Budget on Shaky Legs: The Public Sector Consumes GDP Growth

The state budget plan for 2026 is based on an expected GDP growth of 2.7 percent, which aligns with the projections of the Croatian National Bank (HNB) (2.8 percent) and the European Commission (2.9 percent). However, in the context of a slowing European economy, reduced domestic fiscal impulse, and cooling labor market, the Croatian Employers’ Association (HUP) predicts a more modest growth of 2.5 percent.

The government’s inflation estimate of 2.8 percent, although slightly above the HNB forecast (2.6 percent), may prove to be too low given the strong wage growth and continuous pressures for further increases in the public sector.

According to HUP, the planned growth of tax revenues by 5.5 percent is in line with the expected nominal growth of the economy, but the planned growth of contribution revenues by 8.2 percent is deemed overly optimistic. This is based on an estimated growth of the average gross salary of 5.8 percent and employment growth of 1.8 percent, although wage growth in the private sector has nearly stalled.

Additionally, the employment forecast below the GDP growth level implies an expected productivity growth of around 1 percent, which is difficult to achieve after two years of stagnation in business investments. The real productivity growth per hour worked of 2.3 percent annually between 2020 and 2024, which has been crucial for Croatia’s progress, is currently under pressure.

The expenditure side of the budget also raises concerns. The wage mass in the public sector is expected to increase by 4.9 percent (around 311 million euros), but this is below the nominal growth of the economy. Despite this, the government continues to face pressures for new wage increases. In the period 2024–2025, the wage mass increased by as much as 64.1 percent or 2.5 billion euros, and demands for raises persist.

Payments to citizens, including pensions and inclusive allowances, are growing by 9.3 percent (1.1 billion euros), which exceeds the capacity for economic growth. Croatia is leading in the European Union in terms of wage mass growth in the general government – even 72.1 percent in just three years.

As HUP points out, wage increases have not been linked to the fulfillment of work objectives or to increased efficiency of the state administration. According to their data, the earnings of public sector employees have doubled from 2021 to the present.