Ministry of Finance

PEMPAL Budget Community of Practice

A brief overview of the economy of the Republic of
Croatia
Ivana Jakir-Bajo

Zagreb, December 2015

 A BRIEF OVERVIEW OF THE ECONOMY OF THE REPUBLIC OF

CROATIA
1.

2.
3.
4.

Macroeconomic framework

GDP

deficit

differences in the coverage

public debt
Excessive deficit procedure
Macroeconomic imbalances procedure
Strategic documents The Convergence Programme and the National
Reform Programme

STATE TREASURY SYSTEM

1.
2.
3.

Organisational structure
Budget execution
Comprehensiveness of the budget

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Macroeconomic framework
During 2014, recession trends continued in the domestic economy
for the sixth consecutive year

Macroeconomic trends for the year-to-date period indicate a more

favourable performance of macroeconomic indicators than those

expected in previous periods

After six recession years, gross domestic product achieved a real

growth rate of 0.8% in the first half of 2015, when compared yearover-year.

The biggest positive contribution to the gross domestic product growth

in the first half of the year resulted from:
export of goods and services,
household consumption and state consumption and
gross investments in fixed capital

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Macroeconomic framework - GDP growth

Macroeconomic
framework of the
convergence
programme

Source: Croatian Bureau of Statistics, Eurostat, Ministry of Finance

2013

2014

Projection MFIN
2015. April 2015

Projection MFIN
2015 September
2015

Higher
expected grow
rates

GDP real growth (%)

-1,1

-0,4

0,4

1,1

Household consumption

-1,8

-0,7

0,5

0,6

State consumption

0,3

-1,9

-1,2

0,4

Gross investments in fixed

capital

1,4

-3,6

-1,3

0,7

Export of goods and services

3,1

7,3

3,7

6,8

Import of goods and services

3,1

4,3

2,8

6,1 Ministarstvo financija

Macroeconomic framework - deficit of the general

government

Comparison of total
income,
expenses and deficit of
the consolidated general
government
in the new and previous
Convergence
Programmes shows
significant differences

The differences emanate from:

different nominal gross domestic product levels,
applied policies for managing the income and expense sides of the budget and
application of the new statistical methodology ESA 2010 since September 2014,
which for the first time introduces the statistical coverage of the general government in
the Convergence Programme for the period 2015 - 2018
It should be mentioned that the budget coverage of the general government was used
in the Convergence Programme for the period 2014 - 2017
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Macroeconomic framework - differences in

coverage
Budgetary
coverage of the general government statistical coverage
the
The European statistical methodology ESA 2010 contains specific rules
for classifying units by institutional sectors of society, among which is
the general government sector with its sub-sectors

All statistical reports, including the Fiscal report whereby monitoring

compliance with criteria relating to the state deficit and debt, must be
submitted to Eurostat by the coverage of these sectors

this statistical coverage of the general government sector and its sub-sectors
in most EU countries is not identical to the coverage used for budgetary
purposes
the source of statistical reporting is accounting information
efforts are aimed at making these coverages as similar as possible, as
otherwise they have to be quantified and significant differences explained

The most significant differences in the budgetary system of the Republic

of Croatia have been established in the coverage of extra-budget users
which, in accordance with the Registry of budget and extra-budget users
is much narrower than sectoral coverage
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Macroeconomic framework - public debt

A steep rise in public debt in the past period:

noticeable negative economic trends

restructuring of some sectors,
assuming the obligations of public companies and
accumulation of budget shortfalls

Adjustment was also a consequence of switching to the application of the ESA 2010
methodology and including road transport public companies in the general
government sector

In accordance with the ESA 2010 methodology, social security funds include the
Croatian Pension Insurance Institute, the Croatian Health Insurance Institute and the
Croatian Employment Bureau

%BDP-a

Public
debt

Public debt(% of
GDP)

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Excessive deficit procedure (EDP)

The excessive deficit procedure relates to the measures taken by the
European Union in respect of the Member States whose public finances
are not in accordance with rules relating to the size of budget deficits
and public debt

Within

this procedure, Member States, in accordance with

recommendations given by the European Commission and the Council of
the EU, must adopt and implement measures that should result in the
correction of excessive deficits and debt and bring them within the
envisaged limit until the set deadline

Following this, Member States shall bring measures to reduce their

budget deficits to an acceptable level

The European Commission shall assess whether the measures have

been taken and whether they are implemented in an adequate manner

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Excessive deficit procedure (EDP)

Situation relating to the Stability and Growth Pact

Member States, 13 May 2015

No excessive deficit procedures

Austria, Belgium, Bulgaria, Czech

Republic, Denmark, Estonia,
Germany, Hungary, Italy, Lithuania,
Luxembourg, Latvia, Slovakia, the
Netherlands, Romania, Slovakia,
Sweden, Great Britain,

Closed excessive deficit procedure

Malta, Poland

Ongoing excessive deficit procedure

Croatia, Cyprus, France, Greece,

Ireland, Portugal, Slovenia, Spain

Excessive deficit procedure has been tightened and a

new deadline has been set until 2016/2017

Great Britain

Consideration of opening a new excessive deficit

procedure

Finland

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Excessive Deficit Procedure (EDP) and the Republic of Croatia

The EDP was activated in January 2014
The Council of the EU, acting on a proposal from the European
Commission, adopted in January 2014 the Recommendations requiring
from the Republic of Croatia to resolve its excessive budget deficit by
reducing it below 3% of GDP by the end of 2016, and reduce the
general government debt to less than 60% of GDP two years later.

Since June 2014, the EDP has been put on hold, as the European

Commission established that Croatia was taking appropriate measures

for the purpose of correcting its budgetary imbalances

The Excessive Deficit Procedure continues to be in effect

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Macroeconomic Imbalances Procedure (MIP)

The Macroeconomic Imbalances Procedure (MIP) is a surveillance
mechanism that aims to prevent and correct macroeconomic
imbalances within the EU

The Republic of Croatia is placed in the 5th category of the

Macroeconomic Imbalances Procedure (excessive imbalances that

require decisive political action and specific monitoring) therefore,
the EC monitors the implementation of recommendations through
a specific enhanced monitoring mechanism

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Macroeconomic Imbalances Procedure (MIP)

MIP category

Member States in 2015*

1 Without imbalances

Austria, Czech Republic, Denmark,

Estonia, Lithuania, Luxembourg,
Latvia, Malta, Poland, Slovakia

2 Imbalances that require political action and monitoring

Belgium, Netherlands, Romania**,

Finland, Sweden, Great Britain

3 Imbalances requiring decisive political action and

monitoring

Hungary, Germany

4 Imbalances requiring decisive political action and

specific monitoring

Ireland, Spain, Slovenia

5 Excessive imbalances requiring decisive political action

and specific monitoring

Bulgaria, France, Croatia, Italy,

Portugal

6 Excessive imbalances that require decisive political

action and specific monitoring and activation of the
excessive imbalances procedure (EIP)

*Cyprus and Greece are included in the Macroeconomic Adjustment Programme

** Romania is included in a preventive programme of financial assistance

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Strategic documents The Convergence

Programme and the National Reform
NATIONAL REFORM PROGRAMME CONVERGENCE PROGRAMME
Programme

defines the state of affairs and

plans for the implementation of
key structural policies of the
government
describes the measures taken by
the government to achieve
sustainable economic growth,
job creation and creation of
better opportunities for Croatian
citizens,
while
taking
into
account the stability of public
finances, sustainable level of
debt and high quality of public
services.

defines
key
characteristics
of
the
macroeconomic framework and the fiscal
policy of the Republic of Croatia over a
three-year period
result of a process, during which all EU
Member States have a duty to report and
align their economic policies with the jointly
defined objectives and provisions of the EU.
such alignment and reporting is carried out
within the annual European Semester
cycles

The Convergence Programme and the National Reform Programme describe in detail

principal measures whereby adopting recommendations of the Council of the EU for

resolving an excessive deficit situation
In the case of the Republic of Croatia, recommendations are, to a large degree (>75%)
aligned with the National Reform programme 2015 and the Convergence Programme for
the period 2015 - 2018.
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6 recommendations for Croatia in 10

areas
1.
Public finances
2.

Tax system

3.

Pension system

4.

Health system

5.

Banking sector

6.

Private debt

7.

Labour market

8.

Wage-setting

9.

Service sector - new with regard to the previous year

10.

Modernisation of public administration

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Convergence Programme measures

I. Binding recommendations of the Council of the EU for resolving excessive
deficit situations
Recommendations of the Council for correcting excessive deficits
%GDP
Deficit of the general government
Change in structural deficit
Implementation of structural measures

2014

2015

2016

4,6

3,5

2,7

-0,5

-0,9

-0,7

2,3

1,0

1,0

Fiscal projections - Recommendations of the Council of the EU have been completely

adopted and embedded in the fiscal projections of the Republic of Croatia
GDP
Deficit of the general
government

2014

2015

2016

2017

2018

5,7

-5,0

-3,9

-2,7

-2,4

-0,5

-0,7

-0,8

1,5

1,2

1,0

Change in structural deficit

Implementation of structural
measures

2,5

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Recommendations of the EC and measures in NRP (Ministry of

Finance)
Recommendation 1

Measures in NRP
-

Publish and implement findings established by the

audit of expenditure.

Improve control of expenses at the central and local

levels, in particular by establishing a penalising
mechanism for those entities that do not comply with
budget constraints.

Adopt the Fiscal Responsibility Act and strengthen

the capacity and role of the State Audit Office..

Introduce real estate tax and improve discipline in

the VAT segment.

Measures, chosen on the basis of in-depth analysis of

expenses - have been embedded in NRP
In-depth analyses of expenses will be carried out
periodically for the most important expenses of the State
budget of the Republic of Croatia as a basis for further
rationalisation of the public sector
Improving the budget framework
Instructions for projecting expenses with the aim of
establishing an optimal cost level in view of their type and
application
Strengthening the internal financial control system and
widening the coverage of internal financial controls to
companies owned by the RC and local and regional selfgovernment units, and to other legal entities founded by
the RC or by local and regional self-government units

Improve the fiscal framework and strengthen fiscal rules

Strengthening the concept of the State Audit Office and
developing a penalising model for cases of noncompliance with the Recommendations given by the SAO

Audit of the calculation and collection of utility charges

Improving efficiency in collecting taxes (introducing a
system for managing risks deriving form tax liabilities and
tax payers)

Strengthen public debt management, in particular by publishing the annual risk management strategy and providing adequate resources.

Adoption of the public debt management strategy

Make the issue of state guarantees conditional upon the
restructuring plan of potential guarantee beneficiaries
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State treasury system - organisational structure

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State treasury system

Single account of the treasury transparency of cash flows
The model of managing public expenditure through the state treasury is based on
the principal of the existence of a single account through which all financial
budgetary transactions are performed

The single account of the treasury with its sub-accounts has been
opened with the Croatian National Bank:

Sub-accounts of the single account of the treasury:

Special purpose sub-account for paying salaries - 631
Special purpose sub-account for paying current expenditure - 632

An efficient and transparent daily management of state budget

financial flows has been provided

A base for efficient financial planning

Integration of the information system managing State budget finances
with regional treasury systems

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State treasury system

Comprehensive budget transparent budget

Failure to state all income and expenses of budget users (problem of

third-level budget users - faculties, health institutions, national parks

etc.) in the state budget is contrary to the principle of budget unity and
comprehensiveness

Until 2015 in the Republic of Croatia an exemption from paying in own

revenues and assigned revenues and receipts of budget users in the

budget was tied to the exemption from planning of the mentioned
revenues in the state budget, i.e. in the budgets of local and regional
self-government units

possibility of exemption from paying in the mentioned revenues and

receipts of budget users in the competent budget must not exclude the
obligation of their planning

If the state or local and regional self-government units through the

Budget Execution Act, i.e. decisions on budget execution, lay down an

exemption from the obligation to pay own revenues and assigned
revenues and receipts of budget users in the budget, they must provide
that the realisation of their own revenues and assigned revenues and
receipts is monitored through reporting.

This information must be included in semi-annual and annual reports on

state budget execution, or the budget execution of local and regional self
government units
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State treasury system

Comprehensive budget transparent budget

The State budget of the Republic of Croatian for 2015 and projections for

2016 and 2017

for the first time, own revenues and assigned revenues and receipts of
health institutions, national parks and nature parks and the State Institute
for Nature Protection, as well as public institutions included in the higher
education system have been stated

The Act on the execution of the State budget of the Republic of Croatia for
2015 (Official Gazette, No148/14 and 103A/15) further lays down an
exemption from paying in own revenues and assigned revenues and receipts
of the mentioned institutions in the state budget

Any own revenues and assigned revenues and receipts of third-level users
make part of the state budget for the next mid-term period, but they do not
make part of the cash flow of the state treasury system

these institutions continue to realise such revenues in their accounts and from their
own accounts they settle obligations/expenses which they finance from these sources

on the basis of monthly reports presented by these institutions, concerning the use of
the mentioned revenues, records are maintained in the state treasury system

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