ZAGREB (Reuters) - Croatia will aim to cut its budget deficit to 2 percent of gross domestic product next year with a view to balancing the budget by 2020, the frontrunner in the race to become prime minister of the European Union's newest member said on Friday.
The conservative HDZ party, which won the most parliamentary seats in a snap election this month, is in talks with the smaller centre-right Most ("Bridge") party and lawmakers representing ethnic minorities on forming a coalition. All sides say that talks are going well.
"We see our 2017 budget as a key step towards firm control of the spending side and improving the (country's) credit rating," HDZ leader and the party's prime ministerial candidate Andrej Plenkovic told an economic conference.
"By 2020 we want to reduce our public debt by 10 percentage points," he said.
Croatia's public debt stands at around 86 percent of GDP and Brussels has put Croatia under monitoring for its macroeconomic imbalances and excessive deficit.
The deficit target for this year is 2.7 percent of GDP -- the first time in many years that the government is targeting a level below the EU's 3 percent ceiling -- but the current and likely future Finance Minister Zdravko Maric told the same conference the final figure could be even lower than that.
Croatia is rated two notches below investment grade by all three main credit rating agencies, with a negative outlook.
"I hope our deficit plans for next year will bring us closer to exiting the EU's excessive deficit procedure and a credit rating improvement," Maric said.
Next year is financially demanding for Croatia which has to roll over some 30 billion kuna (£3.4 billion) in debts falling due, which will force the government to raise money both at home and abroad.
Plenkovic also promised his government would tackle key weaknesses of the economy -- the poor investment climate, red tape, loss-making public firms and a high tax burden -- to achieve sustainable growth levels higher than the current 2.5 percent.
"The goal of changing the taxation system is to ease pressure and make it simpler and more stable. We will reduce administrative barriers for businesses and financially restructure public firms," he said.
An HDZ-led government would seek to reduce corporate and income taxes as early as next year, he added.
Reporting by Igor Ilic; Editing by Thomas Escritt and Catherine Evans