25th Position Paper of the Fiscal Policy Commission on the Draft Amendments to the State Budget of the Republic of Croatia and the Financial Plans of Extra-Budgetary Users for 2023

The Draft Amendments to the State Budget for 2023 foresee a significant increase of both state budget revenues and state budget expenditure. This is primarily a consequence of continuous economic growth and high inflation. Croatian public finances are undergoing an expansive stage where the structural (and nominal) deficit is increasing. The Commission invites the Government to limit, when proposing the state budget, the growth of the public expenditure-to-GDP ratio as an important determinant of fiscal sustainability. Owing to strong economic growth and high inflation, a strong decrease of the public debt-to-GDP ratio was achieved, improving the state of public finances. However, despite the significant decrease of the public debt-to-GDP ratio, the size of general government measured by the general government debt-to-GDP ratio, has been increasing significantly, and the Commission warns that the growth of expenditure must be kept under control. Furthermore, the Commission reiterates the need to implement structural reforms bearing in mind the real limitations of the Croatian economy and its structural weakness, as well as to maximize the use of EU assistance for development activities. Although Croatia is still undergoing the favourable stage of the economic cycle, the situation can overturn very quickly, meaning that, should economic activity slow down significantly, public finances would be exposed to higher risks.