Public Spending to Grow Further in 2019

By 2 August 2018

ZAGREB, August 2, 2018 - Croatian state budget revenues for 2019 are projected at 134.2 billion kuna, while expenditures are expected at 139 billion kuna, according to Economic and Fiscal Policy Guidelines for 2019-2021 which were presented at a cabinet meeting on Thursday by Finance Minister Zdravko Marić.

The document builds on the convergence programme and the national reform programme, which was adopted in late April.

"This document provides a macroeconomic framework for the projection period of the next three years, putting emphasis on three key elements: growth projections for the main aggregates, the labour market, prices and tax components of GDP, the revenue side of the budget and the spending limit," Marić said.

He said that the government stood by its growth projection for this year of 2.8 percent, adding that growth was expected to slow to 2.7 percent in 2019 and to 2.5 percent over the next two years.

Taking into account the projected economic growth and forthcoming tax cuts, total state budget revenues for 2019 are projected at 134.2 billion kuna. In 2020, expenditures are expected to increase by 3.6 percent to 139 billion kuna, while in 2021 revenues are likely to go up 1.5 percent to 141.1 billion kuna. The figures are based on the expected growth and the fiscal effects of further tax cuts. "We calculated further tax and administrative relief in the revenue side of the budget," Marić said.

The guidelines say that the most important changes have been made to the Value Added Tax (VAT) and labour taxation system. In order to reduce the regressive effect of VAT on the most vulnerable social groups, as of 1 January 2019 VAT on fresh meat, fish, fruit and vegetables will be reduced from 25 to 13 percent, which should help increase citizens' disposable income.

The government proposes abolishing the 1.7 percent contribution for mandatory insurance in case of unemployment and the 0.5 percent contribution for safety at work and increasing the health insurance contribution to 16.5 percent.

This will reduce employers' wage contributions by 0.7 percentage points and open the room for wage increases. A further reduction of real estate transfer tax, from four to three percent, is also recommended.

Expenditures are projected at 139.1 billion kuna for 2019, 140.6 billion kuna for 2020 and 141 billion kuna for 2021. The largest increase in expenditure next year is expected for pensions and pension allowances, of 1.3 billion kuna.

There will also be considerable increases in expenditure on child's benefits and demographic revival measures. Next year, 337 million kuna will go towards child's benefits, while expenditure on demographic revival measures, which include child's benefits, maternity allowances and subsidised housing loans, will be increased by 270 million kuna compared with this year.

Expenditure on the implementation of the curricular reform and other activities in the science and education sector will be 200 million kuna and Croatia's contribution to the EU budget will be 354 million kuna.

Thanks to continued fiscal consolidation, the public debt to GDP ratio is expected to fall from this year's projected 74.5 percent to 71.5 percent in 2019 and on to 68.5 percent in 2020 and 65.4 percent in 2021.

After last year's surplus of 0.8 percent and this year's projected deficit of 0.5 percent of GDP, the budget is expected to show a deficit of 0.4 percent in 2019 before balancing out in 2020 and reaching a surplus of 0.5 percent in 2021.

The inflation rate is forecast at 1.7 percent in 2018, 1.6 percent in 2019 and 2020 and 1.7 percent in 2021.