"The budget doesn't grow on the basis of VAT and the resulting HRK 2.5 billion will be directed into the economy and the economy will feel the effects the most. Therefore, the economy will reciprocate by not increasing prices," Linic told Nova TV on Friday.

Asked how the government could control that, Linic said the government would have to deal with employers' illiquidity together with them, "confident that they need a partnership with their creditors, which are the state and banks."

"We'll deal with that and save jobs, because they are what matters most. We'll watch very closely how employers behave with regard to the two per cent VAT increase," he said.

Asked how the government would convince credit rating agencies not to downgrade Croatia's rating, Linic said the budget guidelines which the government adopted yesterday provided a huge possibility to convince the International Monetary Fund and the credit rating agencies that it could revive the economy, that it would fight for growth, that the economy would be more competitive, that budget revenue would be more serious and that the government would use it rationally for the public sector and to boost the economy.

Asked how much, for example, an employer with 1,000 workers would get because of the tax deductions, Linic said this would be about HRK 2.5 million thanks to the reduced health insurance rate alone. But, he added, the employer would not be able to pocket that money, as many employers had trouble paying debts, taxes and contributions, and that many would have to talk with the state and banks.

"That means that we will also consider what happens to prices," he said.

"Any government (in power) would have to start dealing with the economy, because if we don't deal with the economy, we can't bring back the 130,000 jobs that have been lost and fight for them. We couldn't start the investment wave that will double all that."

Asked about a backup plan if those measures did not work, Linic said there was no hidden agenda and that there was no alternative for the Zoran Milanovic Cabinet.

When the interviewer remarked that for 750,000 workers a 60 kuna higher monthly salary was not enough, Linic said it was a message to them that the government was aware of the deep crisis in Croatia and that it was trying to help them at least a little.

"That's why many pensions will be indexed. At the same time, we'll fight to prevent price hikes, because we know how to control that process," he said.

Asked when the light at the end of the tunnel would come into sight, Linic said the government would have to prove throughout the year that it was capable of carrying out all the measures, and that citizens would be able to feel an improvement in three to four years' time.

Speaking on Croatian Television, Regional Development Minister Branko Grcic said the budget guidelines were balanced, adding that on the one hand, citizens' standards would be preserved, while on the other, the measures would help increase business owners' competitiveness and liquidity.

He said the health system would not be endangered by the lower health insurance contributions, as part of the funds collected from the higher VAT rate would be directed into health care.

Speaking of saving to be made on public sector workers, Grcic said the reduction would most probably not infringe on collective agreements.