June the 11th, 2024 – The IMF (International Monetary Fund) has told the Croatian Government to scrap their anti-inflation measures and introduce the deeply unpopular property tax.
We all knew that it wouldn’t be long before the topic of property tax would raise its ugly head again. The topic had been more or less put to rest for a while now, but the IMF’s latest advice to the Croatian Government has seen it put back on the table.
As Poslovni Dnevnik/Jadranka Dozan writes, if you were to ask the economists at the IMF, the pace of the slowdown in inflation in Croatia this year will be somewhat weaker than what was initially calculated by the government. In contrast to the projections issued by the Croatian Government, according to which the average inflation should drop to 3.1 percent in 2024, the IMF sees it at 4.2 percent. In the final statement after the visit of the IMF Mission to the country, Croatia is expected to approach the ECB target rate of two percent only at the end of 2025.
This is partly being attributed to persistent service price inflation due to strong wage increases and tourism demand. While after several years of strong tourism results, weaker growth in the sector is expected, dynamic domestic demand continues to support relatively high rates of economic growth, which, according to the IMF, could amount to around 3.4 percent this year.
stifled productivity
The IMF mission concludes that Croatia’s short-term economic prospects are favourable, but at the same time they highlighted their view that “subdued productivity” and the lack of labour represent a challenge for medium-term growth prospects. Aside from the fact that they could be negatively affected by various external risks, such as the intensification of regional conflicts, the volatility of commodity prices and global or regional recession, they also warned that the continuation of wage growth that exceeds productivity could undermine competitiveness and potential growth. The same could also prolong elevated inflation.
On the other hand, the IMF has showered praise on the Croatian Government’s persistence in implementing the National Recovery and Resilience Plan, encouraging it to use it to advance reforms to further raise living standards, build protective layers for future shocks and meet long-term consumption needs that are partly determined by Croatia’s ageing population.
In that regard, government policies should also focus on preserving fiscal prudence, the IMF believes. Along those same lines, they maintain that the powers that be should reduce the fiscal stimulus this year. At the same time, they noted that the expected significant increase in the total deficit, from last year’s 0.7 to 2.5 percent of GDP this year, was largely motivated by generous increases in social benefits and benefits paid out to employees in the public sector.
The continuation of fiscal expansion in a period of strong economic growth could damage hard-earned fiscal credibility, they IMF pointed out to the Croatian Government. That’s why they’re advocating for the “prompt abolition” of wide-ranging measures to reduce the cost of living. Special emphasis has been placed on tax reductions and price controls, which would produce savings of around 0.3 percentage points of GDP.
the imf tells the croatian government: introduce property tax
Some announcements by the Minister of Finance, Marko Primrac, related to the fiscal measures that are due to expire at the end of September. He hinted that the government is not planning any further extensions. In the area of tax policy, property and income taxation favouring investments in residential property stands out. The IMF reiterated their recommendation to introduce a modern value-based property tax and to abolish the extremely favourable taxation of income from short-term rentals. At the same time, they emphasised that the abolition of explicit and implicit subsidies for fossil fuels would increase revenues (estimated at approximately 2 percent of GDP per year) and accelerate the green transition.
When it comes to salaries, the focus of the IMF recommendations to the Croatian Government is on reforms that would result in a reduction of their mass in the coming years. “There is room for rationalising the number of employees in the public sector on the basis of a functional review of the public sector and for the development of the internal market to improve mobility,” the IMF believes, stating that, with certain exceptions, the rule on employee turnover should be applied more strictly.
