RECOMMENDATIONS AND POSITIONS

At its 23rd session held on 14 November 2023, the Fiscal Policy Commission (hereinafter: the Commission), examined the Draft State Budget of the Republic of Croatia and the Financial Plans of Extra-Budgetary Users for 2024 and the Projections for 2025 and 2026 (hereinafter: the Draft) which was adopted by the Government of the Republic of Croatia (hereinafter: the Croatian Government) on 9 November 2023 at its 262nd session.

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.

Despite unfavourable global trends, Croatia’s economic activity achieved strong growth in the first semester of 2023. Such growth, due to favourable labour market trends and significant price increase also facilitated an increase in revenue collected from taxes. At the same time, fiscal expenditure also increased but at a slower pace than income, finally resulting in a surplus of both the state budget and the general government budget. Data on the execution of the state budget in the first half of 2023 indicate that state budget income is being achieved at a satisfactory level, meaning that the total planned budgetary income at the level of the entire 2023 could also be achieved in accordance with the projections. At the same time, state budget expenditure increased, primarily as a consequence of high inflation and Government measures. Such circumstances represent significant risks in the sense of increasing expenditure, which, in case of the materialization of negative risks and significant slowing down of economic growth, could undermine the state of Croatian public finances. Therefore, the Commission highlights the importance of continuous monitoring and examining the fiscal position of Croatian economy, as well as of increasing available fiscal room, so that fiscal policy could act promptly and efficiently in case economic growth slows down and unforeseen fiscal risks are realized. 

At its 18th session held on May 22, 2023, the Fiscal Policy Commission examined the Draft Amendments to the State Budget of the Republic of Croatia and Financial Plans of Extra-Budgetary Users for 2023 and Projections for the Years 2024 and 2025 adopted by the Government of the Republic of Croatia on May 19, 2023 at its 218th session.

The Fiscal Policy Commission (hereinafter: the Commission), at its 16th session held on 21 November 2022, examined the Draft State Budget of the Republic of Croatia and the Financial Plans of Extra-Budgetary Users for 2023 and the Projections for 2024 and 2025 which was adopted by the Government of the Republic of Croatia at its 166th session held on 14 November 2022.