Finance Minister Marić: Tax Reform Is at the Centre of Fiscal Policy

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Finance Minister discusses possible changes to tax system.

Economic growth and the related increase in employment, continued fiscal consolidation and activation of the unused state capital will be the pillars of fiscal policy in the coming period, with a special emphasis on a comprehensive tax reform, announced on Friday Finance Minister Zdravko Marić, reports on October 14, 2016.

He reiterated that the proposal for tax reform was almost completed. “There is not a lot of time. From the very beginning, I said that I would strongly advocate for the approach that changes in the tax laws should come into effect at the beginning of a year. I am not a fan of tax changes during a year, but let us see what the next days will bring us. From the perspective of the Ministry of Finance and all those who have been working on tax reform, we will fulfil our task, and then we will see what will be the next steps”, said Marić to reporters during a conference on the role and functioning of the public sector organized by the Institute of Public Finances.

He said that the analysis had shown that the current tax system was extremely complex, and that the first and the most fundamental goal was to simplify it, increase its transparency, and ultimately its efficiency. He added that in fiscal policy the key was to control the expenditure side of the budget, and to use any surpluses to reduce the deficit and the debt, which makes it possible to reduce the tax burden. “We have already done that – the deficit stands at 0.2 percent of GDP, and we even have a primary surplus which could reach one percent of GDP. However, for further progress we need to do more, we have to implement necessary structural reforms”, said Marić.

Sandra Švaljek from the Zagreb Institute of Economics said that the reform should include the reduction of the highest rate of income tax and an increase in non-taxable part of salary, which means that the reform would be neutral and would not affect the progressivity of income tax. “However, we still do not know all the details of such tax changes, and the question is how it will affect the funding of local government units, which receive revenues from the income tax. If these tax changes lead to a reduction of revenues from income tax, then that will make it harder for local government units to function”, said Švaljek.

“However, recently there was another tax reform that went in the direction of lowering income taxes, but the revenue from income tax has not been reduced as much as it was expected, simply because new jobs have been created, which shows that this measure may even increase economic growth and employment and lead to even higher revenues in local budgets”, said Švaljek.

Katarina Ott, director of the Institute of Public Finances, whose employees participate in the working group which is preparing the tax reform, said that the general VAT rate should not be changed at the moment. “We should first raise the efficiency of collecting tax revenues and consolidate expenditures. As long as we do not drastically reduce the expenditure side of the budget, we should not even think about reducing the general VAT rate”, concluded Ott.


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