‘Four Directions for Overcoming the Crisis Are a Step in the Right Direction’

Four directions for the economy to emerge from the crisis, which Prime Minister Zoran Milanović outlined today in his report on the state of the nation, are a step in the right direction, but it remains to be seen what the budget savings will be in the Government’s fiscal guidelines, say economic analysts.

– The Prime Minister’s four main directions for overcoming the crisis are correctly defined. The policy of fiscal discipline that can be read from his state of the nation speech is a step in the right direction. However, for a complete assessment and the Government’s commitment to that direction, we should wait for the quantification of goals in the fiscal guidelines – says Hrvoje Stojić, head of the Economic Research Department at Hypo Alpe Adria Bank.

Today, Prime Minister Zoran Milanović indicated in the Parliament the main directions of the Government’s activities for overcoming the crisis, which include establishing order and enforcing laws in all areas and activities, consolidating state finances, restructuring and rationalizing the state and public sector, and implementing measures for recovery and new economic growth.

Acknowledging that it will be difficult to keep the budget deficit at the planned 11 billion kuna, Milanović stated that Croatia will undoubtedly enter the Excessive Deficit Procedure (EDP).

 - It was to be expected that during this Government’s mandate, the focus would primarily be on maintaining macroeconomic stability, which includes the consolidation of public finances. Some progress has been made, but for many years we have warned that if fiscal consolidation is concentrated only on the revenue side, these are measures of limited character, especially if the economy is declining. When we enter the EDP, we will have to achieve significant savings in the budget on the expenditure side. This may be shown to us by the Government’s guidelines as early as this week – emphasizes Zdeslav Šantić, chief economist of Splitska Bank.

Milanović also stated that reducing the deficit is short-term possible through the privatization or concession of state assets. In addition to companies and banks that are already in the process of sale, the Prime Minister announced that the Government will create conditions for the privatization of the state tourism portfolio by the end of the year.

Šantić welcomes the announced privatization plan.

 - Although the public finds it hard to accept, one of the fundamental problems why the domestic economy is in a difficult situation lies in the fact that we have not completed the transition process in economic terms and that the role of the state in the economy remains too large – says Šantić.

He believes that this results in low competitiveness, inefficiency, and the inability for domestic economic growth to be based on foreign generators, for example, on strengthening exports, but primarily depends on the consumption of domestic households and state investments. He also notes that analysts are not fully satisfied with the dynamics of restructuring the public sector.

 - As time goes by, there will be less and less time to implement comprehensive public administration reform, and thus achieve some savings. It is currently quite cumbersome, while the legal regulations are convoluted, and the level of informatization is low. This should be the focus of public administration reform to achieve savings and increase efficiency – believes Šantić.

He adds that it should also be considered whether all existing public administration institutions are necessary, especially the numerous agencies, whose number could be rationalized.

As one of the more significant problems, Šantić highlights the abandonment of local self-government reform.

 - Administrative barriers to investments and the development of small entrepreneurship are precisely at the level of local government. After all, it is unprofitable to have such a large number of local units, and it is questionable how much such small units have the capacity and financial strength to utilize EU funds – notes Šantić.

He emphasizes that certain progress has been made through, for example, the reduction of health contribution allocations, and there have also been positive changes in the structure of state subsidies.

 - However, the key remains the reduction of state spending, which would open up space for tax relief for the economy, for the reduction of parafiscal levies, which can only come into effect after the restructuring of the public sector. This is the only correct path, which is neither easy nor short, for Croatia to become a more competitive economy and attempt to build a more stable and sustainable economic model – concludes Šantić.