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Public Finance Review in Croatia: Returning to a Path of Prosperity

December 16, 2014

  • Croatia joined the European Union in July 2013, illustrating the country’s economic and social achievements over the last two decades.
  • Despite this success, the country continues to struggle with fiscal management and debt – counting its sixth year of recession.
  • The new Public Finance Review: Restructuring Spending for Stability and Growth Report from the World Bank analyzes the country’s fiscal weaknesses and public finances - offering a number of policy options that can help maintain macroeconomic stability, promote growth and boost competitiveness in Croatia.

Over the last two decades, Croatia has set upon a path of growth and stability through the implementation of widespread economic and social reforms. The country emerged from the previous period of instability willing to overcome many challenges preventing it from realizing its ultimate economic potential and fully participating in the global economy. These efforts culminated in the country joining the European Union (EU), in July 2013.

Despite this successful trajectory toward EU accession, however, Croatia has struggled in recent years to stabilize its macroeconomic outlook and lay the foundation for a robust recovery. The onset of the global financial crisis triggered a continuing cycle of recession that has yet to be broken. Public debt has doubled since 2008 and unemployment, at 17% in 2013, now hovers well above the EU average of 12%.

As policy makers in the country look to regain some of the momentum that defined Croatia at the outset of the 21st century, they continue to investigate the underpinnings of the country’s fiscal weaknesses - exploring policy options for reversing these negative trends. As part of this effort, the World Bank Group has worked with the government of Croatia and has launched the “Public Finance Review: Restructuring Spending for Stability and Growth Report.” The report analyses three interrelated issues that need to be addressed in the short-to-medium terms in order to put Croatia back on the road toward recovery.

By analyzing the country’s major fiscal and institutional weaknesses and the structure of the country’s public finances, this report offers a number of policy options that can promote growth and boost competitiveness around Croatia.

" Debt sustainability analysis suggests that a fiscal adjustment of 4 percentage points of GDP will be needed over the medium term. This adjustment would need to be predominantly through expenditure measures which would not only reduce the fiscal deficit and the public debt to sustainable levels, but also improve the efficiency of the public sector. "

Sanja Madzarevic Sujster

Lead author of the Report and World Bank Senior Country Economist for Croatia

What this means for the country, according to the report, is the implementation of policies and reforms that can help maximize the efficient use of EU funds now available to the country, improving the country’s tax system, reigning in government expenditures, improving and adjusting social spending, and adjusting subsidies – particularly for railroads and agriculture. These actions can help improve the investment climate, reduce the excessive size and cost of the public sector in Croatia, and streamline the country’s fiscal policies to promote growth and competitiveness in the years to come.

The report offers a number of short-term and medium-term policy options to help achieve these necessary outcomes. For example, coupling the short-term priority of developing a clear strategic vision for the use of EU funds with the medium-term goal of creating a sound financial management system in the government can help ensure that EU funds are utilized to their utmost in coming years. Furthermore, eradicating arrears, creating high-frequency, lower-cost specialized centers for ambulatory diagnosis and treatment, consolidating health service networks by geographic areas, and expanding eHealth systems can collectively increase efficiency and reduce spending in the health care sector – which accounts for approximately 9% of Croatia’s GDP every year.

These measures, along with the many others offered in the report, represent a comprehensive package of reform for the country as it strives toward renewed growth. While certainly a daunting agenda, several countries in the EU have gone through fiscal consolidation in recent history, including Sweden, the United Kingdom, and Ireland, leading the way for Croatia and offering strategic reference points should the country embark on a similar journey.

The stakes remain high for Croatia as it looks toward reversing many of the negative economic trends that have challenged the country in recent years. The consequences of not addressing these challenges could further slowdown recovery prospects. Inadequate absorption of EU funds could stifle this crucial resource while ongoing fiscal vulnerabilities could hamper investment into the country. Fortunately, reports like the “Public Finance Review: Restructuring Spending for Stability and Growth Report” reinforce the understanding that options are available in the country.

Implementation of the kinds of policies and reforms outlined in this report can ultimately lead the country back to the road of economic and social prosperity.