No one believes in the feasibility of the set assumptions or in the commitment of leading political actors to reforms. The budget is a continuation of the previous fiscal and overall government policy.
The government has assumed a growth of national product this year at a rate of two percent for the purpose of drafting the central government budget for 2016, and, with some slowdown in the growth of (discretionary) expenditures and an increase in transfers from the EU budget, it has presented a budget deficit below 3 percent of GDP. In this way, the government is trying to convince the European Commission and the international financial market that it is determined to implement structural changes. The latest reactions from rating agencies show that the government has failed in this communication effort. We are still awaiting reactions from the European Commission, but it is unlikely to be impressed by the proposed measures or to abandon its binding recommendations. No one, in fact, believes in the feasibility of the set assumptions or in the commitment of leading political actors to reforms, nor in the stability of the Croatian economy.
And two percent growth is too little
Political elites have been leading misguided budget policies for more than fifteen years, which not only do not bring the Croatian economic system closer to best practices in developed countries (where the main actors are innovative small and medium-sized private enterprises) but also the government’s economic policies have become the main obstacle to economic growth. The Croatian economy began to recover last year after six years of slowdown and a significant loss of GDP (about 15 percent). However, last year’s economic growth of about two percent can hardly be declared a new trend. It was the result of favorable circumstances in the international market, a good tourist season, and partial stabilization of household balances that had grown weary of the crisis and began to spend a little more. In the existing combination of economic policy and factor prices (the price of labor and capital in Croatia is still unreasonably high), economic growth will remain below two percent in the coming years. Real GDP will simultaneously grow by three to four percent in comparable countries of Central and Eastern Europe. Comparatively more developed Sweden, for example, expects economic growth of 3.2 percent this year. Growth of the Croatian economy at rates of 0.5 to 1.5 percent, which are realistic forecasts, will not be sufficient. The high level of public debt, over 85 percent, along with long-term modest potential for economic growth, places Croatia among the weakest EU member states, alongside Greece and Portugal.
The domestic economy has a natural, long-term growth potential at rates above 4 percent. The geostrategic position, proximity to large and developed markets, and tourism potential, along with human resources that achieve high efficiency in other European economies, could be a successful combination of factors. Despite this, the Croatian economy has actually stagnated for decades. The wrong government policy and its completely erroneous role in the economy over the past decade and a half have certainly become the main obstacles to unleashing the natural potential for economic growth.
