The Fiscal Policy Commission has assessed that Croatia did not take advantage of the favorable period of economic growth to create fiscal reserves, but rather allowed budget expenditures to increase alongside economic growth, which amplifies economic cycles and creates the risk of significantly larger budget deficits, thereby reducing fiscal space for action in future periods of economic slowdown or crisis.
In analyzing the proposal for the annual report on the execution of the state budget for 2024, the Commission has expressed its position, highlighting that real economic developments were more favorable than previously expected, while the inflation rate remained elevated. However, they emphasize that relatively favorable macroeconomic conditions, which favored the growth of fiscal revenues, were not sufficiently utilized to strengthen fiscal consolidation and fiscal resilience. Moreover, they believe that the fiscal position, which began to slightly deteriorate in 2023, significantly worsened in 2024.
Fiscal policy in 2024 operated pro-cyclically and expansively, with fiscal developments in 2024 resulting in a general government budget deficit of 2.4 percent of GDP according to the ESA 2010 methodology. The government turned towards greater expansiveness in fiscal policy during 2024, which is evident in the increase in expenditures for employees and social benefits, they assessed.
They also noted that the strong recovery of economic activity during the period 2021-2023, which significantly impacted the reduction of the public debt share in GDP, continued into 2024. The ratio of public debt to GDP reached 57.6 percent, a decrease of 4.2 percentage points compared to 2023. However, they point out that nominal public debt continues to rise, and the relative reduction is primarily a result of the growth of nominal economic activity.
– The Republic of Croatia did not utilize the favorable period of economic growth to create fiscal reserves, but allowed budget expenditures to dynamically increase alongside economic growth. Such behavior amplifies economic cycles and creates the risk of significantly larger budget deficits and a reduction in fiscal space for action in future periods of economic slowdown or crisis – they warned in their report.
As they state, economic growth rates could be significantly lower in the upcoming period compared to the period 2022-2024 when the average real GDP growth rate was 4.8 percent. Therefore, they further state that it is essential to return to responsible and counter-cyclical fiscal policy and to strengthen fiscal discipline in the upcoming period.
Once increased, salaries and benefits are difficult to reduce
– The resilience of public expenditures to reduction diminishes the flexibility of fiscal policy, as once salaries in the public sector or social benefits are increased, it is very difficult to reduce them. Since this fixes a high level of expenditures, which will also be present in bad economic times, i.e., in periods of economic slowdown, the budget deficit will be more pronounced, and the maneuvering space for stabilization measures will be limited – they conclude in the Commission.
Additionally, they say that the question of the quality and efficiency of increased public spending arises, as a significant increase in expenditures should result in an adequate increase in public sector productivity and stronger long-term economic growth. Otherwise, there is a risk that fiscal space will not be used productively.
The Commission states that Croatia in 2024 met both main fiscal rules from the Stability and Growth Pact, namely that the general government deficit is below 3 percent of GDP and public debt is below 60 percent of GDP.
– However, the Commission emphasizes that in the preventive part of the Pact there are also a number of additional criteria that have not been met. Thus, a significant deterioration of the structural balance to -3.3 percent of GDP was achieved, while according to the new fiscal rules, the targeted framework for the structural deficit should be at most 1.5 percent of GDP – they state in their position.
Expenditures of last year’s budget increased by 16.5 percent
Total revenues of the state budget for 2024, according to national methodology, were 30.5 billion euros, 11.5 percent or 3.1 billion higher than in 2023. At the same time, total expenditures reached 32.7 billion euros, increasing by 4.6 billion or 16.5 percent, with a pronounced increase in operating expenses of 4.5 billion euros or 17.1 percent. In the structure of operating expenses, the largest increase was in employee expenses, by 1.8 billion euros or 45 percent.
This resulted in a budget deficit of 2.2 billion euros, which is 1.49 billion euros higher than in 2023. Along with a state budget deficit according to national methodology of 2.6 percent of GDP, off-budget users achieved a surplus of 0.04 percent of GDP or 38.3 million euros in 2024, as did local and regional self-government units, which achieved a surplus of 0.2 percent of GDP or 208.5 million euros, resulting in a consolidated general government budget deficit according to national methodology recorded at 1.97 billion euros or 2.3 percent of GDP, which is 2.34 percentage points higher compared to 2023.
