Warning to the Government: Fiscal Policy Has Become Too Extravagant

The Fiscal Policy Commission assesses that fiscal policy should allow for greater room for counter-cyclical action and, in preparing the budget for 2026, tighten fiscal policy, limit the growth of certain expenditures, and enhance control over public spending.

– The Fiscal Policy Commission assesses that in conditions of high and rising global uncertainty, fiscal policy should allow for greater room for counter-cyclical action in unfavorable periods. It is necessary to ensure a sustainable fiscal position and, in preparing the budget for 2026, tighten fiscal policy, limit the growth of certain expenditures, and enhance control over public spending while systematically analyzing fiscal risks in the upcoming period – this is stated in the position of the Fiscal Policy Commission adopted at the meeting held on October 10, regarding the proposal for the semi-annual execution of the state budget for 2025.

The Fiscal Policy Commission assesses that based on the execution of the state budget in the first six months of 2025, a relatively expansive and pro-cyclical fiscal policy continues, primarily reflected in a significantly more pronounced growth of budget expenditures than revenues.

Such a policy affects the increase in the general government deficit and contributes to a more pronounced growth of the nominal amount of public debt, with part of the increased expenditures still being a consequence of extraordinary events from previous years – primarily the reconstruction after the earthquake and measures to protect the population and the economy from high inflation, the Commission believes.

It adds that increased expenditures are largely a result of the continuation of policies aimed at improving the position of employees in state and public services and raising the standard of living of the population.

In conditions of stable and moderately high economic growth, expansive fiscal policy further stimulates overall consumption and investment; however, it simultaneously contributes to rising prices and reduces fiscal space for action in the event of a slowdown or decline in economic activity, the Fiscal Policy Commission believes.

Stronger Consolidation of the Expenditure Side of the Budget

It also warns that economic growth, high household consumption, and present inflation further support revenue collection and budget sustainability, but that their growth rates from previous years are not sustainable in the long term.

The Commission emphasizes that increased fiscal pressures require heightened caution in managing public finances as movements on the expenditure side pose a challenge to fiscal sustainability.

Regarding the rebalancing of the state budget for 2025, it states that the proposed changes are justified, primarily for the correction of revenues and expenditures, but also as a measure of regularization of the fiscal situation.

The Commission assesses that the current macroeconomic achievements in 2025 largely confirm the assumptions from the macroeconomic projections published in November 2024, which served as the basis for the preparation of the state budget for 2025. In contrast, fiscal achievements show deterioration compared to planned values.

The Commission reminds that Croatia did not take advantage of the favorable period of economic growth to create fiscal reserves but allowed budget expenditures and the budget deficit to dynamically increase alongside economic growth. Such fiscal policy 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, it states, adding that growth rates may be at lower levels in the upcoming period compared to the period from 2022 to 2025, which was marked by stronger growth.

Although the general government deficit, as well as the share of public debt in GDP, remain below the reference thresholds of three percent and 60 percent of GDP, respectively, the Commission emphasizes that it is necessary to more strongly consolidate the expenditure side of the budget as the current fiscal policy has significantly reduced the fiscal space to respond to potential future negative economic shocks.

The Fiscal Policy Commission is an independent and expert body that monitors and assesses the application of fiscal rules and ensures the long-term sustainability of public finances. It was established to improve the public finance system in accordance with national and European standards, as well as to strengthen the fiscal stability of the state. It operates independently, free from political and other influences, to ensure expert and impartial judgment. It deals with the analysis and assessment of fiscal rules, especially in the budget proposal.