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Besides the usual political debates and confrontations, the opposition bombarded the Government with criticism regarding the state budget rebalance and the decision to impose a crisis tax. There were only a few representatives with suggestions on alternative ways to patch this year’s budget, but with a lack of consistency and sometimes opposing ideas. Many of them feel that the combination of the VAT (PDV) increase, crisis tax and new mobile phone levies will result in price increases. The decrease of citizens’ income will result in reduced spending, creating a vicious circle, finally resulting in a negative effect on the state budget.

Rough estimates
According to many, the effects of this third rebalanced budget are questionable. At the same time, rough calculations indicate that the estimates of the effects on the income side of the state budget are quite conservative. These underestimated amounts were surely a consequence of the previous rebalance’s overestimate of income. As an example, the VAT income in the first six months of 2009 was 16% lower than in the same period last year, while the gross taxes were nearly 20% (7 billion kunas) lower. New VAT estimates predict that the second half of the year will generate 19.7 billion kunas, including 500,000 of the income from the VAT increase. This plan seems significantly realistic since the VAT income increases in the second part are expected after the tourism season. We have to keep in mind that the VAT increase comes in force during the tourist season (even though this one is expected to be less successful than 2008) and that the budget will benefit for four months. The estimated budget increase of 500,000 kunas in Q3 implies a yearly increase of 1,5 billion. Therefore, we can conclude that projections were based on a reduced base or starting point (until recently it was assumed that one percentage point meant 1.9 billion kunas a year).

Solidarity tax
The effects of the “solidarity” tax have also been conservatively estimated. From the number of people employed in various salary grades it is easy to calculate that the effect of 755 million kunas is actually close to the amount we get by only adding up the imposed tax from the lowest salaries across the grades in the period of five months. For the income group of 3,000-6,000 kunas the average 2% tax will surely be higher than 60 kunas. The same is valid for the average tribute of 240 kunas of the 310,000 employees with salaries above 6,000 kn. In short, even with moderate estimation of higher average salaries across salary grades, we come to 1 billion kunas of additional tax income by the end of the year.

Telecommunications tax

Will it Reduce Consumption?
In the end, it was decided that the new taxes on mobile phones will be calculated as ”other administrative contributions”, contributing 143 million kunas to the budget. In the four remaining months of 2009, it is projected they will generate 430 million kunas. It seems that the Government is either conservative in their estimates or took into consideration the reduction in consumption.

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