Their program provides for total expenditure reduction of 7.68 billion kuna in the four-year period
“Fiscal Adjustment in Croatia” was the topic of a conference held on January 25.2016 in Zagreb where economic experts tried to agree on the amount of necessary fiscal adjustments, their pace, and possible economic effects. At the conference, students of the Economics Faculty in Zagreb, Ivan Majić, and Matej Bule, presented their proposal for fiscal consolidation which is based solely on reducing expenditures, while at the same time reducing the tax burden.
As reported by T-Portal their program provides for total expenditure reduction of 7.68 billion kuna in the four-year period, with the largest cuts worth 4.68 billion planned for the first year of the term of new government. Key measures relate to the reduction of salaries of employees in the public sector by five percent (1.5 billion kuna), reduction of subsidies in agriculture (1.4 billion kuna) and reduction of pensions (special pensions by five percent, and regular by 2.5 percent).
Their program provides for the reduction of tax burden with the goal of boosting economic growth. The tax relief includes the reduction of the corporate tax rate from 20 to 12 percent and the elimination of taxes on capital gains, savings, and dividends. Also, it provides for analysis of budgetary spending with the aim of finding additional savings, as well as radical privatization which involves the sale of non-strategic state-owned businesses. The implementation of the fiscal consolidation would be ensured through institutional measures which include independent Budget Office, the introduction of strict fiscal rules and the establishment of the Agency for Public Debt Management.
With an estimated growth of 1.5 percent in the next four years, the implementation of the measures should achieve a budget surplus by 2020, the decline in the public debt to GDP ratio by seven percentage points and significant improvement of country’s credit rating.
Economic analysts present at the conference praised the suggested solutions but expressed doubts about their feasibility. Vuk Vuković said that the implementation of such a program would open space for serious reforms which can bring effects in the long run. He believes that the government will soon be faced with the need for sharp cuts on the spending side of the budget, but the problem is in the number of coalition partners. “Research has shown that a large number of government coalition partners with different interests generally results in a growth of deficit”, concluded Vuković.
Ante Žigman believes that it would be very difficult to cut pensions which are guaranteed by law. He also pointed out that it was not possible to achieve intended effects in the first year due to delays in the adoption of the budget. Žigman does not agree with the proposed selective reduction of taxes. “I do not support changes of a single tax. We should do a comprehensive tax reform or not touch anything”, believes Žigman.
“If such a comprehensive program of fiscal adjustment can be prepared by two excellent students, why our political parties cannot do it before the elections”, wondered Velimir Šonje who supports the idea that fiscal consolidation should be done exclusively on the spending side of the budget. However, he believes that such a radical program would be difficult to implement because it would cause strong resistance from interest groups. He is also a supporter of strong fiscal adjustment in the first year but advocates for a combination of different measures. “I would not support reducing the pensions, but I believe that there is a lot of room for savings in procurement procedures”, said Šonje.