FINANCE MINISTER Ivan Suker, often forgets that he is also the Deputy Prime Minister responsible for the economy say the heads of leading Croatian companies, and works only to secure budget revenue at all costsAfter levelling a number of sharp criticisms at the expense of Government last week and threatening, off the record, to quit the Economic and Social Council, the representatives of the Croatian Employers' Association (HUP) last Friday held a new meeting with top Government officials. According to the information Nacional has, Government at the meeting presented the employers with its plan for a major round of infrastructure investments, and promised concrete resolutions for their problems, above all in regard to para-fiscal levies. After hearing these promises the heads of HUP have for the moment shelved their plans to quit the Economic and Social Council, but are ready to reactivate them if the promised reforms are not carried out as agreed.Among a significant number of the heads of respected Croatian firms the sentiment persists that Croatian Government lacks the capability, political will or clout to come up with and implement a new national economic policy with which Croatia could weather the crisis. What is more, the behaviour of some members of cabinet poses the greatest obstacle to the reforms that are inevitable for the future development of the domestic economy, greater employment and a better standard of living for Croatians.

Their only goal is to sustain the current situation as long as possible and thereby hold on to the reigns of political power. The key means to achieve this goal is the national budget, the piggy bank from which the entire political agenda of the ruling party is financed, i.e. the whole of Government economic policy over the past year and a half since Croatia was hit by the recession is geared towards that goal. During that time the top people in Croatian Government have not implemented a single measure that would be directed towards encouraging private enterprise and the real economy, i.e. reducing the acquired rights of some privileged social groups.

Government has not launched the announced review of those employed in the civil service, or a reform of the inefficient model of Croatia's territorial divisions. Every attempt to negotiate the reduction of the rights of those employed in the civil service or of farmers winds up in failure because of a lack of political decisiveness. And nothing has been done to scrap the enormous para-fiscal levies the employers' association has been demanding for months, or on the introduction of the proposed tax relief to encourage investment. The idea of introducing a tax on property, that would make up for the reduction of some other direct taxes, has been decisively rejected, the bureaucratic obstacles to all interested foreign investors in Croatia continue to be enormous, and the legal system us inefficient.

What is more, practically the only Government anti-recession measure in this period has been to increase taxes and various contributions with the intention of collecting enough money in the budget to cover the needs of all of the privileged social groups. The consequences of these policies have been catastrophic. Hundreds of Croatian companies are on the verge of failing, tens of thousands once employed in privately owned companies are now unemployed, and even in these circumstances Government has not abandoned its policies. A few days ago Croatian Finance Minister Ivan Suker, for example, had a discomforting surprise for the heads of one large Croatian company.

The company in question is one of the most successful in the country, employing over a thousand people, exporting a significant portion of its products and meeting all of its obligations to employees, suppliers and the state on time in spite of the significant illiquidity present in Croatia. In fact, the company is doing a brisk business in spite of the sluggishness of the national administration or the arrears in payments from state institutions and government-owned firms. When Suker said he would pay them a visit the top people at the company hoped that in direct talks with the Minister they would be able to resolve some of their problems, but the exact opposite happened. The Minister visited the company to impose a new tax. Suker told his hosts that he expects them to start paying VAT in the future on product samples.

These are small quantities of merchandise that the company delivers free of charge to potential clients to demonstrate that the product meets their requirements.Suker's demand allegedly shocked the company's managers. But this seemingly trivial story, which has spread these past days among managers in Zagreb, is in fact a quintessential example of the economic policy being led by Croatian Government, especially considering that the principal leader of this policy is in fact Finance Minister Ivan Suker.

For years, in spite of the many megalomanic projects led by former Prime Minister Sanader, Suker was relatively successful in maintaining order in the public finances, but has not found his footing as well in the new circumstances of economic crisis. First he claimed that there was no crisis, then that its effects were being mystified, and in the end recognised that it existed. At the beginning of last year he rejected any idea of a budget rebalance, and only a few months later undertook two in the space of a few weeks.

In March he said that Government was finding it harder and harder to pay wages and pensions, but in June that the payments were made without any problems, and then went on in July to warn that they had to be reduced or there would be no more money for them in September. The reduction was never carried out, or the painful reforms he had announced in November of last year. What is more, Suker's policies over the past two years have been oriented to one goal only - to secure revenue for the state budget.

That is why he hiked up the VAT rate to 23 percent, introduced the crisis tax and a number of new levies. The money he could not collect by introducing new taxes, Suker got by taking on debt abroad, and each of these transactions was presented to the public as a big success. The latest in a series of incomprehensible Suker statements happened a few weeks ago when he publicly criticised all economists that said that Government would be forced to rebalance the budget as a result of a drop in revenues. He called the statements nonsense, and the demands to scrap the crisis tax as ridiculous.

But just a few days later his closest aid, State Secretary Zdravko Maric, said that a rebalance of the budget was unavoidable, and Suker himself a week later announced the scrapping of the crisis tax. As a result of these contradictory statements and actions there are fewer and fewer Croatian economists, and respected businesspeople, that consider Suker a person capable of leading a rational economic policy. Moreover, he is now seen by the Croatian public at large as the chief opponent of the necessary reforms.

Among the leaders of large Croatian companies the feeling is that Suker is acting exclusively from the position of Minister of Finance, in the process entirely disregarding the fact that he is also the Deputy Prime Minister responsible for the economy. Over the past year Suker has on several occasions promised employers that he would draft a precise plan for the reduction of the number of para-fiscal levies that burden their operations, such as the mandatory fees to the Croatian Chamber of Economy, fees for forests, water and monument annuities. But he never did so, and when any of the representatives of employers reminded him of the promises at meetings his reactions were very harsh. Suker has rejected most of the other demands from employers these past months with the universal argument that the proposal was unachievable because it would destabilise the situation in the national budget.

VAT ON EVERYTHING Suker recently visited a company to demand that they pay VAT on product samplesAnd so Suker has presented himself as fighting to maintain order in the public finances, but the fact is that he never managed to put budget expenditure under control. The budget deficit in the first two months of this year, for example, amounted to about three billion kuna, and was largely produced by a growth in expenditure of 1.19 billion kuna. It can be deduced from this that the Minister was quite unsuccessful in his announced control of state expenditure, and was no more successful in the case of state-owned companies, which many employers consider the chief generators of illiquidity in the country.

And as a result of this exactly there are growing doubts among businesspeople nowadays about Suker's ability to come up with a new economic policy. An example of this is the latest Government plan to start the recovery of the economy with a new round of investment into infrastructure projects. In the frame of this plan a further 4 billion kuna is to be invested into road construction. But it was road construction in fact that had for the past decade been the chief generator of the massive budget deficit, which in turn led to a significant growth in foreign debt.

Insofar it is quite clear that it is in fact the economic model that caused the situation in which Croatia currently finds itself, especially considering that the state was short-changed hundreds of millions of kuna in criminal circumstances related to infrastructure construction.

That is why it is hard to see these measures as a reasonable strategy for economic recovery, but more so as a sign of the unwillingness of Government to launch any changes to the current economic model. Only a handful of privileged businesspeople would benefit from a new round of state investment, while the buck will once again be passed to future generations as debt. And while it is unknown whether Suker was the man behind the idea, those who known the situation in cabinet feel that a plan of this kind could not be adopted without his permission, especially considering that it will force the country to take on even more debt abroad.

But Government's plan provoked widespread dissatisfaction among businesspeople, with representatives of the processing and textile industries. A significant number of companies from the sector, namely, suffer from a lack of working capital as a result of a drop in demand for their goods. They have in the past on several occasions asked Government to help them out by giving government guarantees for working capital, which would allow them to get to the money needed at low interest rates. But Minister Suker, who said that the state budget could not bear the cost of activating these guarantees, rejected these demands. Instead Government launched a program of subsidising loans in collaboration with the Croatian National Bank and commercial banks.

But many businesspeople are unhappy with these because they say that the interest rates are too high and the decision on whom to loans would be given to was given to the commercial banks as their discretionary right. It is expected that, with all the fees and contributions related to the issue of loans, the effective interest rate for businesses will amount to over five percent, which many feel is too high. The second big problem with the subsidised loans is that their technical implementation was left to the commercial banks.

That means that they carry out their standard procedure when approving loans. A company without concrete assets such as real estate that can be mortgaged will be hard pressed to get a loan, while companies that have had their accounts frozen for extended periods of time because of problems in their operations will no be able to get the loans at all. And those for whom the loans are approved will wait months before actually getting the money.

At the Croatian National Bank, which initiated the entire campaign, they allegedly foresaw these problems and proposed that the procedural part be transferred to the Croatian Bank for Reconstruction and Development (HBOR), but top officials at HBOR allegedly rejected the proposal, saying that the bank did not have enough staff to process that quantity of loan applications, and that it could not conduct those activities without amendments to the relevant legislation. And while that is partly correct, it is not clear why Government failed to find a better way of processing the loans and why it did not support the demands of businesses for government guarantees when it at the same time was announcing a 4 billion kuna investment into road construction.

As a result it is questionable how many positive effects can be expected from these measures, and it is practically certain that the negative trends in the domestic economy could continue into the coming months. A new long-term period of economic growth in Croatia will not start without comprehensive structural reform which, it appears, Government is at this moment, for political reasons, unwilling to undertake. In these circumstances it is hard to expect Croatia to get out of the crisis in 2010 as they would like in Government, and the continuing economic stagnation could result in exactly what they hope to avoid, and that is early elections and losing power.