Precondition for productivity growth is easing investment
In the context of inflation driven by rising labor costs, the HUP emphasizes that it is more purposeful to strengthen citizens’ purchasing power through further tax relief on income from dependent work. Namely, income growth driven by interventions such as budgetary increases and minimum wage increases stimulates inflation more than growth driven by income tax reductions. Lower income tax rates increase the tax base but also require a more prudent plan for budget expenditures.
Containing expenditures within the framework of new fiscal rules at the EU level is a welcome ‘instrument’ in slowing inflation and price expectations. As at the company level, a precondition for faster productivity growth is easing investment conditions through:
➢ Amendments to the Investment Promotion Act, specifically by abolishing the reduction of incentives for investments from 55-110 million EUR and removing restrictions on incentives above 110 million euros. It is also necessary to extend the incentive utilization period and define it from the start of the sale of products resulting from the investment. Larger manufacturing companies, which are small by EU standards, should be given broader access to EU funds for productivity investments. In most EU member states, large companies have 40-70 percent higher productivity compared to micro and small ones, while Croatian large companies (over 250 employees) have 3.3 times lower productivity per hour worked than the EU average. Croatia needs to attract investments from countries that are building a new architecture of global value chains, which requires stronger support for investors in designing local supply chains.
➢ Croatia needs tax incentives and support from institutions and capital markets to accumulate capital for investments in research and development and new technologies.
➢ Strengthening energy competitiveness by equalizing electricity prices for companies and households while promoting competition and innovation in the energy system and enhancing HEP’s capacity for infrastructure investments, all aimed at achieving energy self-sufficiency by 2030. It is urgent to unblock approximately 2.6 billion euros worth of investments in renewable energy sources, whose realization has been waiting for a decision from HERA on the connection fee for three years.
➢ Strengthening the labor supply through improving educational outcomes, active labor market policies aimed at increasing participation of youth, women, older workers, and foreigners in the labor market.
➢ Strengthening the domestic capital market by facilitating investments from domestic pension funds and generally from venture capital funds into the domestic economy, tax attractiveness for registering start-up companies, introducing investment accounts for citizens with tax incentives, and equal treatment of equity and debt in tax terms.
Profitability of Croatian companies 55 percent lower than the EU average
The desired achievement of real income per employee of around 90 percent of the EU average as the next step is not coincidentally or arbitrarily set. Namely, an analysis of the trends in the relationship of real individual consumption, which includes the real value of public goods consumption, and net migration balances for EU members from 2009 to 2022 shows us that real income at a level of around 90 percent of the EU average is considered satisfactory by the population, thus increasing the likelihood of a positive migration trend – that is, stopping emigration and even the return of emigrants.
To achieve a standard that positively affects the retention of people, net immigration flows, and ultimately demographic stabilization, a broad consensus is needed regarding Croatia’s entry among the top 20 most attractive destinations on the OECD PMR ranking in the next few years, from the current 27th place in the ranking covering 47 countries.
In the latest published OECD five-year report on Product Market Regulation, Croatia has approached the OECD and EU average according to the market regulation criterion, while in the 2018 measurement it was among the four most regulated economies in the EU and at the top of the list of regulation of all countries included in this measurement. According to the ‘drop’ in the PMR index in 2023, or the reduction of the level of regulation by almost 20 percent, Croatia is among the top four EU members, and the latest ‘score’ of 1.39 is close to the OECD average (1.34) and slightly weaker than the EU average (1.21) (a lower index value means greater liberalization). Real progress in the previously mentioned areas, strengthening the perception of their implementation, and a short-term solid momentum of economic growth can accelerate positive changes.
Working towards achieving the goal of 90 percent of the EU average can increase investments in companies and sectors that create higher added value per employee and pay higher real personal incomes. Especially in the upcoming period when the inflow of EU funds significantly slows down. It should also be noted that in terms of business investments, we lag behind the EU average and many economies in the CEE region, while at the same time the gross profitability of Croatian companies, despite improvements in recent years, is still 25 percent below the CEE region average and even 55 percent below the EU average. We know that only profitable companies can invest in productivity and sustainably and justifiably increase employee incomes. Given the disproportionately high relative level of public spending compared to the size of our economy, the HUP considers it opportune to consider future changes in the structure of public spending.
