision, the government has effectively committed itself to continuing benefits to many who are not entitled to them. The welfare ministry, which covers these payments, has already been promised 5.6 billion kunas this year - a billion up from last year.

Sanader also pledged increased benefits to mothers to encourage demographic growth, potentially costing the government more money, though the figure is unknown.

The government has already surrendered some of its key election pledges, starting with a planned cut in value added tax, VAT, from 22 to 20 per cent. Sanader has now said VAT will be cut in a year.

Plans to provide primary school pupils with free textbooks have also been shelved, while investment in the outmoded railway network is likely to be suspended.

All further construction of hospitals and motorways is also in doubt, even though these were projects that the former government had embarked on with some success.

Faced with its impossible shopping list of pledges, Sanader has blamed the former government for the new administration’s plight, attacking the huge increase in the foreign debt.

Sanader’s complaints of poor accounting appear justified, as the HDZ has inherited a foreign debt of 25 billion dollars, which is 16 billion more than when the HDZ lost power in January 2000.

How this massive debt accumulated remains controversial. The former finance minister Mato Crkvenac has blamed excessive personal borrowing and adverse changes in the exchange rate between the dollar and the euro.

But his successor, Ivan Suker, says the new government has had to borrow more money to pay off the interest on these debts. The interest alone will amount to 4.5 billion kunas (600 million euro) this year.

Mladen Vedris, an economist, says Sanader’s team lacks an exit strategy for the country’s dire economic situation. Running up new debts to repay old ones will not help, he adds. The only solution lies in increased production and exports, and in making exports more competitive abroad.

Economic experts fear that Sanader’s promises to minorities, pensioners and other special interests will eat heavily into the planned 85 billion kuna budget, which is four billion higher than last year.

Drazen Kalogjera, a prominent independent economist, says ordinary people are likely to end up as victims of two policies – that of the old government, which ran up bigger debts than it could handle, and that of the new government, which has promised more than it can deliver.

Drago Hedl is an IWPR contributor based in Osijek.