In an effort to meet international debt obligations and bring the national budget closer to balance, the government of Jadranka Kosor is considering the introduction of VAT on items such as milk, bread and medicines.

Ruling coalition partner Milorad Pupovac, however cautioned against the move, saying that the solution was not in tax increases, but in the re-distribution of costs, or savings on existing state subsidies. “Further savings are necessary, even when it comes to subsidies. Unfortunately, subsidies for agriculture are not rational, they are insufficiently productive and not controlled properly. There is room for savings there,” said Pupovac.

Prime Minister Kosor has previously committed the government to a policy of maintaining salaries and pensions, and tax increases, particularly in VAT seem to be her most likely option to balance the budget.

Croatia paid 5.3 billion kunas (€719.5 milion) in debt interest two years agoand the figure is expected to reach 7.3 million (€991 million) in 2011, surpassing even the government’s expenditure on farm subsidies.

Government policy requires that the budget for 2011 must stay within the established framework and the three-year guidelines and with revenues from taxes expected to be 108 billion kunas (€14.6 billion) expenditures must be capped at 122 billion (€16.6 billion), requiring total expenditure to be reigned in by at least half a billion kunas.

This may well be a struggle for the government as it deals with higher debt payments, increased pension costs and the financing for the forthcoming census.

Local media predict that to plug the gap, starting in January 2011, the zero VAT rate (on bread, milk, books, medicine) will be eliminated and replaced by a new rate set anywhere between five and ten per cent.

