The government on Tuesday forwarded to parliament a draft budget revision cutting revenues by HRK 4.5 billion to 108.3 billion and raising expenditures by HRK 898 million to 122.3 billion.

The budget deficit will go up from the initially planned HRK 8.6 billion to 14 billion, an increase from 2.6 to 4.2 per cent of Gross Domestic Product.

The budget revision was drawn up with the projection of a 1.6 per cent GDP decline this year, with Prime Minister Jadranka Kosor saying the draft was not drawn up with next year's elections in mind.

"The revision is not election-oriented and its purpose is not to stay in power, but to protect living standards and boost the economy," she said.

The government asked parliament to convene on Thursday to discuss the draft and moved that it adopt a decision that total budget expenditures in 2011 and 2012 would not exceed this year's revised budget levels.

"By freezing budget expenditures in the next two years we are showing that we are seeing to budget expenditures," said Finance Minister Ivan Suker.

Kosor said ministries' costs had been cut by HRK 1.5 billion, but added that for some expenditures additional funds had to be set aside, which led to a HRK 898.2 million increase in expenditures.

The revised budget ensures an additional HRK 356 million for pensions, 386 million for the jobless, 50 million for the active employment policy, 600 million for agricultural subsidies, 300 million for damages for natural disasters, 100 million for childbirth allowances and 170 million for a referendum on Labour Act amendments.

Kosor said it was decided not to cut at this moment the salaries of budgetary beneficiaries, maternity and children's allowances, and pensions.

She said HRK 490 million would be economised if salaries were cut by 10 per cent and an additional HRK 260 million if monthly pensions exceeding HRK 3,000 were cut.

"Had we cut salaries and pensions, the effect on budget revenues and the economy would have been extremely negative."

Kosor said the draft budget revision raised the deficit, but added that most European countries had deficits higher than Croatia. "That, of course, doesn't mean that we aren't aware of our situation," she said, adding the Economic Recovery Programme measures would continue to be implemented.

Suker said with regard to revenues and the deficit that what was happening in Croatia was happening in other countries as well.

Using 2008 for comparison, he said budget expenditures had gone up HRK 4 billion, mainly due to pensions, salaries and interest rates, while revenues had dropped HRK 7.8 billion, with the highest declines recorded in terms of profit tax (by HRK 4 billion), VAT (3.8 billion) and contributions (some 2 billion).

Speaking to press after the government meeting, Suker said no major privatisations were expected due to the situation on the stock exchange.

Instead of the initial HRK 28 billion, this year the state plans to borrow a total HRK 34.6 billion to service due liabilities and finance the deficit. To date, the state has borrowed HRK 25.1 billion.

The government also adopted regulations to increase as of October 1 tobacco excise tax from 30 to 33 per cent of the retail price as well as excise tax on lead-free gas from HRK 1.65 to 1.90 per litre as of September 1. These increases are expected to bring in some HRK 70 million this and some 500 million next year.

The government adopted a conclusion entrusting the Finance Ministry with resuming talks with representatives of the finance sector on conditions for crediting and investment activities involving the state, the economy and citizens.

"We can't expect a stronger economic cycle unless capital arrives and if banks have it, let them give the money and invest," said Suker