Finance Minister Zdravko Marić is allowed to increase general budget expenditures each year by the same amount as GDP growth. According to the Proposal for the Fiscal Responsibility Act, which the Government adopted last week, three fiscal rules have been introduced. The first rule is the structural balance, the second rule is public debt, and the third rule is expenditures. The last means that government spending must not exceed the reference potential GDP growth rate.
>>>Minister Zdravko Marić should explain how the state ‘earns’
The current expenditure plan for 2019 is 1.5 percent higher than this year, and for 2020, it is 0.65 percent higher than in 2019. However, this year’s budget expenditure plan is almost four percent higher than last year’s. Therefore, if this law had been in effect last year, Minister Marić would not have been able to plan such an increase in expenditures.
The proposal for the new law stipulates that government budget expenditures cannot grow faster than GDP, but it does not specify what they should be in the event that GDP goes negative. If the law had been passed last year, this year’s expenditure growth could not have been four percent.
However, a logical question arises – what happens when GDP is in decline? The positive sign of Croatian GDP will not last forever, but this law does not clarify what happens when GDP is falling, which it will certainly do; it is just a matter of when. We also asked the Ministry of Finance, but by the time this issue was concluded, we had not received an explanation. In this expenditure rule, there are exceptions, and it does not apply to categories of expenditures established by legally binding acts of the European Union.
In addition to the expenditure rules, the public debt rule is also interesting. Thus, the share of public debt in GDP must not exceed 60 percent. If it is higher, then the difference between the share of debt in GDP and the reference value of 60 percent must be reduced according to a certain dynamic. Currently, the total public debt of the state at the end of February was around 282 billion kuna, and its share in GDP is 78 percent, which is the lowest level since 2012. Given the low interest rates in the market and the expected good results of the tourist season, a cost restructuring of the public debt structure should also be followed, which will affect the decline.
>>>The Government proposes three fiscal rules: the structural balance rule, expenditure rule, and public debt rule
The proposal for the law also more precisely defines the rules of operation of the Fiscal Responsibility Commission. The goal is to strengthen the independence of this commission. It is defined as a permanent, independent, and autonomous body. The president of the Commission would be elected through a public competition, and its members would be representatives of the State Audit Office, the Croatian National Bank, the Economic Institute Zagreb, the Institute of Public Finance, and the faculties of economics and law.
