By Zoran Radosavljevic
ZAGREB, Dec 5 (Reuters) - Croatia's government scrapped plans to run a balanced budget in 2009 and approved higher spending on Friday, in a move analysts said would make its indebted economy even more exposed to external shocks.
Prime Minister Ivo Sanader said the small European Union candidate country expected its gross domestic product to rise some 2 percent, versus 3.5 percent expected this year, while inflation would slow to 3.5 percent.
But Finance Minister Ivan Suker said the government and all businesses would have to work hard to achieve that.
"We are looking at a very complex year, in which we will have to fight to have economic growth of 2 percent and keep the jobs," he told a cabinet session during a budget draft debate.
An additional difficulty, he said, was finding funds to refinance budget obligations worth some 1.1 billion euros in 2009 and help the real economy reprogramme its own maturing debt in the amount of 8.4 billion euros.
Croatia's external vulnerability is at worrying levels, with foreign debt reaching 90 percent of gross domestic product and the current account deficit at some 10 percent of GDP.
Suker said the spending side was set at 128.9 billion kuna ($22.78 billion), compared to some 121 billion kuna this year. Revenues were pencilled in at 124.2 billion kuna.
The government had planned to run a balanced budget and proposed a blanket freeze on the public sector wage bill. Trade unions rejected that this week, saying the government must stick to an earlier agreement to raise salaries six percent.
Suker did not elaborate on the deficit, but earlier this week he said it could amount to 1.3-1.7 percent of GDP, compared to the fiscal gap of 1.3 percent envisaged this year.
"This is a step back in efforts to stabilise the economy and make it more resistant to external shocks," said Zdeslav Santic of Raiffeisenbank. On top of a blanket six percent wage increase in the public sector, the government also needs to foot the bill for reforms of public health and the ailing shipyards, the latter vital for concluding Zagreb's European Union membership talks, Suker said.
The government will also allocate more funds to the interior and justice ministry, tasked with fighting organised crime and corruption, as required by the EU.
"All of this means the central bank will have to provide additional liquidity for the state to borrow at home....Access to foreign capital in 2009 will probably remain difficult," Santic said. (Additional reporting by Igor Ilic) (Reporting by Zoran Radosavljevic, Editing by Ron Askew)