March 5, 2014 / 10:22 AM / in 4 years

UPDATE 2-Croatia cuts general budget deficit target to 4.5 pct of GDP

* Government aims to cut deficit to 4.5 pct of GDP

* Sees growth at only 0.2 pct this year

* European Commission may seek more reforms, cuts (Adds PM, analyst comments)

By Igor Ilic

ZAGREB, March 5 (Reuters) - Croatia’s government, struggling to observe European Union limits on budget deficits, said on Wednesday it has lowered its 2014 general deficit target by one percentage point to 4.5 percent of GDP, thanks to plans to raise its revenue.

“As of this month, we want to ensure higher revenues and savings with the aim to reduce the deficit and public debt, in line with European Commission recommendations,” Finance Minister Slavko Linic told a cabinet session.

The EU began disciplinary steps in January against Croatia, its newest member, for running an excessively large deficit. It gave Zagreb three years to bring the deficit under the bloc’s target ceiling of 3 percent of GDP.

Croatia plans to increase revenue by imposing higher health contributions, a higher lottery tax and concession fees. The government will also draw on part of the profits of public companies and reduce the number of beneficiaries of private pension funds, Linic said.

The government will cut spending across the board, by abolishing bonuses for public-sector employees and reducing subsidies for agriculture, shipbuilding and the state railways.

However, the government will need to spend 3.2 billion kuna ($574.61 million) to overhaul the indebted public-health sector. The net effect will be a slight increase in spending.

Prime Minister Zoran Milanovic told a news conference after the cabinet session the budget revision was proof that real reforms had started.

“We are still living beyond our means,” he said. “Now we have moved towards less borrowing and focused on spending and deficit cuts. This is a political message: structural reforms and fiscal adjustment will continue.”

Linic said the European Commission may not be entirely happy with the deficit plan. It was partly based on the one-off measure of moving some private pension fund beneficiaries to the pay-as-you go system. The Commission instead wants to see more structural reforms leading to a sustainable consolidation.

“There will have to be more talks with the Commission, to spread structural spending cuts over three years, rather than have a big push in 2014, because we will have little economic growth this year,” Linic said.

The government in January cut its growth forecast to 0.2 percent from 1.3 percent, citing fiscal consolidation and uncertainty about investments in the private sector.

Hrvoje Stojic, an analyst at Hypo Group Alpe Adria, said the budget revision was too small, given the scale of problems.

“The reforms should be stronger and faster,” he said. “Actually, this further reduces the economy’s competitiveness because of the higher health contribution. Major reformist moves are still lacking.”

Croatia, which joined the EU last July, has lost more than 12 percent of output since 2008. The International Monetary Fund said this week its economy would contract up to 1 percent in 2014, for a sixth straight year without growth ($1 = 5.5690 Croatian kunas) (Reporting by Igor Ilic, writing by Zoran Radosavljevic; Editing by Larry King)

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