The new budget is aimed at preserving the country's credit rating and ensuring lower interest rates and more favourable deadlines for loan repayment, Linic said at a meeting of the Exporters Association.

A tax reform, which will include the introduction of a property tax, is expected to be prepared by July 1, which means that the tax policy will be changed in the second half of the year, and that will make a budget revision necessary, the minister said.

Fiscal consolidation will help reduce budget spending and its purpose is to send a signal to domestic and foreign creditors that we will act responsibly towards our credit obligations and to investors that it pays to invest in Croatia, said Linic.

In January, the government will decide how much the VAT rate will go up and it will introduce several new VAT rates to protect the most vulnerable groups and lift some of the burden on the business sector. The new VAT rates will be applied as of March 1 and the current zero VAT rate on bread, milk and medicines will not be changed until accession to the EU in 2013, Linic said.

The government plans to help vulnerable social categories also by relieving the tax burden on the minimum salaries and salaries amounting to up to 3,000 kuna will no longer be taxed. As for salaries exceeding 3,000 kuna, the nontaxable part of income in the amount of 1,800 kuna will remain the same.

Pensions will not be touched because our pensioners are poor and almost 70 percent of them have pensions that are not sufficient to cover their monthly expenses, Linic said.

The wage budget will be reduced by more rational organisation and reorganisation and by reducing the number of public sector employees, after which everything that is not in the function of export, development and more efficient operation of the state administration will be cut, Linic said, adding that this year the government planned to recapitalise the Reconstruction and Development Bank (HBOR) with 500 million kuna.

The government will introduce a tax on dividends and lower para-fiscal levies, while profit tax will not see any significant changes except for the introduction of benefits for re-invested profit or profit retained to deal with insolvency.

Local rates, which are the main source of financing for local self-government units, will be replaced by a property tax that will depend primarily on property value and use, which means that taxes on property that is not used will grow progressively while those on property that is used will decline significantly. That is a message to business people - unnecessary property will cost you dearly, said Linic.

This is also a message to local self-government units about the importance of investing in the health care system because the current deficits are the highest in the health care system, and the new government plans to reduce health contributions that are paid from salaries, Linic said.

He went on to say that in the next six months the government would draft changes to the law on local self-government units, taking into account the differing fiscal capacity of individual local self-government units. Local units will be divided into those that can finance their health, education and municipal services, and those that cannot. Local self-government units that cannot finance their health, education and municipal services will have to reduce the number of employed officials and civil servants, the minister said.

Linic also announced measures to deal with illiquidity, to be supported by a law on financial operations to set the deadline for the payment of financial obligations at 45 days. Deadlines for the payment of VAT for private enterprises would be prolonged to 45 days. The state would have to fulfil its financial obligations within a period of 30 days and the payment deadline for private business owners would be prolonged to 60 days, if so agreed with the government.

Obligations must not be outstanding for a period of more than 60 days, which is a clear message to companies to make deals with their creditors within a period of 30 days, otherwise the state will do it on their behalf within 90 days, which means that banks will be able to take over their real estate and property that is not in function, said Linic.

This will be followed by bankruptcies without restructuring, he said, announcing very high taxes on property undergoing bankruptcy proceedings so as to make creditors assume responsibility for financial consolidation.

The Minister of Regional Development and EU Funds, Branko Grcic, also addressed today's meeting of exporters, saying that despite negative forecasts, the government nevertheless expected at least a minimum growth rate in 2012, which he said would determine the growth of budget revenues.

The reduction of spending will depend on the growth of budget revenues, and it will range between five and nine billion kuna, said Grcic.