Comparison with Previous Programme

In this chapter, an overview is given of total revenues, expenditures and net lending/borrowing levels presented in the previous year’s PEP and this year’s PEP, along with an explanation of differences.

A significant part of changes in revenues, expenditures and net lending/borrowing as a share in GDP during the reviewed years is the consequence of differences in the levels of the nominal GDP. The differences in the levels of the nominal GDP in the new programme, in comparison with the previous one, are a result of altered macroeconomic assumptions. In the period 2008-2010 the projected real GDP growth amounted on average 6.5%, which is in accordance with the preceding programme, or 2.6%, which, on the other hand, is in accordance with the new one. In the same period an average growth rate of GDP deflator amounted to 3.4%, which complies with the previous programme, and 4.5%, which complies with the new one. In addition, the level of the nominal GDP in 2007 is higher in the new programme than in the previous one. Lower level of the real GDP growth, higher level of the GDP deflator growth and higher level of the nominal GDP in 2007 in accordance with the new programme and in comparison with the previous one had implications on development of projected levels of the nominal GDP in the period under review, affecting thus developments of the observed values expressed as shares in GDP.

However, the differences between certain fiscal values for the same years in last year’s PEP and this year’s PEP can also be explained by other reasons, which are all very characteristic of revenues and expenditures.

As regards the revenue side it is important to stress that 2007 was accomplished in accordance with the plan, whereas there were certain changes in the projected revenue levels during other reviewed years. Namely, in 2008 revenue realisation was higher, which can be attributed to revenue movements in the first half of 2008, which turned out to be higher than expected. Therefore, new revenue projections have been incorporated into amendments to the budget for the abovementioned year. One-off revenues, realised on the basis of revenues from profits of public companies, banks and other financial institutions as well as from dividends, had their implications on developments of the share of revenue in GDP as well. The effect of a higher revenue level in 2008 is carried over throughout the period under review through the baseline effect. However, lower expected levels of the overall economic activity in 2009 and 2010 affect the movement of revenues in the opposite direction.

Various factors have had an effect on differences in the levels of expenditures expressed as a share in GPD between the previous and this year's programme. In addition to the effects of

change of the nominal GDP level it is important to emphasise the effect of capital transfers growth, which mostly results from the changes in the general government coverage. The difference in the coverage of the general government is the consequence of defining the new coverage of institutional sectors of national accounts in accordance with ESA 95 methodology, which has been applied since the second half of 2008. The application of the new methodology on determining the coverage of institutional sector has also reflected upon the coverage of general government sector. In other words, certain institutional units, which had until then been a part of the general government sector, were classified, following certain rules, under other sectors, whereas some other institutional units became a part of the general government. One of the most notable changes in this respect was classification of Croatian Motorways (HAC) outside the general government sector, which has had an impact on capital transfer movements in the period under review. It has resulted from the fact that transfers towards this unit are no longer consolidated in the general government budget, but are now pure expenditure. Changes of macroeconomic assumptions have further influenced the movements of this category in the examined period.

Furthermore, differences in the expenditure levels expressed as shares in GDP with regard to two programmes are also caused by expenditures for subsidies. The primary reason for that are the subsidies for agriculture. Namely, last-year's programme projections built on the 2007 projection, whereas they were finally realised at a higher level and the same occurred with medium-term projections. Also, changes have been brought on by differences in the levels of the projected gross fixed capital formation, which mostly results from the changes in the coverage of the general government sector described above. Other changes that need to be mentioned are effects of social transfers, which are influenced by expenditures used for the recovery of health care as a part of amendments to the 2008 budget and effects of the health care reform as of 2009.

Table 11: Comparison of Revenues, Expenditures and Net Lending/Borrowing of the General Government according to 2007 PEP and 2008 PEP

2007 2008p 2009p 2010p 2011p 2008 PEP (% GDP) Total revenue 46.0 45.7 45.2 44.8 44.4 Total expenditure 47.6 46.9 46.1 45.4 44.4 Net lending/borrowing -1.6 -1.3 -0.9 -0.6 0.0 2007 PEP (% GDP) Total revenue 46.2 43.7 42.8 41.8 Total expenditure 47.8 45.2 43.4 41.6 Net lending/borrowing -1.6 -1.5 -0.6 0.2

Difference: 2008 PEP and 2007 PEP (percentage points)

Total revenue -0.2 1.9 2.4 3.0

Explained by:

Revision of GDP -0.2 0.3 2.0 3.5

Difference due to final outturn of 2007 0.0

Increase in one-off revenues 0.3 0.2 0.0

Difference due to projection for 2008 1.3

Difference due to projection for 2009 0.1

Difference in projection for 2010 -0.5

Total expenditure -0.2 1.7 2.7 3.8

Explained by:

Revision of GDP -0.2 0.3 2.1 3.4

Subsidies 0.4 0.3 0.3

Social transfers 0.3 0.9 0.9

Gross fixed capital formation -0.4 -0.5 -0.3

Interest expenditure -0.2 -0.3 -0.5

Compensation of employees 0.3 0.3 -0.3

Kapital transfers 0.7 0.2 0.3