Fiscal consolidation has no alternative and the only question is how intensive it will be, Croatian National Bank (HNB) Governor Zejko Rohatinski said at a news briefing on Thursday, adding that he advocated a strong consolidation which would cut budget spending by 9 billion kuna in 2012.
"We in the HNB have no dilemma: consolidation is a must," Rohatinski said.
He cautioned against pushing the country towards a possible Greek scenario. If Croatia continues this way, its fiscal deficit could jump from 6 percent to over 7.5 percent of GDP in the next two or three years, with the public debt exceeding 75 percent of GDP in 2014, which might result in the downgrade of Croatia's credit rating, which would unable the country to take on foreign debts under relatively reasonable conditions and all of which might trigger off a long recession, according to Rohatinski.
The governor presented two possible scenarios of fiscal consolidation: a minimum consolidation and a stronger consolidation scenario. The former is based on the Fiscal Responsibility Act and the reduction of the budget spending by one percent of GDP annually, which means the lowering of the current expenditure by 6 billion kuna in 2012. This would be a modest consolidation and perhaps insufficient for retaining the country's rating.
Rohatinski said that a more intensive consolidation envisaged reduction of the general government spending by 1.5 percent of GDP in 2012, or by 9 billion kuna.
We will present this proposal to the government at our future talks, Rohatinski said, warning that everything signalled that 2012 would be a very tough year with a possibility of economic contraction.
