MFIN Proposes New Fiscal Rule

The current fiscal rule requires that the share of budget expenditures in GDP be reduced by one percentage point annually, and if the Parliament accepts the amendments to the Fiscal Responsibility Act in the autumn, the state would already apply the new fiscal rule this year, which is aligned with the framework for managing economic policy in the EU and is related to the obligation to adhere to medium-term budgetary objectives.

The medium-term budgetary objective, as a preventive measure, represents the value of the structural balance determined to ensure that the general budget deficit does not exceed 3 percent of GDP, explains the Ministry of Finance, which has published the proposal for amendments to the Fiscal Responsibility Act on its website and opened a public discussion on it.

In terms of sustainable expenditure trends, the law introduces a provision that the annual growth of general budget expenditures must not exceed the reference potential GDP growth rate, allowing for exceptions for certain categories of expenditures.

Thus, there is an explicit legal provision that general budget expenditures, essential for the aforementioned provisions of the fiscal rule, do not include interest expenditures, expenditures for the implementation of EU programs without national co-financing, annual changes in expenditures due to changes in the institutional coverage of the general budget, and annual changes in cyclically sensitive expenditures determined by the European Commission.

Additionally, the amendments foresee that budget expenditures could grow above the potential GDP growth rate by the amount of revenue increase due to changes in the legislative framework.

The established fiscal rule, as proposed, would not apply in cases of disaster and major economic disturbances (which relate to year-on-year real GDP decline or cumulative output loss over a longer period characterized by year-on-year real economic growth rates significantly lower than potential), and the existence of such circumstances would be determined by the Fiscal Policy Committee at the proposal of the Government.

The Ministry of Finance, in its explanation of the rules that need to be adhered to within the framework of the European Semester, reminds that for member states that exceed the limits of budget deficit (3 percent of GDP) or public debt (60 percent of GDP), an Excessive Deficit Procedure is initiated as a corrective measure to achieve the fiscal criteria from Maastricht. They also explain how the new fiscal rule takes into account the existence of economic cycles, which is of exceptional importance for overcoming recessionary conditions.

The amendments also expand the scope of the law, which would, in addition to the state budget and local unit budgets, budgetary and extra-budgetary users of state and local budgets, apply to commercial companies and other legal entities fully owned by the state or one or more local units, and these companies would also be required to provide a statement on fiscal responsibility.

It has also been proposed to remove provisions regarding the political responsibility of the leaders to whom the law applies, and to introduce penal provisions, i.e., misdemeanor liability. Thus, a monetary fine of five to one hundred thousand kuna is foreseen for a leader who does not prepare and submit a statement on fiscal responsibility, as well as when it is found during the verification of the content of the statement that it was given based on documentation that is not credible.

The new legal provisions would also change the position and role of the Fiscal Policy Committee, which would henceforth be a professional and independent working body of the Parliament, which would also appoint its members.

The Fiscal Policy Committee was established in 2011, and for five years its members were appointed by the Government.

The proposal that it henceforth be a professional and independent working body of the Parliament, as explained, would enhance the independence of the Committee, so that in accordance with best practices, it would have a supervisory role over the implementation of the Fiscal Responsibility Act, as well as over the implementation of the state’s fiscal policy in its entirety, all with the aim of improving the public finance system.